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In brief:
- Proposed from 1 July 2028 (announced but not yet legislated): A 4.5 percentage point uplift in offset rates for core R&D expenditure; removal of supporting R&D expenditure eligibility; and a reduced intensity threshold from 2% to 1.5%.
- Eligibility and threshold changes: Increase in the refundable turnover threshold from $20m to $50m; limitation of refundability to a company’s first 10 years; increase the minimum R&D spend to $50,000; and an increased expenditure cap to $200m.
- Timing and status: All measures remain unlegislated and are expected to apply from 1 July 2028, subject to the passage of legislation.
Australia’s productivity challenge has placed innovation policy firmly back at the centre of the national economic agenda. Against that backdrop, the 2026–27 Federal Budget proposes a significant redesign of the Research and Development Tax Incentive (R&DTI), aiming to better target support to ‘core’ experimental R&D while moderating the program’s fiscal cost.
The package reflects elements of the Strategic Examination of Research and Development (SERD) (‘Ambitious Australia’) and builds on themes explored in our previous article on the case for bold R&D reform. The key question now is whether the final design strengthens incentives to increase Australian business investment in R&D without creating unintended cliffs for long-cycle innovators or uneven impacts across industries and business models.
What’s proposed (at a glance)
From 1 July 2028 (subject to legislation), the Budget’s proposed R&DTI reforms would:
1. Increase offset rates for core R&D expenditure by 4.5 percentage points
The primary pro-investment lever, increasing support for qualifying experimental activity (the portion most closely linked to additionality and spillovers).
2. Remove eligibility for supporting R&D expenditure
Only ‘core’ R&D, defined as experimental activities aimed at generating new knowledge, would qualify.
3. Lower the R&D intensity premium threshold from 2% to 1.5%
Enabling more companies to access higher offset rates at a lower R&D-to-total expenditure ratio.
4. Lift the refundable turnover threshold from $20m to $50m
Expanding eligibility to larger scale-ups and some mid-market businesses, aligning with contemporary growth trajectories and reinvestment periods.
5. Limit refundability to a company’s first 10 years of operation
Older firms remain eligible, but only on a non-refundable basis after that point (offset to apply against current or future tax liability), regardless of turnover and subject to transitional rules.
6. Adjust expenditure thresholds
Increase the minimum R&D expenditure threshold to $50,000 (from $20,000) and raise the annual R&D expenditure cap to $200m from $150m. These changes affect the smallest and largest R&D claimants, respectively.
Why this matters
The R&DTI remains a cornerstone of Australia’s innovation policy, designed to stimulate private sector R&D investment. The proposed reforms signal a shift toward prioritising uncertain, experimental ‘core’ R&D work, typically associated with higher spillover benefits, while containing long-term program costs.
The impact will not be uniform.
Business models and R&D investments vary significantly. Some organisations are ‘core-heavy’, with a high proportion of spend directed at experimentation. Others rely on substantial enabling, or supporting, activities to deliver R&D outcomes.
Time-horizons for R&D programs also differ. Some innovations are delivered within months, where others require years or decades. Investment intensity can also shift across an organisation’s lifecycle.
As a result, the reforms are likely to have uneven impacts across sectors, business models and stages of growth.
Three design features shaping real-world R&D outcomes
1. Removal of supporting expenditure
This simplifies the boundary of eligible R&D but may create uneven outcomes across industries.Companies with more ‘core-heavy’ cost structures may benefit from increased offset rates, potentially offsetting the loss of supporting expenditure eligibility. Organisations that rely on significant enabling activity may see a reduced incentive to invest.
2. The 10-year refundability limit
This is likely to be a high-impact, but less immediately visible, measure.
Restricting cash refunds to a company’s first 10 income years uses age as a proxy for maturity. However, this can be a blunt measure where R&D commercialisation cycles are long.
For mid-market firms nearing the threshold, the implications for cashflow, and potentially viability, could be material. Definitions, including whether this applies at the entity or group level, along with transitional rules and integrity settings, will be critical to avoid unintended cliffs.
3. Turnover threshold and intensity changes
Increasing the refundable R&D turnover threshold to $50m reflects how companies scale today and is a constructive update for many growing businesses, however, the benefit of this change is limited to those companies that remain under the 10-year refundability age limit.
Lowering the R&D intensity threshold may also allow more companies to access higher rates sooner.
However, intensity tests remain an imperfect proxy for innovation effort. Businesses with large non-R&D expenditure may not meet the threshold, even where absolute R&D investment is substantial.
What businesses can do now
- Model exposure under a ‘core-only’ scenario to understand the trade-off between higher offsets and reduced eligibility.
- Review how R&D activities are classified and ensure documentation aligns with ‘core’ definitions.
- Assess the impact of the 10-year refundability threshold, particularly for mid-market firms and group structures.
- Plan for flexibility given the proposed 1 July 2028 commencement and potential legislative changes.
Where to from here: consultation and implementation
The proposals are expected to undergo consultation with Treasury, regulators and industry stakeholders.
There are significant technical and practical considerations to resolve, including definitions, transitional rules and administrative settings. As with other major reforms, the design will evolve through consultation and draft legislation.
Importantly, all measures remain proposals. While there is time for refinement, certainty is critical for long-term R&D planning, reinforcing the importance of early clarity.
EY teams will continue to monitor developments and provide insights as further detail emerges.
Innovation system context
The R&DTI does not operate in isolation.
Recent commentary highlights potential gaps in the ‘middle’ of the innovation pipeline, between early-stage research and scaled commercialisation. Without mechanisms to support this phase, Australia risks losing capability, talent and long-term economic value.
While the Budget adopts several SERD recommendations, it is notably silent on others, including:
- Removal of clawback rules
- A deemed rate for supporting R&D
- Advanced quarterly payments
- Premium or high‑growth R&DTI streams
This suggests further policy development is needed. A more integrated approach across the innovation lifecycle will be important as reforms progress.
The bottom line
The proposed R&DTI package represents a clear pivot toward incentivising ‘core’ R&D while improving fiscal sustainability of the program.
It delivers stronger benefits for some R&D claimants through higher core offset rates and more modern thresholds. The 10-year age limit to refundable R&D eligibility will impact many innovation intensive companies where R&D commercialisation cycles are long. Outcomes will depend on implementation detail, particularly whether the final design:
- avoids disproportionately impacting sectors with high supporting costs
- preserves cashflow support for long-cycle and scaling innovators
These factors will be critical in determining whether the reforms support Australia’s innovation and productivity ambitions.
We will continue to monitor developments as legislation and guidance emerge.
Summary
The 2026–27 Federal Budget proposes a significant redesign of the R&D Tax Incentive, introducing higher support for core R&D while tightening eligibility and refundability settings. The changes aim to better target investment in experimental activity, but impacts will vary across industries, business models and growth stages, with outcomes depending on final design and implementation.