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1 Are the R&D activities conducted by Entity A a wholly owned subsidiary of Entity B, a company incorporated in foreign country, conducted for Entity A and not to a significant extent for Entity B for the purpose of section 355-210 of the Income Tax Assessment Act 1997 (ITAA 1997)?

1 Yes Question 2 Does section 355-405 of the ITAA 1997 'Expenditure not at risk' apply to expenditure incurred by Entity A on the underlying R&D activities conducted by Entity A to deny the notional deductions for the expenditure? Answer 2 No Question 3 Is the funding received by Entity A from Entity B in the form of debt and equity an assessable R&D recoupment for the purposes of section 355-440 of the ITAA 1997? Answer 3 No Question 4 Does certificate XXXXXXX for Advanced Finding and Overseas Finding apply to Entity A for the purposes of paragraphs 355-210(1)(d) and 355-210(1)(e) of the ITAA 1997? Answer 4 Yes This private ruling applies for the following period: X Month 20XX to X Month 20XX

This private ruling is based on the facts and circumstances set out in items 1-22 below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. Find out more about when you can rely on your private ruling at ato.gov.au/relyonprivateruling . Entity B Entity B is a company that focuses on developing novel products. Entity A Entity A was incorporated in Month 20XX. Entity A is a wholly owned subsidiary of Entity B, a company incorporated in a foreign country. Entity A is an R&D entity under section 355-35 of the ITAA 1997. Entity A from 20XX to 20XX had Australian resident directors who are highly respected industry experts. In 2024, the directors retired from the Board of Entity A and were replaced by another industry expert. R&D activities of Entity A Product X is a novel product currently being developed. The rights to Product X base IP were exclusively licensed to Entity B from a third party.

Under a license agreement Entity A is obliged to use commercially reasonable efforts to manufacture Product X and will own any associated intellectual property invented in the process of doing so. There are no restrictions on Entity A to sell or otherwise exploit the developed intellectual property. Further to this agreement Entity A has been granted the right to commercialise Product X (when successful) in its territory. Engagement of CMO1 by Entity A Entity A has engaged specialist contract manufacturing organisation (CMO1) in Australia to undertake the manufacture of the Product X, this constitutes the majority of the expenditure. Entity A has engaged CMO1 under a manufacturing agreement under which: Entity A retains all rights to its background technology and is the exclusive owner of all intellectual property specific to a product, process, deliverable and any improvements made to its background technology by CMO1 (to the extent that is does not contain CMO1's existing technology).

Entity A is required to pay CMO1 in line with the price detailed in their statement of work. Entity A is also financially responsible for any price increase due to regulatory changes and additional costs incurred by CMO1 (beyond those detailed in the statement of work). Further manufacture of Product X was undertaken by contract research organisation (CMO2) overseas. This process of manufacturing was undertaken abroad as CMO1, nor any entity in Australia, possessed the relevant technical capability or equipment to undertake this work. Engagement of CMO2 by Entity A Entity A has engaged CMO2 under a manufacturing agreement under which: Entity A owns and has an unrestricted free right to all intellectual property resulting from the engagement, with the exception of those intellectual property rights owned or controlled by CMO2 prior to the agreement. Entity A is required to pay CMO2 in line with the price detailed in the agreed manufacturing agreement. Entity A, through its directors, has and continues to manage and oversee the development of the manufacturing process undertaken by the CMOs. Advanced and Overseas Finding Certificate

Entity A has an Advanced and Overseas Finding Certificate from the Department of Industry, Science and Resources. The relevant Overseas Finding Certificate number is 0000000. The Advanced and Overseas Finding (certificate 0000000) was issued on the same R&D activities as those being conducted in the year ended XX Month 20XX. Entity A sells completed product X to Entity B at cost (CMO fees) plus a X% mark-up. In conducting the development of the manufacturing process Entity A bears the risks of the development. For example, during a previous manufacturing campaign, a number of Product X stock broke resulting in a significant loss to Entity A. Once Product X is commercialised Entity A will be required to pay a X% royalty on all third-party sales in their territory to Entity B. In turn, Entity B required to pay a third party royalty for the base IP equal to X% on sales in Entity A's territory. Entity A has funded the R&D activities through debt and equity funding from Entity B. Historically, debt funding has been repaid, in part, through the sale of Product X stock to Entity B. The debt funding is interest bearing and not limited recourse. Core and supporting R&D activities

For the year ended XX Month 20XX Entity A registered both core and supporting activities. Assumptions Entity A has satisfied all integrity provisions in Subdivision 355-F of the ITAA 1997 that are not addressed in this ruling. Does Part IVA apply to this private ruling? Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. For more information on Part IVA, go to our website ato.gov.au/gaar .

