R&D Tax Incentive reform
R&D Tax Incentive reform
The Government has announced major reforms to the R&D Tax Incentive (RDTI), purportedly seeking to simplify the scheme and better target support for business research and development activities. These changes will take effect from 1 July 2028 and will adjust offset rates as well as program delivery and eligibility criteria.
Overall, these changes will reduce what qualifies as R&D and significantly reduce refundability but provide a higher rate of benefit in respect of expenditure that does qualify. The proposed changes will move Australia out of step with the rest of the OECD regarding the definition of eligible R&D.
The proposed changes are summarised below.
Increase in core R&D offset rates
From 1 July 2028, the Government will increase the offset rates of core R&D expenditure by 4.5 percentage points. Currently, this is between 8.5% and 18.5% above an entity’s corporate tax rate, but it will be increased to between 13% and 23%. This change will boost the tax benefit (i.e. the offset received less the tax impact of ordinary deductions foregone) by approximately 25% to 50%, depending on a company’s circumstances, providing stronger financial incentives for expenditure incurred on core R&D activities.
Reduction in intensity threshold
The eligibility threshold for the intensity premium will be reduced from 2% to 1.5%. This adjustment, combined with the increased rates, will enable companies that are eligible for the non-refundable offset and spend more than 1.5% of total business expenditure on R&D to access a premium rate of up to 21% above their corporate tax rate.
Removal of supporting R&D expenditure eligibility
The Government will remove the eligibility for supporting R&D expenditure from the RDTI. This means that only expenditure incurred on ‘core’ R&D activities will qualify as a notional deduction for the R&D tax incentive.
Turnover threshold and refundability changes
The turnover threshold for the highest offset rate (which will be 23% above the corporate tax rate) will increase from $20 million to $50 million. This will allow growing companies to retain access to the higher offset rate.
For firms below this $50 million turnover threshold, older firms will continue to be eligible for the higher offset rate, but eligibility for the refundable tax offset will be limited to companies under 10 years old. It is currently unclear whether this will be based on the age of the R&D entity or on the age of the corporate group as a whole.
Changes to expenditure thresholds
The maximum RDTI expenditure threshold will be raised from $150 million to $200 million, and the minimum threshold will be raised from $20,000 to $50,000. Research activities valued below this minimum threshold must be undertaken with a registered Research Service Provider or Cooperative Research Centre to be eligible for the RDTI.
BDO comment
We welcome the increased benefit rates, the lowered intensity threshold, and the higher program cap. Aside from this, we are highly concerned with the changes to the program.
Removing supporting R&D expenditure from eligibility will significantly reduce the scope of qualifying activities and risks turning the R&D Tax Incentive into the ‘Development Tax Incentive’. This is out of step with the rest of the OECD and could push companies to invest in other jurisdictions rather than Australia. It also abandons the definitions of research and development established by the Frascati Manual, on which OECD countries, including Australia, based their RDTIs. We anticipate that this change will also introduce further complexity and increase the administrative burden rather than alleviate it, due to ambiguity regarding the delineation between ‘core’ and ‘supporting’ R&D.
Limiting refundability to companies less than 10 years old is a highly arbitrary threshold that has no relationship with the value of their R&D (which can progress at different rates). It neglects the fact that an existing business may choose to invest in R&D for the first time at any time in its journey.
We also note that lifting the minimum expenditure threshold will make some 6% of claimants ineligible per the most recent transparency data. This will have flow-on impacts to the Early-Stage Innovation Company (ESIC) regime, which is designed to encourage capital investment in high-risk innovative businesses. In its current state, a significant portion of the eligibility points for ESIC can be met by claiming the R&D Tax Incentive, however, companies seeking to raise capital may be locked out due to the higher expenditure threshold and the exclusion of supporting activities, including preliminary research and planning.
The Government should reconsider the impact of these changes and their flow-on effects on Australia’s productivity. Failing this, further details and modelling on how the changes will be implemented must be released as soon as possible. Businesses should review their R&D strategies ahead of the proposed 1 July 2028 implementation and start early planning to navigate these proposed changes effectively.
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