Connected and affiliated entities in an R&D claim

If your business is part of a group, whether through common control, cross-shareholding, or a web of trusts and partnerships, the R&D Tax Incentive rules require you to look beyond your own company. Connected and affiliated entities can change your aggregated turnover, your expenditure totals, and ultimately how much offset you may be able to claim. Getting this wrong is one of the most common ways an otherwise solid claim attracts review. What follows is general information only, not tax, financial, or legal advice. You should confirm your own situation with a registered tax agent before lodging any claim.

This guide walks through the practical steps Australian businesses and their advisors can take to map entity relationships, apply the aggregation rules correctly, and build a record set that supports the claim. The R&D Tax Incentive is jointly administered by the Australian Taxation Office (ATO) and the Department of Industry, Science and Resources (via AusIndustry), and the entity grouping rules draw from definitions in the Income Tax Assessment Act 1997.

Prerequisites for assessing connected and affiliated entities

Before you start working out how grouping affects your claim, gather these items. They will make the mapping exercise precise and help your registered accountant or tax agent give you a clear view.

• Your corporate structure chart: a diagram showing every entity in the group, including companies, trusts, partnerships, and sole-trader structures that sit under common control. Even entities that are dormant or holding entities matter because they may influence control percentages.
• Copies of relevant entity constitutions and shareholder agreements: these can reveal default voting rights, casting-vote arrangements, and rights to appoint directors, details that feed into the control test for connected entities.
• Access to annual financial statements: for each entity, at least the most recent full-year statements. The aggregated turnover calculation needs the ordinary income and other assessable amounts of the whole group.
• Agreement with a registered tax agent: the rules around connected entities and affiliated entities are complex and the ATO publishes detailed guidance. No software or guide can replace a registered tax agent’s judgment when you interpret directors’ voting power or the influence of a family trust. If you’re already working with an accountant, let them know you’re mapping entity relationships for an R&D claim. If you’re exploring the incentive for the first time, GrantsMAX for first-time claimants shows what you may be eligible for and prepares the pack from your data, which your accountant then reviews and lodges.

Step 1: Map your corporate structure with precision

Start with a list of every entity that could be part of the group. Don’t assume that because a subsidiary files its own tax return it sits outside the R&D aggregation rules. The ATO’s view, set out in its Steps for claiming R&D tax offset, is that you must consider all connected entities and affiliates of the R&D entity, and the turnover of all those entities may be aggregated.

List all entities in the group

Write down every Australian and foreign entity where:

• the same individuals or family group hold more than 50% of the voting power, or
• one entity controls the composition of the board of another, or
• the entities are connected through a chain of control (entity A controls B, B controls C, so A, B, and C are all connected).

Foreign entities are included because the aggregated turnover rules look at the worldwide group, not just Australian operations. This can matter a great deal for businesses that are Australian subsidiaries of an overseas parent. Even if the parent does no R&D in Australia, its turnover may push the aggregated figure above a threshold that changes the R&D tax offset rate.

Identify direct and indirect control relationships

Control in this context means the capacity to determine the outcome of decisions about the financial and operating policies of the entity. The ATO and AusIndustry take a substance-over-form approach. A 40% shareholding might be enough if the remaining shares are widely held and no other party can block the decisions. Don’t rely only on registered share percentages; look at who appoints the directors, who holds a veto right, and who controls the trustee of any trust involved.

Watch for de facto control

De facto control can arise from relationships that aren’t captured by simple share counts. For example, one company may be financially dependent on another, or a long-term supply agreement might give the supplier the practical ability to direct the business. The Check if you are eligible for the R&D Tax Incentive page on business.gov.au encourages self-assessment of eligibility factors, and entity relationships are a key part of that assessment. If you have any doubt about whether an entity should be treated as connected, flag it for your tax agent early.

Step 2: Understand the legal definitions of connected and affiliated entities

This is where many businesses trip up. The terms “connected entity” and “affiliate” have specific meanings in the tax law, and they aren’t just synonyms for “related party.”

