R&D Tax Incentive:

Treasury has released exposure draft materials setting out the first stage of the Government's reforms to better target the Research and Development (R&D) Tax Incentive. The measures form part of the tax reform package announced in the 2026-27 Budget and respond to recommendations of the Ambitious Australia - Strategic Examination of Research and Development report published by the Department of Industry, Science and Resources in March 2026.

Under these proposals, the R&D Tax Incentive will be reshaped in the following broad ways for income years commencing on or after 1 July 2028:

1. Offset rates would rise by 4.5 percentage points across the board and the expenditure thresholds would be lifted, with the maximum expenditure eligible for a premium rate increasing from $150m to $200m and the intensity threshold reducing from 2% to 1.5%.
2. Access to the refundable offset would be extended by increasing the aggregated turnover cap from $20m to $50m.
3. Access to the refundable offset would be confined to entities in their first ten years of operation or registration or 15 years for eligible therapeutic goods R&D. Companies with aggregated turnover below $50m that fall outside that 10 or 15 year window would retain the highest offset rate on a non-refundable basis.
4. Supporting R&D activities would cease to be eligible, so that only activities meeting the current core R&D activity tests (to be renamed simply R&D activities) would attract the offset.

Removal of supporting R&D activities

The most significant change is the removal of eligibility for supporting R&D activities. The definitions of core R&D activities and supporting R&D activities would be repealed, with the existing core R&D activity tests in s355-25 of the Income Tax Assessment Act 1997 (ITAA 1997) recast as the single concept of R&D activities. A new provision would specifically outline that an activity is not an R&D activity merely because it is directly related to, or undertaken for the purpose of supporting, an eligible activity. Expenditure previously claimed under the supporting activity limb would therefore only qualify if the activity itself satisfies the experimental and new knowledge requirements.

Consequential and related amendments would flow through the ITAA 1997 and the Industry Research and Development Act 1986 (IRD Act), including to the registration and findings provisions administered by Industry Innovation and Science Australia (the Board) and to the overseas activity conditions. In particular, the expenditure comparison test for overseas activities would be recalculated by reference to Australian R&D activities only, so that the scope of eligible overseas activity is not wider than the corresponding Australian activity.

Offset rates and expenditure thresholds

Each of the base offset rates would increase by 4.5 percentage points, and the R&D intensity threshold at which the higher non-refundable premium applies would fall from 2% to 1.5% of total expenses. The table below compares the proposed and current settings.

Expenditure above the maximum threshold would continue to attract an offset equivalent to the entity's corporate tax rate. Companies with less than $50,000 of notional deductions in an income year would generally no longer be able to claim, although the existing concession for amounts paid to research service providers and Cooperative Research Centres would be retained.

Eligibility for the refundable offset will now include an age limit based on how long the claimant has been in business or registered in the program in addition to an aggregated turnover test. An entity with aggregated turnover below $50m would be entitled to the refundable offset only where a day in the income year falls before the tenth anniversary of the earlier of the day it, or a connected entity or affiliate, first started to carry on an enterprise, and the day it, or such an entity, first registered for R&D activities under the IRD Act.

A longer 15-year window is proposed for entities whose R&D activities are conducted for the dominant purpose of generating new knowledge about therapeutic goods, or the therapeutic use of therapeutic goods, within the meaning of the Therapeutic Goods Act 1989. To access the extended window, the entity must have been registered for one or more such activities for the income year in which its start day occurred or one of the following nine income years. The Board would be given a new power to make findings about whether an activity was conducted for that dominant purpose, either on application by the entity, at the request of the Commissioner of Taxation, or on its own initiative. An application would need to be made within ten months after the end of the relevant income year, unless the Board allows a further period, and findings (and refusals to extend time) would be reviewable. Findings notified by certificate would bind the Commissioner where made within four years after the end of the relevant income year.

Entities that fall outside the ten-year or 15-year windows but remain below the $50m turnover threshold would keep the highest offset rate of 23 percentage points above their corporate tax rate, on a non-refundable basis.

The substantive changes will apply to assessments for income years commencing on or after 1 July 2028. Transitional provisions are designed so that the removal of supporting R&D activities does not operate retrospectively. The amendments would not apply to an assessment for a post-1 July 2028 income year to the extent it relates to supporting R&D activities conducted, or registrations for supporting R&D activities, for earlier income years, so that expenditure paid in later years on those earlier activities may still be deductible for offset purposes.

Existing findings would be carried across, with a finding that an activity is (or is not) a core R&D activity treated as a finding that it is (or is not) an R&D activity for the affected income years. Conversely, the Commissioner would no longer be bound by a finding to the extent it would require an assessment on the basis that an activity is an R&D activity when, after the amendments, it is not. Findings about overseas activities that are core R&D activities would continue to bind the Commissioner despite the change to the expenditure comparison test.

Although the proposed start date is still some years away, the reforms would change the economics of R&D claims for many companies and the practical work of preparing them should begin well before 1 July 2028. Companies that rely heavily on supporting activities, such as trial production, data collection or routine testing, should model the effect of removing that limb from their claims, and consider how activities are scoped, documented and registered so that eligible experimental work can be identified in its own right. Higher offset rates, a higher expenditure cap and a lower intensity threshold may partly offset that narrowing for larger claimants, while the increase in the minimum threshold is likely to exclude the smallest claims.

The introduction of an age limit for the refundable offset is a significant shift in the design of the program and warrants early attention from established companies with turnover below $50m, particularly those in a loss position that have relied on refunds to fund their R&D and sustain their operations. Life sciences and medtech businesses should consider whether their activities would satisfy the therapeutic goods dominant purpose test and whether early registration is needed to preserve access to the longer window. Because the age limit looks to connected entities and affiliates as well as the claimant, group structures and prior registrations will need to be reviewed carefully.

The exposure draft remains subject to consultation (with comments due to be made to Treasury by 28 September 2026) and there may be changes before the measures are introduced. Detail may be refined as further stages of the Government's response to the Ambitious Australia report are developed.

If you would like to discuss what these changes could mean for your business or to contribute to a submission, please contact your PwC Tax or R&D advisor.