Promoting Australia as a destination for life science and medtech manufacturing

Additional benefits for global organisations to choose to manufacture here include access to Australia’s generous Research and Development Tax Incentive (RDTI), especially if they plan to commercialise the results of R&D programs in Australia. Informing them of and promoting their potential access to cash refunds or general tax benefits could help secure the work for Australia when other jurisdictions are also being considered. Australia’s generosity to companies that undertake business here will in turn help bolster its medtech and life sciences manufacturing expertise through promotion of Australia as a destination for R&D and manufacturing.

There are several scenarios where Australian manufacturing activities could be subject to an RDTI claim for overseas companies looking to set up an Australian presence to contract with local manufacturers. There could be R&D in the development or improvement of the manufacturing process, the product itself, or use of the product in field or clinical trials. The commercial benefit for undertaking R&D in Australia can vary significantly and depends on a company’s structure, its commercial intentions, and its global aggregated turnover.

There are two mechanisms for an overseas entity (OS Co) to claim the RDTI in Australia for expenses incurred on manufacturing here (each through an eligible Australian presence, the most common being a subsidiary company, ‘Aus Co’).

1. Through an Australian-owned RDTI claim, whereby: Aus Co undertakes R&D for itself (independent of OS Co); bears financial risk with regard to the expenditure it incurs (and therefore does not receive any recoupment or reimbursement of R&D expenditure by the parent company or any other company); owns or has rights to exploit IP it develops (note the IP can vest with OS Co); and controls the R&D activities. The entity undertakes R&D for itself in return for receipt of a right to commercialise the product in a specified territory (e.g. within Australia or surrounds), commensurate with its proportionate efforts in getting that product to market. Transfer pricing advice is required to determine and define the territory. Under this scenario, Aus Co can access the maximum RDTI benefit; a 43.5% refundable R&D tax offset if its global aggregated turnover is below $20m in FY21, or the company tax rate plus 18.5% (i.e. either 43.5% or 48.5%) for FY22 and beyond.
2. Through a ‘Foreign-owned’ RDTI claim, which allows Aus Co to undertake R&D in Australia for or on behalf of OS Co. This means that in addition to the IP vesting with OS Co, OS Co can fund the R&D activities Aus Co undertakes. Under this scenario Aus Co usually acts as an ‘agent’ for OS Co, undertaking R&D under OS Co’s instruction and control. However, even if a company can access the refundable R&D tax offset (by having a global aggregated turnover below $20m as well as sufficient tax losses), the overall benefit will be largely reduced by mark-ups for transfer pricing and agency fees, reducing the benefit to approximately 16%-19% of R&D expenditure.

In contrast, an additional benefit for conducting Australian-owned R&D activities is that Aus Co can also claim expenditure it incurs on activities outside Australia, if they meet the eligibility criteria for Overseas Advance Findings – essentially pre-approvals given by regulators regarding eligibility of R&D activities undertaken overseas. These Findings must be applied for before the end of the first financial year in which R&D expenditure is incurred on these overseas activities.

It is essential that appropriate legal agreements (such as funding, IP licencing, service, and agency agreements, depending on the claim pathway chosen) and transfer pricing documents (including a Commercial Rationale for Australian-owned R&D) are in place between OS Co and Aus Co. Also, Aus Co must have service agreements in place between it and its Australian contract manufacturer and any other contract service it may utilise. Generally, for Australian-owned R&D, it is preferred that OS Co funds Aus Co through debt funding rather than equity – debt funding is seen as stronger evidence of the requirement to bear financial risk, as Aus Co is liable to repay any amounts borrowed from OS Co within a specified timeframe, whereas equity funding may mean Aus Co fails the requirement to bear the financial risk as it is technically OS Co’s funds being used to pay for Australian R&D activities.

Despite significant upfront costs involved in structuring and setting up foreign companies to claim the RDTI through an Australian presence in the first year, the set-up costs are only incurred once, while the benefits can be realised for many years, especially for larger projects spanning multiple years. Overseas companies should always consider their long-term goals, first and foremost, when deciding where to commercialise products. Generally, it is recommended that OS Co models its entire business scenario from start to finish (including its exit) for the R&D structure it chooses.

Further icing on the cake for profitable medical and biotechnology companies looking to commercialise Australian IP is that they will be eligible to pay tax at a 17% rate (as opposed to 30% for large businesses and 25% for most SMEs) through Australia’s new ‘patent box’ scheme. This scheme will apply to patents that have been applied for after the federal budget announcement at 7.30pm on 11 May 2021, and the concession will be applied to income years starting on or after 1 July 2022.

Overall, the Federal Government is keen to support overseas companies looking to conduct R&D and general business in Australia, to help them and their Australian service providers prosper and ultimately benefit the Australian economy. The generous RDTI that overseas companies can access is a win-win for all. Governments, both federal and state, are also contributing vast amounts of cash to Australian manufacturers to ensure our capabilities are world class, in turn attracting more foreign business to Australia. It is onwards and upwards for Australian manufacturing.

Dr Rita Choueiri is a scientist and the head of the Melbourne R&D Incentives division at William Buck.

www.williambuck.com