Connected entities under the aggregation rules

Two entities are connected if:

• one controls the other (the control test), or
• both are controlled by the same third entity, or
• an entity and a partnership are connected if the entity is a partner and the partnership is not a widely held unit trust or a complying superannuation fund, or
• an entity and a trust are connected if the entity controls the trustee or has a fixed entitlement to a share of income or capital of the trust of at least 40%.

The Income Tax Assessment Act 1997 defines these tests in section 328-125 and surrounding provisions. For R&D claims, the ATO applies the same definition to determine which entities’ turnover gets added together.

Affiliated entities and the ATO’s view

An entity is an affiliate of another if it acts, or could reasonably be expected to act, in accordance with the directions or wishes of the other entity. The relationship does not need to be documented; it can arise from family ties, business dependency, or informal understandings. The ATO’s guidance in R&D tax offset - understanding affiliates and connected entities (PwC Australia’s tax alert) provides examples of affiliate relationships that can cause aggregated turnover to swell unexpectedly, for instance, a husband and wife each running a separate company but where one company’s decisions are routinely made by the other spouse.

Why the distinction matters for the R&D claim

The connected and affiliated entity rules impact your claim in three critical ways:

1. Aggregated turnover: you must add the ordinary income of the R&D entity and all its connected entities and affiliates. That single figure determines whether you access the refundable or non-refundable R&D tax offset.
2. Expenditure aggregation: expenditure on R&D activities incurred by connected entities may need to be consolidated or may attract feed-in rules that affect the R&D entity’s claim.
3. Integrity provisions: the ATO targets structures that attempt to split turnover artificially across entities to stay under a threshold. If your entity mapping doesn’t hold up, the claim can be adjusted and penalties may apply.

Step 3: Determine how grouping affects aggregated turnover

Aggregated turnover is the sum of the ordinary income of the R&D entity and all entities that are connected or affiliated with it at any time during the income year. Ordinary income includes sales, service fees, royalties, and other amounts that are assessable in Australia, excluding capital gains. The R&D Tax Incentive-Aggregate Turnover guide from Bulletpoint explains how to calculate this figure and why it can change your offset category.

Calculate aggregated turnover step by step

1. Identify the R&D entity that will lodge the claim.
2. List all connected entities and affiliates (as mapped in Step 1).
3. Obtain the ordinary income of each entity for the same income year. If an entity has a substituted accounting period, align the period to the R&D entity’s income year.
4. Add those amounts together. Exclude income from transactions between entities in the group (intra-group sales) to avoid double counting. The ATO expects you to eliminate these.
5. The resulting figure is your aggregated turnover for that income year.

The $20 million refundable offset threshold (and proposed change)

Currently, if your aggregated turnover is less than $20 million, you may be eligible for the refundable R&D tax offset, which means you can receive a cash refund if the offset exceeds your tax liability. If your aggregated turnover is $20 million or more, the offset is generally non-refundable, meaning it reduces your tax payable but doesn’t generate a cash refund. These thresholds are set in the tax law and should be checked for your current income year.

In the 2026 reform (announced but not yet enacted as at the time of writing), the government has proposed raising the refundable offset turnover threshold from $20 million to $50 million. As with any proposed change, you must verify its status with a registered tax agent and not rely on it for a current claim. The GrantsMAX for growing companies page discusses how the proposed reform may affect businesses as their turnover grows.

Example: a startup with two subsidiaries

Suppose StartupCo Pty Ltd develops a software product and is 100% owned by Founder. Founder also owns 100% of SalesCo Pty Ltd, which markets the software, and 60% of DevCo Pty Ltd, which does contract development. StartupCo, SalesCo, and DevCo are all connected entities because they are controlled by the same individual. If StartupCo conducts R&D and wants to claim the incentive, its aggregated turnover will include the ordinary income of SalesCo and DevCo. Even if StartupCo itself is below $20 million, adding SalesCo’s revenue might push the group over the threshold, switching the offset from refundable to non-refundable.

