Quick answer: Yes, you can claim R&D paid to a related company or associate where the underlying expenditure is otherwise eligible and the activities are conducted for you, but the amount is broadly only deductible in the income year it is actually paid or settled with real value (not merely accrued or credited to an inter-company loan account or similar internal settlement mechanism). Where you don't deal at arm's length, the claim is also capped at the market value of the work supplied. Confirm eligibility and timing with your own tax agent (self-assess).
25 June 2026 — the 2026–27 Federal Budget announced R&DTI changes scheduled to start 1 July 2028; this article describes the current rules unless stated otherwise.
A company finishes a strong development year, racks up a large invoice from a sister company that did much of the technical work, and books the cost in its accounts before 30 June. The R&D schedule goes in, the refund looks healthy — and then, on review, the Australian Taxation Office (ATO) asks one quiet question: was that amount actually paid? If the invoice was merely accrued, or "settled" through an inter-company loan account, the answer is often no. The deduction doesn't disappear forever, but it can be pushed into a later year, which is rarely what the cash-flow plan assumed.
This is the associate payment-timing trap. It is one of the few R&D Tax Incentive (R&DTI) rules that catches sophisticated, well-advised groups precisely because it runs against normal tax intuition — and almost no one explains it in a dedicated piece. Here is how it works and how to stay on the right side of it.
The default rule, and the exception for associates
For most R&D expenditure, the R&DTI follows the ordinary tax principle: an amount is notionally deductible in the income year it is incurred — broadly, when you become definitively committed to it — regardless of when you actually pay. That is the rule for arm's-length contractors, salaries and most consumables.
Expenditure to an associate is the carve-out. Under the R&DTI rules in Division 355 of the Income Tax Assessment Act 1997, an amount incurred to an associate can only be notionally deducted in the income year in which it is actually paid. Incurring it isn't enough. The ATO is explicit that the expenditure must be paid, in that year, before it can form part of your notional deductions (ATO, "Expenditure you can claim").
Who is an "associate"?
"Associate" is a deliberately wide concept, defined in section 318 of the Income Tax Assessment Act 1936. For a company claimant it can include, among others:
Another company under common control or ownership (a sister or parent entity in your group)
Directors and their relatives
A trust or partner connected to the entity or its controllers
If R&D work is being done by another part of your corporate group, or by a director personally, assume the associate rules are in play and check the definition rather than guessing.
What "paid" means
The sharpest edge of the rule is what counts as payment. Broadly, only in the income year the amount is actually paid or settled with real value — not merely accrued or credited to an inter-company loan account — does it count. In practice that usually means real value has left the claimant and reached the associate. Because this is fact-specific, confirm your timing with your own tax agent (self-assess). The following generally do not count as having paid the amount in the year:
Booking a journal entry or accrual
Crediting the amount to a loan account or inter-company current account
A "round-robin" where the same funds are lent back, gifted back, or circulated and returned
Where an amount to an associate is incurred but not paid by year-end, the deduction is not lost — it simply rolls forward and may be claimed in the later income year in which it is finally paid. The cost is timing, not eligibility.
Associates vs ordinary contractors
It's worth being precise, because the two are treated differently. As a quick decision guide:
SituationWhich rule appliesTiming / market-value consequenceNon-associate (arm's-length) contractorOrdinary "incurred" ruleGenerally claimable in the year the cost is incurred (definitively committed), even if the invoice isn't paid by 30 June. No related-party market-value cap. Must still be "conducted for you".Associate (related company, director, etc.)Associate "actually paid" ruleClaimable only in the income year the amount is actually paid or settled with real value — not merely accrued or credited to an inter-company loan account. If incurred but unpaid at year-end, the deduction rolls forward. Where you're not at arm's length, the claim is capped at market value.Amount "settled" via a loan / inter-company current accountTreated as not yet paid for an associateCrediting a loan account, journal entry or round-robin generally does not satisfy "actually paid". Deduction is deferred until the amount is actually paid or settled with real value — not merely accrued or credited to an inter-company loan account.
These are general indicators — self-assess your own facts and confirm with your tax agent. Now in more detail:
Ordinary (non-associate) contractors. If you engage an arm's-length contractor to carry out eligible R&D activities, the expenditure is generally claimable when it is incurred — you don't have to have paid the invoice by 30 June for that year's claim, provided you were definitively committed to the cost. The key questions are whether the activities are eligible and whether they were conducted for you.
