Australia’s R&D Tax Incentive Overhauled: What the 2026–27 Federal Budget Means for Your Business

The R&D Tax Incentive (R&DTI) landscape has been particularly fluid over the last few years. As such, Ascentium Australia aims to provide timely updates covering key topics relating to the R&DTI to ensure claimants have the most up-to-date information. This covers areas such as changes to legislation, R&DTI-related news, case studies, and more.

On 12 May 2026, the Australian Government announced one of the most significant reforms to the Research and Development Tax Incentive (R&DTI) in recent times, with sweeping changes proposed to take effect from 1 July 2028. While the reforms promise higher offsets for core research activity, they also narrow the program’s scope.

Why reform, and why now?

The Government’s case for reform is built on two key foundations: cost and effectiveness.

The R&DTI has become increasingly expensive, with program costs rising approximately 70% over five years to reach $4.4 billion in 2023-24. Much of that growth has been driven by claims for “supporting activities”, activities covering literature reviews, equipment maintenance, and data collection, rather than the core experimental, knowledge-generating work the program was originally designed to encourage.

Research commissioned for the Government’s Ambitious Australia: Strategic Examination of Research and Development report found a stark contrast in outcomes. Incentives for core R&D generated approximately $1.58 of additional R&D for every dollar of offset. However, subsidies for supporting activities generated no additional R&D at all, yet accounted for 29% of all claims in 2023-24, up from just 18% in 2012-13.

In this article, we break down the key developments and what they mean for your business.

Key changes if the proposed budget goes ahead (effective from 1 July 2028)

The reforms will look to introduce the following changes to the R&DTI:

• Higher offsets for core R&D activities: Offset rates for all claimants will increase by 4.5 percentage points, representing an increase of around 25% to 50% in the premium offset above the company tax rate.
• Removal of supporting activities: Expenditure on supporting activities, such as literature reviews and equipment maintenance, will no longer be eligible for the R&DTI offset. Only expenditure on core R&D activities, being uncertain, experimental work conducted to generate new knowledge, will qualify for the R&DTI.
• Reduced intensity threshold: The intensity threshold for the higher non-refundable offset will reduce from 2% to 1.5%, allowing more firms undertaking substantial core R&D to claim at the higher rate.
• Increased turnover threshold for small-to-medium enterprises (SMEs): The turnover threshold for the premium SME offset rate will increase from $20 million to $50 million, providing greater support to growing firms.
• Refundability targeted to young firms: The refundable offset will be limited to firms operating for less than 10 years. Older firms with turnover below $50 million will receive an equivalent non-refundable offset. At this stage, it is unclear as to whether this would be based on the R&D entity or the corporate group.
• Higher maximum expenditure threshold: The cap on eligible R&D expenditure will increase from $150 million to $200 million, encouraging Australia’s largest R&D businesses to keep their R&D onshore.
• Increased minimum expenditure threshold: The minimum expenditure threshold will rise from $20,000 to $50,000. R&D expenditure below this amount will only be eligible, provided it is undertaken with a registered Research Service Provider (RSP) or Cooperative Research Centre (CRC).

Summary of offset changes

What this means for claimants

The Government believes these reforms are expected to deliver $650 million in savings over five years and unlock an estimated $400 million in additional R&D investment by young firms each year.

For SMEs and young firms, the changes are broadly positive. A higher turnover threshold, increased offset rates, and continued refundability mean that eligible businesses will receive greater cash flow support during their growth phase.

For larger and more established businesses, the increase in the maximum expenditure threshold to $200 million and the lower intensity threshold are also welcome changes.

However, for all claimants, the removal of supporting activities is a significant change that will require claimants to consider their R&D activities and how they are documented. Additionally, SMEs that have been operating for more than 10 years will no longer be eligible for the refundable tax offset, instead receiving an equivalent non-refundable offset.

Our take: A welcome shift, with some caveats

These reforms send a clear message from the Government; they want the R&DTI to fund genuine experimental work, not the administrative scaffolding around it. On balance, we believe that some of the reforms are positive; however, a few things give us pause:

• The complete removal of supporting activities goes further than recommended. The Ambitious Australia report recommended introducing a deemed rate for supporting activities relative to core R&D expenditure, not eliminating them entirely. The Government chose the blunter option. In practice, this means that legitimate costs, such as the literature reviews needed to establish the current state of knowledge, the data collection that feeds directly into experimental design, or GMP manufacturing, will no longer attract the offset. It is unclear as to whether this would lead to better targeted claims or simply undervalues the full cost of doing R&D.
• Australia may be moving out of step internationally. The proposed definition of eligible R&D, limited to core activities only, would put Australia out of step with the rest of the OECD countries, where supporting activities are widely recognised as part of the R&D process. This change could incentivise businesses to go overseas to conduct their R&D activities.
• The 10-year refundability cut-off needs clarity. Whether this is measured at the entity or group level will make a real difference for restructured businesses, acquisitions, and startups that sit within larger corporate families. We expect further guidance on this in due course.
• The transition window matters. With a 1 July 2028 effective date, businesses have roughly two years to prepare. That is enough time to reassess claim structures, strengthen documentation practices for core activities, and ensure that the experimental nature of eligible work is clearly and contemporaneously documented.

We're here to help

Ascentium Australia will share further updates via the Ascentium Insights and the R&D Unwound Newsletter.

If you would like more information on how the proposed R&DTI budget reforms could impact your R&DTI claim, please get in touch with your Ascentium Australia R&D Consultant or Victoria Campbell at victoria.campbell@incorpadvisory.au.