These reasons for decision accompany the Notice of private ruling for Entity A This is to explain how we reached our decision. This is not part of the private ruling. Question 1 Are the R&D activities conducted by Entity A a wholly owned subsidiary of Entity B, a company incorporated in foreign country, conducted for Entity A and not to a significant extent for Entity B for the purpose of section 355-210 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary Yes, the R&D activities are conducted for Entity A and not to a significant extent for Entity B. Detailed reasoning Notional deductions for R&D expenditure 1.              Broadly, Subdivision 355-D of the ITAA 1997 provides the conditions a R&D entity must satisfy to enable it to notionally deduct its expenditure on registered R&D activities. Specifically, sub-section 355-205(1) provides that an R&D entity can deduct expenditure incurred in the current year to the extent that the expenditure: (1) An *R&D activity covered by one or more of the following paragraphs is an activity to which this section applies: (a)            is incurred on one or more R&D activities:

(i)              for which the R&D entities is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and (ii)             that are activities to which section 355-210 (conditions for R&D activities) applies... Conditions for R&D activities: 2.              Section 355-210 of the ITAA 1997 provides the conditions for activities to be recognised as R&D activities. Subsection 355-210(1) of the ITAA 1997, includes: (1) An *R&D activity covered by one or more of the following paragraphs is an activity to which this section applies: (a)           the R&D activity is conducted for the *R&D entity solely within Australia; ... (d)           the R&D activity is: (i)                  conducted for the R&D entity solely outside Australia; and (ii)                  covered by a finding in force under paragraph 28C(1)(a) of the Industry Research and Development Act 1986 ; (e)           the R&D activity consists of several parts, with: (i)                  some parts being conducted for the R&D entity solely within Australia; and

(ii)                  the other parts being conducted for the R&D entity outside Australia while covered by a finding in force under paragraph 28C(1)(a) of the Industry Research and Development Act 1986 . 3.              Subsection 355-210(2) of the ITAA 1997 provides an exclusion to section 355-210 of the ITAA 1997. It states: (2) However, an *R&D activity is not an activity to which this section applies if the activity is conducted, to a significant extent, for one or more other entities not covered by any paragraph of subsection (1). 4.              Paragraphs 3.52 to 3.55 of Explanatory Memorandum to the Tax Laws Amendment (Research and Development) Bill 2010 (the EM), which introduced section 355-210, explain: 3.53 This retains a key rule from the existing law commonly known as the 'on own behalf' rule. This rule is intended to limit eligibility for a notional R&D deduction to where an R&D entity is the major benefactor from the expenditure it incurs on the R&D activities. In certain situations, the rule also prevents duplication of claims by different R&D entities. [Schedule 1, item 1, section 355-210]

3.54 Determining the major benefactor of expenditure on R&D activities involves examining the extent to which R&D activities are carried out for the R&D entity compared to the extent to which they are carried out for any other entity. This is tested by weighing up three key criteria, namely who: •                'effectively owns' the know-how, intellectual property or other similar results arising from the R&D entity's expenditure on the R&D activities; •                has appropriate control over the conduct of the R&D activities; and •                bears the financial burden of carrying out the R&D activities. In short, the question of whether an R&D activity is conducted for an R&D entity is a question of fact, determined by whether the activity is conducted in substance to provide the majority of knowledge benefits resulting from the activity, such as access to intellectual property, to this entity.

