Ambitious Australia: Proposed changes to the R&D Tax Incentive
Ambitious Australia: Proposed changes to the R&D Tax Incentive
The Ambitious Australia report from the Strategic Examination of Research and Development proposes a significant redesign of Australia’s Research and Development Tax Incentive (RDTI).
As the largest form of government support for business R&D in Australia, the RDTI plays a central role in encouraging companies to invest in innovation. The report identifies the incentive as a key policy lever but argues that reform is needed to increase its impact and better support high-growth innovative businesses.
If implemented, the proposals would represent a complete overhaul of the program. However, the scale of the proposed reforms means they may be challenging to legislate and potentially even more challenging to administer in practice.
The proposed framework also introduces substantially greater complexity. The current system differentiates between refundable and non-refundable offsets based on turnover and is largely industry agnostic. The proposed model introduces on- and off-ramps linked to revenue growth, alongside sector-specific carve-outs and premium incentive streams, significantly increasing the complexity of the program.
This article outlines the key proposals and their potential implications for businesses.
A more targeted RDTI
A central theme of the report is that the RDTI should be better targeted toward businesses demonstrating stronger growth potential and meaningful R&D activity.
Recommended reforms include:
- Simplifying the administration of the RDTI
- Introducing separate incentive streams for startups, small-to-medium enterprises (SMEs) and large companies
- Increasing incentives for multinational and large corporations to undertake R&D in Australia
- Linking some access to refundable benefits to business growth outcomes.
The report notes that business R&D investment in Australia has declined to 0.9 per cent of GDP, compared with the Organisation for Economic Co-operation and Development (OECD) average of 1.99 per cent, and suggests stronger incentives could help reverse this trend.
However, a more targeted system may also introduce new complexity in determining eligibility, contrary to the goal of reducing administrative burden.
A premium RDTI stream for startups
One of the most notable proposals is a premium RDTI stream for startups. The proposal aims to support high-growth early-stage companies through:
- A higher refundable offset of 23.5 per cent (currently 18.5 per cent) above the company tax rate
- Simplified eligibility rules
- Quarterly payments, rather than annual refunds
- Expanded eligible activities including some early commercialisation work.
These changes are intended to improve startup cash flow and reduce reliance on advisers or financing arrangements while waiting for RDTI refunds.
However, eligibility will be limited to companies meeting specific innovation criteria, such as venture capital backing or participation in recognised accelerator programs. Businesses that are bootstrapping their R&D activities may fall outside the program, particularly with the proposed increase in the minimum R&D expenditure threshold to $150,000.
While the report proposes an innovation voucher program as an alternative support mechanism, this may not necessarily provide the same level of support for undertaking R&D itself. In addition, eligibility is proposed to be limited to three years, with a process to reapply every three years for a further three-year period for companies in industries with longer development timeframes such as pharmaceuticals.
Growth-based access for SMEs
For SMEs outside the startup stream, the report proposes increasing the turnover threshold for the refundable R&D tax offset up to $50 million while restricting ongoing access to the refundable RDTI benefits to revenue growth.
Under the proposed model:
- Businesses would initially access refundable benefits at the current 18.5 per cent for a limited period
- Continued eligibility would depend on achieving revenue growth of five per cent above inflation
- Companies failing to meet these thresholds would lose refundable benefits.
The aim is to focus support on firms actively scaling their innovation activities.
However, linking eligibility to revenue growth raises broader policy considerations. The RDTI is intended to encourage businesses to undertake R&D activities they may not otherwise pursue due to uncertainty of outcomes. Tying access to commercial success outcomes may run counter to this objective, particularly where R&D projects do not result in a viable product or revenue uplift. In these cases, businesses could lose access to refundable benefits despite undertaking genuine R&D activity.
This approach may also create challenges for businesses undertaking long-term or cyclical R&D projects, where revenue growth may lag behind development timelines. The added complexity of growth-based eligibility may make it more difficult for SMEs to strategically plan R&D investment, particularly in sectors experiencing market volatility.
Increased incentives for large corporates
The report also seeks to attract larger RD&I-active firms and multinational companies to conduct more R&D in Australia.
Proposed changes include:
- Removing the $150 million R&D expenditure cap
- Increasing and simplifying the incentive structure for large companies
- Encouraging partnerships between corporates and Australian startups or research institutions
- Removing the RDTI offset from franking credit calculations.
Large firms often play an important role in innovation ecosystems by supporting supply chains, research collaborations and startup acquisitions. The proposals aim to strengthen these ecosystems and improve Australia’s competitiveness for global R&D investment. The recognition of the role these businesses play in driving R&D activity in Australia is broadly positive, and the proposed simplification of the incentive structure for large taxpayers may improve the program’s attractiveness.
Simplification measures
The report also proposes several administrative changes to simplify the RDTI, including:
- Introducing a deemed rate for supporting R&D activities
- Increasing the minimum R&D expenditure threshold
- Removing certain clawback rules where businesses receive government grants.
While the proposed simplification measures are welcome, they are unlikely to fully offset the additional complexity introduced elsewhere in the redesigned RDTI framework.
The introduction of a deemed rate for supporting activities may simplify claims for some taxpayers, but it is concerning in industries where supporting activity expenditure can equal or exceed core R&D due to substantial upfront research, or where supporting activities occur in earlier years while core activities take place later. A more practical approach may be to treat the deemed rate as a safe harbour, while still allowing detailed registration and costing of supporting activities where higher expenditure can be substantiated.
Winners, losers and potential policy gaps
The redesigned RDTI appears intended to shift support toward high-growth startups, scaleups and large RD&I-active firms, while reducing access for businesses that do not demonstrate strong growth.
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Potential losers |
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Possible oversights
For many of these businesses, the refundable RDTI has historically helped support innovation during periods where revenue growth is limited. External shocks may also affect SME eligibility under growth-based criteria. Businesses in sectors such as agriculture, manufacturing or regional industries can experience sudden revenue declines due to:
- Severe weather events such as floods or droughts
- Supply chain disruptions
- Commodity price volatility
- Broader economic downturns.
In these circumstances, otherwise innovative businesses could lose access to RDTI support despite continuing to undertake valuable R&D.
Innovation also occurs within mature or lower-growth companies seeking to transform existing products or processes, suggesting that flexibility in any redesigned framework will be important.
What happens next?
The recommendations in the Ambitious Australia report will likely form part of ongoing policy discussions around innovation and productivity.
Given the scale of the proposed reforms, any changes to the RDTI would likely involve industry consultation and detailed legislative design.
Businesses currently accessing the RDTI should monitor developments closely, particularly if their eligibility could be affected by growth-based criteria or revised thresholds.
Next steps
BDO in Australia is closely monitoring developments relating to the proposed reform of the R&D Tax Incentive.
If you would like to discuss how potential changes may affect your organisation, or explore strategies for managing R&D investment under evolving policy settings, please contact BDO’s R&D and government incentives specialists.
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