Step 4: Work out R&D expenditure that needs to be counted at the group level

Just as turnover is aggregated, R&D expenditure may need to be examined across the group. However, the rules are not as simple as adding all R&D spend from every connected entity.

Expenditure to include from connected and affiliated entities

The R&D entity itself claims notional deductions for eligible R&D expenditure it incurs directly. If a connected entity incurs expenditure on R&D activities for the R&D entity, that expenditure can sometimes be treated as if the R&D entity incurred it, under what are known as the “feed-in” rules. This most often applies when a group service company employs the R&D staff and charges a management fee to the R&D entity. The ATO and AusIndustry scrutinise these arrangements to ensure the R&D entity truly bears the risk and controls the activities. Simply moving staff onto a different entity’s payroll without changing day-to-day substance won’t work.

What about intra-group transactions?

Payments between connected entities for R&D services are generally not deductible as R&D expenditure if they create double counting. For example, if DevCo charges StartupCo for software development, and StartupCo is the R&D entity, the payment from StartupCo to DevCo is an expense, but the R&D activity is being conducted by DevCo, not StartupCo. The R&D entity must itself conduct the core and supporting R&D activities. The Accountant Review & Lodge Workflow illustrates how a complete, evidence-backed pack separates activity narratives by entity and flags intra-group charges that need review.

Notional deductions and feed-in rules

When a connected entity incurs expenditure that relates to R&D activities conducted for the R&D entity, the R&D entity may be able to include that expenditure in its notional deductions, provided certain conditions are met. The rules are in Subdivision 355-E of the Income Tax Assessment Act 1997. It’s a technical area best navigated with a registered tax agent. GrantsMAX can help by pulling together your entity data from connected accounting files (Xero, MYOB, QuickBooks, Microsoft 365, Google Workspace, read-only) and drafting the cost structure so your accountant can see exactly where each dollar sits. AI Application Pack Drafting turns that data into a complete application pack.

Step 5: Apply the aggregated turnover figure to the R&D tax offset rate tests

Once you have your aggregated turnover and the group’s R&D notional deductions, you can work out which offset rate applies.

Refundable vs. non-refundable offset rates

The refundable R&D tax offset is currently 18.5 percentage points above the corporate tax rate for eligible entities with aggregated turnover under $20 million. For entities with aggregated turnover of $20 million or more, the non-refundable offset is linked to a premium that varies with R&D intensity. These rates are set by legislation and can change; always refer to the ATO’s current Steps for claiming R&D tax offset for the income year you are claiming.

How the turnover test interacts with entity status

A common misunderstanding is that only the R&D entity’s turnover matters. The law says otherwise: you must use the aggregated turnover of the group. So even if your R&D entity is a small startup, the presence of an affiliate with significant income can push you into the non-refundable category. If you’re uncertain about an entity’s status, Eligibility Assessment & Risk Flags can help you identify where a reviewer might ask questions, but the final call rests with your tax agent.

The importance of keeping current income year rules in mind

The R&D Tax Incentive has seen multiple legislative changes, and more are proposed. The R&D tax incentives: Integrity rules and taxpayer alerts article from Holding Redlich highlights how the ATO and AusIndustry focus on entity structures that appear designed to manipulate thresholds. Make sure you’re applying the rules for the income year in question, not a previous year’s version, and that you confirm the latest rates, thresholds, and definitions with a registered tax agent. The R&D Tax Incentive: Targeting Access explanatory materials from Treasury provide background on the policy intent, but your tax agent will help you apply the law as it stands.

Step 6: Document your entity mapping and keep contemporaneous records

Because entity grouping is an area the ATO actively reviews, your records should stand up to scrutiny years after the claim is lodged.

Evidence to retain for entity relationships

• A dated entity structure diagram, with control percentages and notes on how each connection was determined.
• Board minutes or resolutions that record any changes in directors, voting rights, or shareholder agreements during the income year.
• Financial statements for each connected entity and affiliate, clearly showing ordinary income and intra-group eliminations.
• Email correspondence where control or affiliate status was discussed with advisors.