3.55 Whether an R&D entity has effective ownership involves reviewing all the circumstances surrounding the conduct of the relevant activities and the ownership and control of, and/or ability to utilise, the intellectual property or similar results obtained from the expenditure on the R&D activities. 5.              Paragraph 3.54 of the EM provides guidance on the 'conducted for' requirement in section 355-210(1) of the ITAA 1997, detailing 3 key criteria in determining whether the R&D activities have been conducted 'for' the R&D entity. Applying these key criteria from the EM to a particular case requires weighing them up against the relevant facts and circumstances of that case. However, any R&D activities which are conducted, to a significant extent, for one or more other entities not covered by any paragraph of subsection 355-210(1) of the ITAA 1997, are not activities to which section 355-210 of the ITAA 1997 applies. Application to your circumstances Effective ownership

6.              Entity A, under its CMO agreements, retains the rights to any intellectual property generated under the agreements, except for any existing intellectual property rights owned or controlled by the CMOs. Under the License Agreement between Entity A and Entity B, Entity A maintains the responsibility for the development of a process to manufacture Product X and subsequently owns any resulting intellectual property it develops in relation to this work. Consistent with this right, Entity A sells the manufactured product X of its R&D activity to Entity B based on fully absorbed costs (CMO costs) plus a mark-up of X%. 7.              The License Agreement provides Entity A with the exclusive right to commercialise Product X in its territory. At that time, Entity A will be required to pay a royalty to Entity B upon all net sales in their territory, being sales to third parties once Product X is a commercialised product. In turn, Entity B is required to pay a X% royalty of all net sales in the territory (and elsewhere) to a third-party licensor for the base IP.

8.              Subsection 355-210(1) of the ITAA 1997 requires the 'conducted for rule' be considered on an R&D activity basis as registered by the R&D entity. The registered R&D activities for the year end XX Month 20XX concern the manufacturing of product X itself. Entity A not only retains any resulting intellectual property it develops in relation to the manufacturing work undertaken by the CMOs but is also exploiting the results of the manufacturing R&D activities through its sales to Entity B. Additionally, it has further commercialisation rights in its territory. As such, Entity A effectively owns the know-how, intellectual property or other similar results arising from the R&D activities. It is in a position to, and does, commercially exploit its effective ownership of the R&D activity. Financial burden 9.              Entity A engaged CMO1 directly under a manufacturing agreement, which requires Entity A to pay CMO1 in line with the price detailed in their statement of work. Entity A is also financially responsible for any price increase due to regulatory changes and additional costs incurred by CMO1 (beyond those detailed in the statement of work).

10.          Entity A has also engaged CMO2 under a manufacturing agreement, which requires Entity A to pay CMO2 the price detailed in the manufacturing agreement. 11.          Under Entity A's manufacturing agreements with CMO1 and CMO2 that Entity A bears the legal liability and financial burden to meet the costs associated with the R&D activities. Further to this, Entity A has, and continues to maintain the means to meet its financial obligations to CMO1 and CMO2 through the provision of debt funding from Entity B and through the prospect of further revenue from the sale in their territory of commercialised Product X. 12. Control of the R&D activities

13.          Identification of suitable CMO to undertake the R&D activities was made under the advice and direction of Entity A's 2 Australian directors at the time, director A and director B. Since director A and director B's retirement in 20XX director C has been appointed as the Australia director. Entity A has, and continues to, oversee and manage the manufacturing process and associated CMO functions through its relevantly skilled directors. Through its director's management and oversight Entity A retains the appropriate control over the conduct of the activities. The agreements and conduct of the arrangement show that the R&D activities are not controlled by the CMOs, with the services they provide being under the control of Entity A. Also, no entity other than Entity A participates in the direction and control of the R&D activities that are conducted. Significant extent

14.          Subsection 355-210(2) of the ITAA 1997 excludes any activities that have been conducted, to a significant extent, for any entity not covered by subsection 355-210(1). In this circumstance, subsection 355-210(2) requires consideration of what benefit, if any, Entity B obtains from the arrangement with Entity A and the R&D activities being performed for Entity A. Under the arrangement, Entity A as the manufacturer is commercially remunerated for its manufacturing efforts comprising the R&D activities through a cost-plus structure. The primary benefit derived from this arrangement is the remuneration resulting from the cost-plus structure. This is a common pricing model used in the manufacturing sector, particularly where projects and tasks present with a high degree of uncertainty such as those in an R&D context. Entity A receives this remuneration in both a legal and commercial context, rather than Entity B. Entity B acquires manufactured goods as its only benefit from the arrangement and at a cost equivalent to the price it would pay for goods from another supplier, or at a similar cost had it chosen manufactured the good itself. Entity B does not own, or have any other interest in, the results of the R&D activities. Entity B does not participate in any way in the control of the R&D activities, and does not bear any financial burden of the R&D expenses met by Entity A in any relevant way, providing only group financing by way of usual equity and loan funds. In these circumstances, Entity B does not to any extent, or to any significant extent, obtain a benefit from the R&D activities.

