Government releases draft legislation to significantly reshape the Australian R&D Tax Incentive

Research and development (R&D) in the context of the R&D Tax Incentive refers to experimental activities conducted to generate new knowledge, where the outcome cannot be known or determined in advance and can only be established through a systematic progression of work based on established scientific principles.

At a glance

• Refundable R&D tax offset turnover threshold proposed to increase from $20 million to $50 million.
• R&D benefit rates proposed to increase by 4.5 percentage points.
• Threshold proposed for accessing the higher non-refundable R&D premium to reduce from 2% to 1.5%.
• Maximum annual eligible R&D expenditure cap proposed to increase from $150 million to $200 million.
• Minimum annual expenditure threshold proposed to increase from $20,000 to $50,000.
• Supporting R&D activities proposed to be removed.
• New 10-year age restriction proposed for refundable claimants, with an extension for up to 15 years for therapeutic goods R&D.
• Consultation closes: 28 September 2026.

The Australian Government has released exposure draft legislation and an accompanying exposure draft explanatory memorandum proposing changes to the Research and Development (R&D) Tax Incentive following the announcements made in the 2026 Federal Budget and recommendations arising from the Ambitious Australia Strategic Examination of R&D.

Consultation on the draft legislation “Treasury Laws Amendment (Tax Reform No. 5) Bill 2026: Better targeting the Research and Development Tax Incentive”, opens for a limited period, with submissions due by 28 September 2026.

The proposed reforms contain substantial changes to the R&D Tax Incentive that are expected to impact a significant number of current claimants. While the Government has proposed increases to the rates of assistance available under the program, several new eligibility restrictions and exclusions have also been introduced.

Subject to enactment, the changes are expected to apply from the first full income year commencing after 1 July 2028.

Key proposed changes

• Expanded access to refundable offset
  
  The aggregated turnover threshold for access to the refundable R&D tax offset would increase from $20 million to $50 million.
  
  This change may enable a broader group of SMEs (small to medium enterprises) to access the refundable R&D tax offset, although entities would still need to satisfy the new proposed age-based eligibility rules discussed below.
  
  
• Enhanced benefits through a rate increase
  
  The Government has proposed increasing the rate of benefit available for eligible R&D activities by an additional 4.5 percentage points.
  
  For companies eligible for the refundable R&D tax offset, the current premium benefit of 18.5% above the corporate tax rate would increase to 23% above the corporate tax rate.
  
  For most eligible SME claimants, this would increase the effective benefit rate from 43.5% to 48%.
  
  
• Increased non-refundable R&D tax offset rates
  
  For entities claiming the non-refundable R&D tax offset:
  
  The base premium would increase from 8.5% to 13% above the company tax rate.
  
  The higher intensity premium would increase from 16.5% to 21% above the company tax rate.
  
  For larger claimants, these changes represent significant increases in the value of the incentive, particularly for expenditure above the R&D intensity threshold.
  
  
• Reduced R&D intensity threshold
  
  The threshold for accessing the higher non-refundable R&D premium would be reduced from 2% to 1.5%.
  
  This change may allow more companies to access the enhanced premium rate for a greater proportion of their qualifying expenditure.
  
  
• Increased R&D expenditure cap
  
  The maximum annual eligible R&D expenditure cap would increase from $150 million to $200 million.
  
  While only a limited number of taxpayers are expected to benefit from this change, it would increase access to R&D tax benefits for some of Australia's largest R&D investors.
  
  
• Increased minimum R&D expenditure threshold
  
  The minimum annual R&D expenditure threshold would increase from $20,000 to $50,000.
  
  The Government has indicated that an exception would continue to apply to eligible expenditure incurred through Cooperative Research Centres (CRCs) and Registered Research Service Providers (RSPs).
  
  
• Removal of supporting R&D activities
  
  One of the most significant proposed reforms is the removal of eligibility for supporting R&D activities.
  
  Supporting activities currently include activities directly related to conducting experimental core R&D activities. Under the draft legislation, these activities would no longer be eligible for the R&D Tax Incentive unless they independently satisfy the requirements of the existing definition of a core R&D activity. The changes clarify that an activity will not qualify merely because it is directly related to or supports another R&D activity.
  
  This proposed change may have a significant impact on the ability to claim R&D activities and increase the requirement of organisations to update systems to record and delineate organisational R&D processes.