The IP structure you set up to protect your assets might be the exact reason the ATO denies your multi-million dollar R&D Tax Incentive claim.
The ATO doesn’t just ask whether you’re doing genuine R&D. They ask: who has effective ownership of the results (including IP), who controls the R&D day-to-day, and who bears the financial risk? For biotech companies navigating complex collaboration agreements, university partnerships, and global corporate structures, this “conducted for” test creates a minefield where even well-intentioned arrangements can fail on technical grounds.
The stakes are rising fast. Australia’s biotech sector has grown to encompass over 2,654 organisations, a 43% increase since 2019, with market revenue projected to surge from USD 16.6 billion in 2023 to over USD 51.4 billion by 2030. Business expenditure on research and development rose to $24.41 billion in 2023-24, up 18% on 2021-22, with biomedical and clinical sciences spend rising 35% in 2021-22.
This boom hasn’t gone unnoticed. The ATO is now actively targeting arrangements where IP ownership structures don’t align with the substance of who benefits from the R&D, issuing taxpayer alerts specifically focused on biotech and life sciences structures.
When a claim gets denied or reduced, the consequences cascade. Clinical trials stall while you wait for alternative funding. Hiring freezes hit just when you need to scale your team. Your runway shrinks at the exact moment you need it most. Understanding how IP ownership intersects with R&D eligibility goes beyond compliance; it shapes your entire financial strategy as a biotech leader.
Who Must “Own” the Results?
Most biotech companies understand the baseline eligibility criteria to conduct experimental activities that generate new knowledge. What catches leadership teams off guard is a deeper legislative hurdle: Section 355-210 of the Income Tax Assessment Act 1997, which requires R&D activities to be “conducted for” the entity making the claim.
The ATO assesses this through three key factors: effective ownership of results (including IP and know-how), appropriate degree of control over the R&D, and bearing the financial risk. The first pillar is where most structures fail. Effective ownership means the practical rights to exploit results and IP, not just nominal title. You might hold the patent certificate on your laboratory wall, but if your foreign parent company has an exclusive, royalty-free license to commercialise that IP globally, the ATO will likely conclude that the parent has effective ownership and receives the major benefit.
The ATO’s focus is on commercial substance over legal paperwork. They weigh all three pillars together: who effectively owns the IP and results, who controls the key R&D decisions, and who bears the financial loss if the research fails. AusIndustry’s Guide to Interpretation walks through examples that distinguish between activities conducted “for” you versus “on behalf of” another entity. The assessment looks at economic reality, who actually makes decisions, who funds the work, and who ultimately profits from success.
This substance-over-form approach is reinforced in the ATO’s public ruling TR 2021/5, which references effective ownership interest in IP and know-how as central to the “conducted for” question. This makes it clear: the ownership test is a core eligibility requirement, not a peripheral consideration that gets glossed over during claim preparation.
Five Common Biotech IP Ownership Pitfalls (And How to Fix Them)
1. Foreign Parent Holds Developed IP or Restricts Exploitation
The Risk: Your Australian subsidiary conducts clinical trials and legally owns the resulting patents, but your foreign parent company has been granted exclusive global rights to develop and commercialise the technology. The parent makes all major strategic decisions about the R&D program, go/no-go decisions on trial phases, budget approvals, and development priorities.
The ATO’s Taxpayer Alert TA 2023/5 warns about exactly these arrangements. Australian entities run R&D, but foreign-related entities ultimately hold IP rights or dictate development. What makes this particularly concerning is that the ATO’s concern exists regardless of whether the Australian entity legally holds title to the IP or has obtained a favourable Overseas Finding from AusIndustry. EY’s analysis of this alert notes that life sciences companies have been specifically highlighted as an area of focus.
The Fix: Align your transfer pricing documentation with your R&D Tax Incentive treatment. Your Australian entity needs to demonstrate genuine control through documented board decisions, retain substantive exploitation rights to the IP it develops, and bear real financial risk through equity funding or commercial-rate debt rather than non-recourse arrangements. If your structure involves a foreign parent with operational oversight, ask whether your Australian entity truly has the degree of autonomy required. RSM has analysed the current R&D landscape and ATO guidance for Australian inbound investment structures; their insights are particularly valuable for multinational biotech groups navigating this complexity.
2. University Owns IP; Company Has Non-Exclusive Research Licence
The Risk: You’ve partnered with a leading Australian research institution to advance your drug candidate. The university owns the background IP and retains ownership of any improvements or derivatives. Your company has been granted a non-exclusive research licence to use the technology for your studies, but you lack the right to exclusively commercialise any discoveries that emerge from the collaboration.
The ATO has clarified in their guidance on “For whom are the R&D activities conducted?” that practical rights matter more than formal title. If you don’t have the ability to commercially exploit the R&D results for their expected useful life without making further payments, you may lack effective ownership.
