Australia’s R&D Tax Incentive Reform: What Businesses Need to Know Before 2028
Australia’s Research and Development Tax Incentive (R&DTI) is set for significant changes, with the Government releasing draft legislation in September 2026. The proposed reforms aim to encourage business investment in research and development that delivers economic benefits, while improving the effectiveness and long-term sustainability of the program.
For businesses that rely on R&D tax offsets to support innovation, manage cash flow and fund future development, these changes could affect both eligibility and tax planning.
The reforms are proposed to take effect from 1 July 2028. While the draft legislation is not yet law, businesses should begin assessing how the proposed changes could affect their future R&D activities and investment decisions.
What Is Changing Under the R&D Tax Incentive?
The R&DTI provides eligible companies with tax offsets for qualifying research and development expenditure. It is designed to encourage businesses to invest in innovation that may otherwise be commercially difficult to pursue.
Under the proposed reforms announced in the 2026–27 Federal Budget, the Government plans to make several changes to the current framework.
1. Higher Minimum R&D Expenditure Threshold
The minimum expenditure threshold is proposed to increase from $20,000 to $50,000 per income year.
Businesses undertaking relatively small R&D projects will need to assess whether their annual eligible expenditure meets the proposed threshold. This may be particularly relevant to smaller businesses that undertake R&D intermittently or operate with limited development budgets.
Companies should review their expected R&D spending and consider how project timing and expenditure allocation could affect their eligibility under the proposed rules.
2. Supporting R&D Activities to Be Excluded
One of the most significant proposed changes is the removal of supporting R&D activities from eligibility for the R&D tax offset.
The Government intends to replace the offset previously available for supporting activities with a higher offset rate for eligible core R&D activities, including a proposed increase of 4.5 percentage points.
This change makes it more important for businesses to understand the distinction between core and supporting R&D activities. Companies should review how their projects are structured, how activities are documented and whether expenditure can be substantiated as relating to eligible core R&D activities.
Businesses should not assume that expenditure previously included in an R&DTI claim will automatically remain eligible under the proposed framework.
3. Changes to Refundable Tax Offset Eligibility
The proposed reforms aim to focus refundable offsets on businesses that are more likely to need financial support during their growth and development stages.
Under the draft legislation, access to the refundable offset would generally be restricted to a company's first 10 years of operation, subject to the detailed eligibility rules.
An extended period of up to 15 years is proposed for eligible entities conducting R&D activities related to therapeutic goods, recognising the longer development and regulatory approval timelines in biotechnology and medical technology.
For businesses approaching these proposed time limits, it will be important to understand how their operating history, R&DTI registration history and specific circumstances may affect future eligibility.
Companies should also distinguish between refundable and non-refundable offsets when assessing the potential financial impact of the reforms.
4. Higher Turnover Threshold for the Refundable Offset
The turnover threshold for the refundable offset is proposed to increase from $20 million to $50 million.
This would potentially expand access to the refundable offset for eligible businesses with aggregated turnover between the existing and proposed thresholds, subject to the other eligibility requirements.
For growing businesses, the change could influence how R&D investment is funded and how expected tax benefits are incorporated into cash flow forecasts.
However, a higher turnover threshold does not mean every business below $50 million will automatically qualify. Companies will still need to satisfy the applicable eligibility criteria.
5. Higher Maximum R&D Expenditure Threshold
The maximum expenditure threshold eligible for the premium rate of tax offset is proposed to increase from $150 million to $200 million.
This change is intended to encourage larger-scale R&D investment in Australia by allowing eligible businesses to access the relevant premium offset treatment across a higher level of expenditure.
For companies with substantial R&D programs, the proposed increase may affect the financial modelling of Australian research projects and decisions about where future R&D activities are undertaken.
6. Lower R&D Intensity Threshold
The proposed reforms would reduce the R&D intensity threshold from 2% to 1.5%.
R&D intensity measures eligible R&D expenditure relative to a company's total expenditure under the applicable rules. It is relevant to determining the premium rate available under the non-refundable offset framework.
The proposed change could affect how eligible companies calculate their R&D tax benefit. Businesses should assess the interaction between their expected R&D expenditure, total expenditure and applicable offset rates before making financial projections.
How Could the Proposed Reforms Affect Your Business?
The impact will depend on a company's size, development activities, expenditure levels and eligibility for refundable or non-refundable offsets.
Startups and Small Businesses
Startups and smaller businesses may need to pay closer attention to the proposed $50,000 minimum expenditure threshold.