Conclusion 15.          The R&D activities were conducted for Entity A and not, to a significant extent, for Entity B for the year ended 31 December 2024. Question 2 Does section 355-405 of the ITAA 1997 'Expenditure not at risk' apply to expenditure incurred by Entity A on the underlying R&D activities conducted by Entity A to deny the notional deductions for the expenditure? Summary No, the 'expenditure not at risk' integrity rule does not apply to the expenditure incurred by Entity A. Detailed reasoning Expenditure not at risk: 16.          Section 355-405 of the ITAA 1997 prevents an R&D entity from claiming a notional R&D deduction for expenditure that is not 'at risk'. It provides: (1) An *R&D entity cannot deduct expenditure under section 355-205 or 355-480 if: (a)            when it incurs the expenditure, the R&D or its *associate had received, or could reasonably be expected to receive, consideration: (i)                  as a direct or indirect result of the expenditure being incurred; and (ii)                  regardless of the results of the activities on which the expenditure is incurred; and

(b)            that consideration is equal to or greater than the expenditure. Note: Section 355-205 is about deductions for R&D expenditure. Section 355-480 is about deductions for earlier year associate R&D expenditure. (2) If: (a)            when an *R&D entity incurs expenditure, the R&D entity or its *associate had received, or could reasonably be expected to receive, consideration: (i)                  as a direct or indirect result of the expenditure being incurred; and (ii)                  regardless of the results of the activities on which the expenditure is incurred; and (b)            that consideration is less than the expenditure; the R&D entity cannot deduct under section 355-205 or 355-480 so much of the expenditure as is equal to the consideration. (3) for the purposes of paragraphs (1)(a) and (2)(a), have regard to: (a)            anything that happened or existed before at the time the expenditure is incurred; and (b)            anything that is likely to happen or exist after that time. (4) This section does not apply to expenditure incurred on *R&D activities covered by paragraph 355-210(1)(b) or (c).

Note: Those paragraphs cover R&D activities conducted for foreign residents. 17.          Taxation Ruling TR 2021/5 Income tax: research and development tax offsets - the 'at risk' rule (TR 2021/5) provides the Commissioner's view when considering the tests for determining whether an R&D entity's expenditure is 'not at risk' under section 355-405 of the ITAA 1997. It includes the following example: Example 10 - repayable loan 110. Hartlock Pty Ltd (Hartlock) is a small pharmaceuticals R&D entity that takes out a full recourse loan of $100,000 from ABC Bank Ltd (ABC) to fund its research into producing its latest heart medication. The parties are dealing with each other at arm's length. 111. Interest is payable on the loan and the loan is repayable after a five-year term to ABC. This money is loaned on the condition that Hartlock must use the loan funds to incur expenditure on R&D activities which meet certain quality standards. 112. Shortly after signing the loan agreement, Hartlock draws down and receives the $100,000 loan proceeds from ABC.

113. The agreement by ABC to grant the loan facility in favour of Hartlock is non-monetary consideration (being an interest in a credit arrangement) which Hartlock receives to incur expenditure on R&D activities regardless of the results of Hartlock's R&D activities. 114. However, in working out the value of that consideration for determining the amount subject to the 'at risk' rule, it is necessary to consider what has happened and what is likely to happen. 115. In this case, at the time Hartlock is granted the loan, Hartlock is required to repay and expects to have the capacity to repay ABC the $100,000 of borrowed monies, together with interest under the terms of the loan. As the financial benefits Hartlock has received will be equalled or exceeded by its financial obligations under the terms of the loan, the value (and amount) of consideration to Hartlock under the 'at risk' rule is nil. 116. The 'at risk' rule will not prevent Hartlock from notionally deducting all of its R&D expenditure. Application to your circumstances

18.          Expenditure is not at risk to the extent that, when it is incurred, you could reasonably have expected to receive consideration as a direct or indirect result of incurring the expenditure, irrespective of the results of the activities.