The Record keeping guidance on business.gov.au sets out general principles that apply to R&D entity records, especially the need for contemporaneous evidence.

Linking records to the R&D claim

When you prepare the R&D application, your aggregated turnover calculation should be referenced to the source documents. GrantsMAX’s Audit-Ready Evidence Trail builds a supporting-evidence index that ties each figure in the claim pack to the underlying invoices, timesheets, and financial reports, which gives your registered accountant a clear line of sight and helps the business own the claim.

Using technology to build an audit trail

Manually reconciling entities’ financials each year is labour-intensive. Platforms that connect directly to your accounting software can pull the data for each entity and flag changes in control or turnover. Grant & R&D Discovery and Matching continuously scans programs and matches them to your business profile, while the Annual Refresh & Accountant Channel repeats the analysis each financial year so that any turnover changes are picked up early. That way, if a subsidiary’s income grows, you’ll see the potential impact before the claim is lodged.

Pro tips and warnings

Tip: Map early to avoid surprises
Don’t wait until the end of the income year. Draw your entity map now and update it whenever a new entity is created, an acquisition occurs, or a shareholder agreement changes. If you’re a manufacturer introducing a new product line, the associated GrantsMAX for manufacturers page explains how process improvement and automation work may be eligible; but any new entity created to hold IP or handle production could affect your grouping.

Warning: Group changes during the income year
If your business acquires or sells a subsidiary partway through the income year, the aggregated turnover calculation must include the other entity’s ordinary income for the part of the year it was connected. If a connection exists for even one day, it counts. The ATO expects a full-year aggregation unless you can clearly demonstrate the timing.

Tip: Coordinate with your accountant before lodging
When you use GrantsMAX, the platform prepares an evidence-backed pack and hands it to your registered tax agent in a shared workspace. The accountant reviews, refines, and lodges the claim, the business owns the claim. For founders and CFOs, GrantsMAX for founders and CFOs shows how this workflow brings down the cost compared with legacy consultants while keeping the accountant in control. If you’re a technology company with complex entity structures, GrantsMAX for technology companies can help draft the narratives and cost mapping your agent will need.

Warning: Don’t try to “turn off” an affiliate relationship
Some businesses attempt to restructure ownership just before the income year end to break a connection and reduce aggregated turnover. The ATO and AusIndustry have integrity measures that can disregard artificial arrangements. Always seek professional advice before making structural changes, and consider the long-term business purpose, not just the tax outcome.

Summary and key takeaways

Getting connected and affiliated entities right in an R&D claim isn’t a box-tick exercise, it’s a foundation piece. Here are the most important points:

• The R&D Tax Incentive requires you to aggregate turnover across the group under the connected entity and affiliate definitions in the tax law.
• Miscalculating this figure can push you from a refundable offset to a non-refundable offset, or lead to a claim adjustment later.
• Mapping entities with a detailed structure chart, shareholder agreements, and financials is the only safe starting point.
• Intra-group R&D expenditure calls for careful analysis of who conducts the activities and bears the risk; the feed-in rules are technical and need a registered tax agent’s input.
• Keep contemporaneous records of entity relationships, control decisions, and turnover calculations. An audit-ready evidence trail makes the whole claim defensible.
• None of this is tax advice. The law and rates change; always confirm thresholds, definitions, and your eligibility with a registered tax agent for the specific income year.

If you’re still unsure how your corporate structure affects your R&D claim, Compare pages: see how GrantsMAX stacks up against grant directories and traditional consultants. Read What is the R&D Tax Incentive? to solidify the basics. For R&D-active startups, GrantsMAX for R&D-active startups explains how early-stage work can be eligible and how GrantsMAX reads your Xero data to build the pack.

Take the next step with GrantsMAX

Entity mapping is one of those tasks that quietly decides whether a claim stands up. GrantsMAX handles the heavy lifting, connecting to your accounting data, identifying connected entities and their turnover, and drafting a substantiated application pack, so you and your registered accountant can move straight to review and lodge. Join the waitlist today at www.grantsmax.com and be ready for the next funding round.