What was announced?
The 2026 Federal Budget revealed a substantial reform of the Research & Development Tax Incentive (RDTI), Australia’s flagship program encouraging business innovation through tax offsets. The Government aims to better target support for “core” R&D that delivers economic benefits while simplifying the scheme for participants and improving the integrity of claims.
The key elements of the announcement are:
- Core R&D focus with higher offsets – expenditure on supporting R&D activities such as administrative tasks, literature reviews and performing equipment maintenance will no longer be eligible under the RDTI. Instead, the incentive’s value is being concentrated on core (experimental) R&D by increasing both the refundable and non-refundable R&D offset rates by 4.5 percentage points across all tiers:
- Refundable offset – Increasing from 18.5% to 23%
- Low intensity non-refundable offset – Increasing from 8.5% to 13%
- High intensity non-refundable offset – Increasing from 16.5% to 21%
At the same time, the R&D intensity threshold that triggers the higher offset is reduced from 2% to 1.5% of total expenses, allowing more large non-refundable companies to access the maximum offset.
- Refocusing refundable offsets on young, innovative businesses – refundable R&D tax offsets (which provide a cash refund for companies in a tax loss position) will be limited to companies in their first 10 years of operation. Established firms older than 10 years will still receive the same uplift in offset rates but only as a non-refundable tax credit against future taxable income. The turnover threshold for receiving the refundable offset will also be expanded from $20 million to $50 million, letting more medium-sized businesses qualify for cash refunds provided they meet the 10-year criteria. Additionally, the minimum R&D expenditure per year required to access the RDTI will increase from $20,000 to $50,000, unless the R&D is carried out via an approved research service provider (which continues to allow smaller projects to claim).
- Higher R&D expenditure cap – the annual cap on R&D expenditure eligible for the offset will be raised from $150 million to $200 million per company per year. This enables large R&D-intensive firms to receive the tax offset on a bigger portion of their R&D spend (although amounts above $200 million will still receive no RDTI credits).
Who is impacted by these changes?
These changes will affect any businesses currently conducting R&D or planning to do so, with distinct impacts depending on size and R&D intensity:
- Small and medium enterprises (SMEs) – particularly those with turnover between $20 million and $50 million stand to benefit. More SMEs will qualify for a refundable R&D offset with the threshold proposed to be lifted to $50 million, and if they are under 10 years old, they can still receive cash refunds for R&D spend. Furthermore, their offset rate on core R&D will increase. This higher cash benefit improves the incentive for start-ups and early-stage innovators by returning more cash per dollar spent on R&D.
- Large companies and R&D-intensive corporations – the changes are a mixed bag for bigger end of town who exceed the $50 million threshold. They will still get an increased offset rate and lowering the intensity threshold to 1.5% means that more of a large company’s R&D outlays can qualify for the top offset rate. However, R&D claims heavily reliant on supporting activities will decrease, as those costs become ineligible. For large companies with substantial “core” R&D, the net effect may be positive or neutral due to the higher rates but for those whose R&D claims include a lot of peripheral spending, the net incentive could be less generous.
- Older companies – the proposed changes will significantly impact established companies by limiting access to the refundable offset to entities under 10 years old. This effectively removes the ability for more mature businesses, many of which have traditionally relied on cash refunds to fund innovation, to access upfront funding support, instead pushing them into a non-refundable tax offset position. The change disproportionately affects industries with long development cycles such as biotech, medtech and pharmaceuticals, where R&D programs often span many years before commercialisation, as well as companies that pivot, scale or continuously expand their R&D programs over time, reducing their capacity to reinvest in ongoing innovation.
Crucially, no retrospective changes apply, that is, past R&D claims are unaffected. These measures are intended to apply prospectively from the 1 July 2028 with the current rules remaining in force until then.
Professional commentary is largely supportive of the scheme’s simplification and sharper targeting, with the lowered intensity hurdle and higher base rates seen as positive steps, especially for mid-sized and high-tech firms. However, industry groups emphasise that certainty and stability are crucial. Frequent changes to R&D incentives in recent years have made long-term planning difficult. It’s vital that any new definitions (like what constitutes a “supporting activity”) are clearly articulated well ahead of time, so companies have the confidence to continue investing in multi-year R&D projects.
What’s next?
These RDTI changes form part of the Government’s response to the Ambitious Australia review of business innovation programs. Draft legislation is expected in 2027 in time for consultation and commencement by 1 July 2028. Businesses claiming or planning to claim the RDTI should use the lead time to review their R&D spend categories. Identifying which costs qualify as “core R&D” (versus what will be considered supporting) will help in forecasting the Budget reforms’ impact. It may be worthwhile to maximise R&D claims under the present rules (while they last) for projects that might not qualify in the future, and to start planning any adjustments to project design or record-keeping needed for compliance with the new definitions.
Moore Australia will continue to monitor these developments. We can provide further guidance to help businesses navigate the proposed changes – but until legislation is enacted, the status quo remains. For now, the emphasis is on understanding what’s coming and being prepared to adjust R&D strategies, if required, once details are confirmed.