The Fix: Negotiate your collaboration agreements with R&D Tax Incentive eligibility in mind from the outset. Seek assignment of foreground IP, the new results created under the project, or, at a minimum, exclusive field-of-use rights that allow your company to commercialise discoveries in your therapeutic area. Ensure your agreement explicitly documents that your company retains day-to-day control over the research direction and bears the financial risk of the project. While the university may contribute expertise and facilities, your company needs to be positioned as the principal that will reap the commercial benefit of success.
3. Cost-Plus Service Model with No IP Rights
The Risk: Your Australian operation performs R&D activities but operates essentially as a contract service provider to your parent company or another related entity. You’re reimbursed for costs plus a margin, but you have no stake in the IP developed and no control over whether the research continues or pivots.
If an Australian OpCo is merely providing services under cost-plus to a foreign owner with no IP rights, the OpCo typically fails the “conducted for” test grounded in section 355-210. The economic substance here: you’re a fee-for-service provider rather than the principal beneficiary of the innovation.
The Fix: If your business model genuinely requires a service arrangement, recognise that the entity receiving the benefit, the one that will own and exploit the IP, must be the one to claim the R&D Tax Incentive, provided it’s an eligible Australian entity. The service provider cannot make a valid claim. If you want your Australian entity to claim, you need to fundamentally restructure so that it holds effective ownership of the results, controls the R&D program, and bears the risk.
4. Group Structures with Associated Entities Delivering R&D
The Risk: You’ve created a new Australian entity specifically to claim the R&D Tax Incentive, while a related company, perhaps one that’s above the turnover threshold or otherwise ineligible, actually performs the R&D work, holds the IP, and makes all technical decisions. The claiming entity is effectively a shell, with minimal staff and no real capability to direct or supervise the research.
The ATO is actively reviewing these arrangements under Taxpayer Alert TA 2023/4, which targets structures where associated entities deliver R&D in ways that appear designed to maximise tax benefits rather than reflect commercial substance.
The Fix: Ensure the entity making the R&D Tax Incentive claim is the entity with the substance, the people, the decision-making authority, and the financial risk. If you’re using intercompany service agreements, they must be commercially robust and at arm’s length. The claiming entity must demonstrate that it genuinely controls the R&D, that it has been charged for services at market rates, and that it has paid those fees before year-end for the expenditure to be claimable. Even better: structure your operations so the entity conducting the R&D is the same entity claiming the incentive, eliminating this layer of complexity and risk.
5. Overseas Components Without an Overseas Finding
The Risk: Your clinical trial requires patient populations or specialist facilities only available overseas, perhaps you’re running a Phase II trial in collaboration with a European research hospital. You’ve included the costs of that offshore work in your R&D Tax Incentive claim without first obtaining specific approval.
Generally, if part of the biotech R&D must run overseas, you need an Overseas Finding first from the Department of Industry, Science and Resources. Without this advance approval, those costs are simply ineligible. Including them in your claim creates both an immediate disallowance and a signal to the ATO that your compliance processes may be inadequate.
The Fix: Apply for an Overseas Finding before you commence any overseas R&D activities. The application requires you to demonstrate that the activities cannot be conducted in Australia due to the absence of necessary facilities, expertise, or population groups. Document the necessity thoroughly, obtain the findings, and maintain detailed records of the offshore expenditure. This is a procedural requirement entirely within your control; there’s no reason to risk your claim by skipping this step.
The Impact on Claim Success and Cash Flow
When IP ownership structures don’t align with the “conducted for” test, the financial consequences extend far beyond a rejected claim. For biotech startups and SMEs, the R&D Tax Incentive refund represents essential fuel, the money that pays for laboratory consumables, staff salaries, and clinical trial progression. For eligible companies with an aggregated annual turnover under $20 million, the incentive provides a 43.5% refundable tax offset. Nearly half of every dollar spent on eligible R&D comes back as cash.
The refund timing creates its own challenge. Payments only arrive annually, months after the end of the financial year in which the expenditure was incurred. This creates a significant cash flow gap that can force companies to halt or slow down critical research while they wait. Now layer on the risk of a claim being reduced or denied entirely due to structural issues. The resulting delay, while you engage advisors, restructure arrangements, and potentially dispute the ATO’s assessment, can extend well beyond a year.
For innovative enterprises operating in the capital-constrained Australian biotech ecosystem, these delays go beyond inconvenience. They derail milestone achievements. They erode competitive advantage against better-funded international rivals. In extreme cases, they force the sale of IP assets or the winding down of operations entirely. Companies contributing to the sector’s 35% growth in biomedical R&D spend can find themselves unable to access the very incentive designed to support them, purely because of how they’ve structured their corporate affairs.
The sector context makes this particularly acute. With 178 ASX-listed biotechs and over 1,231 private companies as of March 2024, Australia has a mature biotech ecosystem that depends heavily on the R&D Tax Incentive to bridge the funding gap between research grants and commercial revenue. When structures fail the “conducted for” test, promising science can stall at the exact moment it needs momentum most.