The "conducted for you" test. You can only notionally deduct expenditure on R&D activities conducted for your company — broadly, where your company bears the financial risk, effectively controls the project, and stands to gain the benefits (such as the resulting intellectual property). The ATO sets out who R&D activities are "conducted for" in its guidance on the point (ATO, "R&D activities conducted for you"). If a contractor is really doing the work for their own benefit and risk, it may not be your R&D to claim.
Associates. With associates you have both hurdles: the activities must still be conducted for you, and, broadly, the amount must be actually paid or settled with real value — not merely accrued or credited to an inter-company loan account — in the year you want to claim it.
The market-value limit
There is a second associate-specific guardrail. Where you and the associate are not dealing at arm's length, the amount you can notionally deduct may be limited to the market value of what was supplied — broadly, you can't inflate a related-party charge to manufacture a bigger claim. The deductible amount may be capped at what an independent party would reasonably have charged for the same work. This is one reason contemporaneous evidence of how an inter-company R&D charge was priced is worth keeping. Pricing is fact-specific, so self-assess and confirm the approach with your tax agent.
A worked timing example
Suppose ParentCo runs the R&D claim and SubCo (an associate) performs $400,000 of eligible development during the year ended 30 June.
Scenario A — invoiced, not paid. SubCo invoices ParentCo for $400,000 on 28 June; the amount is credited to an inter-company loan account but nothing is actually paid or settled with real value before 30 June. Because it is incurred to an associate but not paid, ParentCo generally cannot include the $400,000 in this year's notional deductions. It rolls to the year the amount is actually paid or settled with real value.
Scenario B — actually paid. ParentCo transfers $400,000 to SubCo's bank account on 29 June. The amount has, broadly, been actually paid or settled with real value to the associate in the year — not merely accrued or credited to an inter-company loan account — so, assuming the activities are eligible, conducted for ParentCo, and the charge reflects market value, it may be included in this year's claim.
Same work, same invoice, same group. The main difference is whether the amount was actually paid or settled with real value before year-end. Companies should self-assess their own facts and confirm the position with their tax agent; this is an illustration, not a ruling.
How to avoid the trap
Map your associates early. Before year-end, identify any R&D spend flowing to group companies, directors or other associates under ITAA 1936 s318.
Actually pay or settle associate R&D invoices with real value before 30 June if you want the deduction this year — a genuine bank transfer, not merely an accrual, journal entry or inter-company loan credit.
Don't rely on loan accounts or round-robins. They generally won't satisfy the "paid" requirement.
Price related-party R&D at market value and keep the working that supports it.
Confirm "conducted for you" for every contractor, associate or not — risk, control and benefit should sit with the claimant.
Getting the substance of your R&D right is the hard part; getting the payment timing right is the avoidable part. As a Registered Research Service Provider, our role is to help you structure and evidence eligible R&D — and to flag traps like this one so your finance team can act before, not after, year-end.
Talk to Ignition Research before year-end — we help structure associate and contractor R&D so the expenditure is claimable when you expect. (We're a Registered Research Service Provider, not your tax agent; confirm eligibility and timing with your own adviser.)
Frequently asked questions
Q: Can I claim R&D paid to a related company? A: Potentially yes — subject to the underlying R&D being eligible and conducted for you, and broadly only where the expenditure is actually paid or settled with real value in the relevant income year, and subject to the associate and market value rules.
Q: When is associate R&D expenditure deductible? A: Broadly, in the income year the amount is actually paid or settled with real value to the associate — not merely accrued or credited to an inter-company loan account. If it is incurred but unpaid at year-end, the deduction rolls forward to the year it is actually paid — it isn't lost, just deferred.
Q: What is the market-value rule for associates? A: Where you don't deal at arm's length with an associate, the amount you can notionally deduct may be capped at the market value of the goods or services supplied, so related-party charges can't be inflated to enlarge a claim.
Q: Can I claim R&D done by a contractor? A: Generally yes, if the activities are eligible and "conducted for you" — meaning your company bears the risk, controls the work and gets the benefit. For ordinary arm's-length contractors the cost is claimable when incurred; for contractors who are associates, it must also be paid in the year.
Sources & further reading
ATO — Expenditure you can claim (ato.gov.au)
ATO — R&D activities conducted for you (ato.gov.au)
Federal Register of Legislation — Income Tax Assessment Act 1936 (s 318, associate) (legislation.gov.au)
Income Tax Assessment Act 1997 — Division 355 (R&D) (legislation.gov.au)
business.gov.au — Research and Development Tax Incentive (business.gov.au)
This article is general information from a Registered Research Service Provider about the R&D Tax Incentive. It is not tax, legal or financial advice; eligibility depends on your circumstances and you should self-assess and seek your own advice.