19.          Under the arrangement, money received by Entity A from Entity B is of 2 distinct types which may be in the nature of consideration for the purposes of the not at risk rule. The first is the remuneration for the supply of Product X resulting from successful R&D. The second being the ongoing funding via debt and equity. In relation to the first type of funds, Entity A is remunerated on a commercial basis for the supply of Product X. This consideration is neither received merely for incurring the expenditure nor for merely performing R&D activities as such. Rather, it is for the supply of commercial goods in performance of its contractual obligation to deliver these goods. Further,, with the obligation to supply a product suitable comes significant developmental risk. This risk is demonstrated by past conduct between Entity A and Entity B. Where Product X produced under the R&D activities resulted in an unsuitable product, Entity A has been responsible for absorbing replacement costs. As such, it cannot be concluded that Entity A receives this renumeration simply as a result of incurring the R&D expenditure or regardless of the results.

20.          Evidence that money lent is not genuinely repayable can result in the not at risk rule applying. The second type of funding includes debt funding received by Entity A in exchange for the promise to repay the funds plus interest, not for merely incurring the R&D expenditure. Moreover, in line with example 10 in TR 2021/5, the money received by Entity A will be exceeded by the financial obligations for repayment under the terms of the debt funding and as such does not attract the application of the at risk rule. Conclusion 21.          The 'not at risk' rule in section 355-405 of the ITAA 1997 will not apply to either type of funding. Question 3 Is the funding received by Entity A from Entity B in the form of debt and equity an assessable R&D recoupment for the purposes of section 355-440 of the ITAA 1997? Summary No, the funding received by Entity A from Entity B does not constitute an assessable R&D recoupment for the purposes of section 355-440 of the ITAA 1997. Detailed reasoning Section 355-440 of the ITAA 1997 provides what constitutes R&D recoupments. It states: (1) The *R&D entity has an amount under this section if:

(a)           the entity, or another entity mentioned in subsection (5), receives or become entitled to receive a *recoupment from either of the following (otherwise than under the *CRC program): (i)                  an *Australian government agency; (ii)                  an STB (within the meaning of Division 1AB of Part III of the Income Tax Assessment Act 1936 ) ... Application to your circumstances 22. Entity A has received funding from Entity B in the form of debt and equity funding. Entity B is a foreign incorporated company. Entity A has not received funding, or become entitled to received funding from, an Australian government agency or a body that is a State or Territory body as defined in Division 1 AB of Part III of the Income Tax Assessment Act 1936. The funding received from Entity B by Entity A does not constitute an assessable R&D recoupment for the purposes of section 355-440 of the ITAA 1997. Question 4 Does Certificate XXXXXXX for Advanced Finding and Overseas Finding apply to Entity A for the purposes of paragraphs 355-210(1)(d) and 355-210(1)(e) of the ITAA 1997? Summary

Yes, certificate XXXXXXX for Advanced Finding and Overseas Finding applies to Entity A for the purposes of paragraphs 355-210(1)(d) and 355-210(1)(e) of the ITAA 1997. Detailed reasoning 23.          Section 355-210(1) of the ITAA 1997 provides the following conditions for R&D activities. It states: An * R&D activity covered by one or more of the following paragraphs is an activity to which this section applies: (a) the R&D activity is conducted for the * R&D entity solely within Australia; (d) the R&D activity is: (i)                  conducted for the R&D entity solely outside Australia: and (ii)                  covered by a finding in force under paragraph 28C(1)(a) of the Industry Research and Development Act 1986 (e) the R&D activity consists of several parts, with: (iii) some parts being conducted for the R&D entity solely with Australia; and (iv) the other parts being conducted for the R&D entity outside Australia while covered by a finding in force under paragraph 28C(1)(a) of the Industry Research and Development Act 1986 . Application to your circumstances

24.          The R&D activities for the year ended 31 December 2024 were conducted for Entity A (see Question 1). In addition to this, Entity A has obtained an Advanced Finding and Overseas Finding for the relevant R&D activities and as such paragraphs 355-210(1)(d) and 355-210(1)(e) of the ITAA 1997 have application.