How Rocking Horse Fits In: Your Finance Partner, Not Your Tax Advisor
Rocking Horse doesn’t determine your R&D Tax Incentive eligibility or prepare your claim; that’s the role of your tax advisors and R&D consultants. We solve a different problem: the cash flow gap that sits at the intersection of your R&D spend and your need to keep executing.
We provide non-dilutive R&D financing against your incurred, eligible R&D expenditure during the current financial year. Instead of waiting 12-18 months for your refund to arrive, you can access capital now. This is the working capital that keeps your trials enrolling patients, your researchers employed, and your development timeline on track. We work alongside your existing advisors, not in place of them. Your tax team assesses eligibility and prepares the claim; we provide the funding bridge that ensures financial constraints don’t throttle your scientific progress.
Think of our role as complementary. If you’re navigating the IP ownership questions raised in this article, your first conversation should be with specialist R&D Tax Incentive advisors who can assess your structure against the ATO’s “conducted for” test. Once you and your advisors have confidence in your eligibility, we can arrange fast, non-dilutive capital to ensure cash flow keeps moving while the formal claim process unfolds.
For start-ups and growing biotech companies, this approach means you don’t have to choose between financial prudence and scientific ambition. You can structure your IP arrangements correctly for both commercial success and R&D Tax Incentive compliance, while simultaneously accessing the capital you need to execute against your milestones. Just as sustainability in pharmaceutical operations requires balancing multiple objectives, building a capital-efficient biotech company requires aligning your corporate structure, tax compliance, and funding strategy.
IP and Structure Questions to Resolve Before You Claim
Before you register your R&D activities or lodge your claim, work through these questions with your advisors:
Ownership: Who will own or effectively own developed IP and know-how from the project? Do collaboration or licensing agreements grant the claimant the right to exploit results commercially? You’re looking for the practical rights to use and commercialise, not just the name on the patent certificate.
Control: Who has day-to-day control of the R&D? Can your entity make the critical decisions, selecting projects, changing research direction, stopping unproductive work, or pursuing unexpected discoveries? Or are these decisions made by a parent company or collaborator?
Financial Risk: Who bears the financial risk if the project fails? Is your entity funded through equity or commercial-rate debt where capital is genuinely at risk? Or through non-recourse loans or cost-plus arrangements that insulate you from loss?
Overseas Activities: Are there any overseas activities? If so, is an Overseas Finding needed? Don’t assume that work conducted offshore is automatically eligible; obtain advance approval where required.
Alignment Across Frameworks: Are transfer pricing, service fees and R&D Tax Incentive treatment aligned so the economic substance matches the documentation? Your structure needs to make sense not just for tax purposes, but for the operational reality of how your business actually functions.
If any of these questions surface concerns, address them now, before you register your activities with AusIndustry. Restructuring after the fact, or worse, during an ATO review, is exponentially more difficult and expensive than getting it right from the start.
Frequently Asked Questions
Can I claim if the university owns the IP?
It depends on the nature of your rights. The ATO looks at effective ownership, the practical ability to exploit the results commercially, not just legal title. If you have an exclusive license with substantive field-of-use rights and the ability to commercialise discoveries without ongoing payments, you may have effective ownership. If you only have a non-exclusive research licence with no commercialisation rights, you likely lack the necessary ownership. This is a complex area that requires careful drafting of collaboration agreements and assessment by specialist advisors.
Our parent company owns the global IP. Can the Australian subsidiary still claim?
This is precisely the structure targeted in ATO Taxpayer Alert TA 2023/5, which warns about arrangements where Australian entities conduct R&D but foreign parents hold IP rights or dictate development. The ATO’s concern exists regardless of whether the Australian entity has legal title to patents or has obtained an Overseas Finding. Whether your subsidiary can claim depends on the substance of the arrangement: does the Australian entity have genuine control over R&D decisions, does it bear real financial risk, and does it retain substantive rights to exploit the IP (even if the parent has certain licenses)?
These are fact-specific questions that require a detailed analysis of your agreements and operational reality. Many foreign-owned structures can be made compliant through careful structuring, but it requires proactive planning with advisors who understand both the R&D Tax Incentive rules and international tax considerations.
Structure for Success and Keep Cash Moving
The complexity of IP ownership structures and their intersection with R&D Tax Incentive eligibility continues to evolve. The ATO’s heightened scrutiny through Taxpayer Alerts TA 2023/4 and TA 2023/5 signals that compliance expectations are rising, not plateauing. For biotech CEOs and CFOs, the imperative is clear: proactively assess your corporate and IP structures now, before they become the reason a multi-million dollar claim is denied.
The good news? You don’t have to wait for a perfect structure to access capital. Once you and your advisors have confidence in your eligibility, Rocking Horse can provide non-dilutive R&D finance that bridges the gap between when you incur eligible spend and when the ATO refund arrives. We work alongside your tax team to ensure your funding strategy supports both compliance and growth, so you can fix any structural issues without compromising your runway.
Apply now to explore how R&D financing can support your runway while you optimise your structures for long-term success.