Businesses with limited or irregular R&D spending should assess whether their planned activities and budgets align with the proposed requirements. They should also consider how any changes to eligible activities could affect the amount of expenditure available for an offset.
For early-stage companies, the distinction between refundable and non-refundable offsets is particularly important because tax benefits can play a role in funding ongoing development.
Growing and Established Businesses
Businesses that have operated for longer periods should assess the proposed restrictions on refundable offset eligibility.
For some companies, the potential availability of a non-refundable offset may remain relevant. However, the financial value and timing of that benefit will depend on the company's circumstances, applicable tax rules and ability to use the offset against its tax liability.
Businesses should incorporate these considerations into longer-term tax planning and cash flow forecasts rather than relying solely on historical R&DTI outcomes.
Biotechnology and Medical Technology Companies
Companies developing therapeutic goods may benefit from the proposed extension of refundable offset eligibility to up to 15 years for qualifying entities.
This recognises that product development and regulatory approval in these sectors can take considerably longer than in other industries.
Nevertheless, businesses should assess the detailed requirements carefully and avoid assuming that all biotechnology or medical technology activities will automatically qualify for the extended period.
Refundable vs Non-Refundable Offsets: Why the Difference Matters
A refundable tax offset can provide a cash refund when the relevant conditions are met, including where the offset exceeds the company's tax liability.
A non-refundable tax offset generally reduces tax payable but does not ordinarily generate a cash refund for any unused excess.
This distinction matters because two businesses undertaking similar R&D activities may experience different financial outcomes depending on their eligibility and tax positions.
Under the proposed reforms, businesses should consider not only the applicable offset rate but also whether they can access a refundable offset and when the associated tax benefit may be realised.
Understanding this distinction can help businesses develop more realistic R&D budgets, funding strategies and cash flow forecasts.
How Businesses Can Prepare Before 1 July 2028
Although the proposed changes are not yet law, businesses do not need to wait until 2028 to review their position.
The following steps can help companies prepare for the proposed reforms.
1. Review current and planned R&D activities
Identify the activities undertaken across each project and assess how they may be classified under the proposed framework. Pay particular attention to the distinction between core and supporting R&D activities.
2. Assess expenditure against the proposed thresholds
Review annual R&D budgets and forecast eligible expenditure against the proposed $50,000 minimum threshold and $200 million maximum expenditure threshold. Consider how the changes could affect future project planning.
3. Reassess refundable offset eligibility
Review your company's operating history, registration history, aggregated turnover and other relevant eligibility conditions. Businesses approaching the proposed time limits should assess the potential implications for future claims.
4. Strengthen documentation and record-keeping
Maintain appropriate records of R&D activities, project objectives, technical work, expenditure and supporting evidence. Clear documentation can help businesses substantiate their claims and assess whether activities meet the applicable requirements.
5. Update tax and cash flow forecasts
Model how the proposed changes could affect the expected value and timing of R&D tax benefits. Where relevant, consider alternative scenarios to account for changes in eligibility or offset treatment.
6. Monitor legislative developments
The draft legislation may be amended before enactment. Businesses should follow updates from the Australian Treasury, the Australian Taxation Office (ATO) and the relevant government agencies before finalising their plans.
What Happens Next?
The Government released the exposure draft legislation for consultation in September 2026, with submissions closing on 28 September 2026.
The proposed reforms are intended to commence on 1 July 2028. Until then, the R&DTI continues to operate under the existing rules, subject to any subsequent legislative developments.
Businesses should therefore distinguish between the requirements that apply to current claims and the proposed framework that may affect future R&D investment.
The proposed R&D Tax Incentive reforms could change how Australian businesses qualify for tax support, classify R&D activities and plan their innovation expenditure.
While some businesses may benefit from higher thresholds or revised offset rates, others may need to reassess their eligibility, documentation and funding arrangements.
Preparing early can help your business understand the potential impact, make informed investment decisions and reduce the risk of relying on outdated assumptions.
At ZT Partners, we help businesses navigate tax obligations and plan for regulatory changes with greater confidence. If your business invests in research and development, consider reviewing your current arrangements and seeking professional advice on how the proposed reforms may affect your future tax position.
Disclaimer: This article provides general information based on the proposed R&D Tax Incentive reforms announced in 2026. The draft legislation is not yet law, and the final rules may differ. It should not be relied upon as a substitute for advice tailored to your circumstances.
