The policy tension in the R&D Tax Incentive exposure draft
The policy tension in the R&D Tax Incentive exposure draft
Treasury has released exposure draft legislation for Treasury Laws Amendment (Tax Reform No. 5) Bill 2026: Better targeting the Research and Development Tax Incentive (Exposure Draft). These changes form part of the government’s response to the Ambitious Australia – Strategic Examination of Research and Development Final Report (Ambitious Australia) which recommends that the R&D Tax Incentive (RDTI) be reformed to simplify and focus the scheme for greater impact, and to address concerns around program complexity, cost and integrity. These reforms are part of the first stage of the Government’s response to the report and purports to address these by:
- Simplifying the RDTI
- Improving its economic impact by gearing it towards high-impact innovation
- Addressing concerns surrounding the program’s complexity, cost and integrity.
Key changes proposed
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Proposed changes |
Alignment with Ambitious Australia recommendations |
Claimants impacted |
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Raising the minimal R&D expenditure threshold for non RSP (Research Service Provider) and CRC (Cooperative Research centres) expenditure to $50,000 |
Increase the minimum R&D expenditure threshold to $150,000 |
Based on the 2022-23 R&D Transparency report, applicants with less than $50,000 in R&D expenditure made up ~6% of the total claims |
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Raising the maximum expenditure eligible for a premium R&D tax offset rate to $200 million |
Remove the R&D expenditure cap |
Based on the 2022-23 R&D Transparency report, there were only two applicants with R&D expenditure over $150 million. However, we are aware that a number of large players have not been maximising their entitlements in recent years |
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Raising the Refundable R&D Tax Offset Aggregated Turnover threshold to $50 million |
Raising the turnover threshold will enable growing entities to retain access to the refundable offset as they expand, further enabling them to leverage their successful and impactful R&D. |
Rapidly growing businesses, and those that are connected or affiliated with medium-size businesses |
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Restricts access to the refundable R&D tax offset to the first 10 years from the earliest date on which the claimant, or a connected or affiliated entity, began carrying on an enterprise or first registered for the RDTI |
There was no recommendation to limit access to the refundable offset based on entity age. |
A significant proportion of claimants accessing the refundable offset have 'carried on an enterprise' for 10 years or more. Enterprise age bears no necessary relationship to R&D intensity or financial need, particularly where the test extends to connected entities and affiliates |
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Therapeutic-goods exception. Claimants who are conducting R&D activities to generate new knowledge about therapeutics goods or their use can obtain a Finding to extend the 10-year refundability limit for up to an addition 5-years |
There was no recommendation to provide preferential treatment to a particular industry |
This change would affect less than 10% of the total claimants |
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Lowering the Non-Refundable R&D expenditure intensity threshold to 1.5% of total company expenses |
Remove the tiered R&D intensity measure and provide a standard offset rate that is globally competitive, such as bringing the rate for large firms in line with that currently provided for SMEs |
All claimants accessing the non-refundable offset although a large proportion will still not meet the intensity threshold |
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Expenditure on supporting R&D activities is not eligible to receive the tax offset, with the concept of ‘core R&D activities’ renamed ‘R&D activities’ |
Eligible R&D expenditure for the startup stream should be based on R&D projects instead of the core and supporting R&D definitions that still apply to the non-startup RDTI streams. Additionally, eligible expenditure should be extended to include development and deployment, early commercialisation, and allow for user testing and adoption research |
Most claimants currently register R&D activities that would likely be excluded by the new definition |
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Increasing the R&D Tax Incentive premium by 4.5% for both Refundable and Non-Refundable claimants to 23% and 13% respectively |
A higher refundable offset rate of corporate income tax +23.5% for those entities that would meet certain criteria under a 'high growth RDTI stream' |
All claimants |
BDO Comment
BDO supports reforms that simplify the Research and Development Tax Incentive (RDTI), improve its integrity and ensure its long-term sustainability. Increasing the refundable turnover threshold to $50 million, increasing the maximum expenditure threshold and reducing the R&D intensity threshold will are all welcome changes and help keep the scheme current with rising costs and inflation. However, the divergence of from the recommendations proposed in the Ambitious Australia report, alongside the limited consultation time of the proposed changes with industry (two weeks) is disappointing.
As with other recent measures announced in the 2026-27 budget, we are of the view that the proposed changes to the RDTI may achieve the opposite of the policy intent through increasing the administrative burden and imposing new restrictions which limit claimants access to the Refundable RDTI offset depriving them of cashflow when it is needed most.
Currently, the legislation provides an equal tax benefit for eligible “core” and “supporting activities”. Accordingly, provided the activity qualified as either, its nomenclature was a moot point. Over time DISR guidance and practice on what might be considered part of the systematic progression of work encompassed in the core activity definition, has been narrowed to focus solely on one element of that definition, being “the experiment”. Our concern is that the intention of treasury in removing “supporting activities” is to in-bed that narrow interpretation of core activities.
An experiment-only approach could change how businesses plan and document R&D. It may encourage them to break integrated programs into separate experiments, move too quickly into testing, and spend less time on the research, modelling and design needed to make those experiments worthwhile. The risk is that the RDTI rewards the appearance of experimentation rather than well-designed R&D that generates valuable new knowledge.
If supporting R&D activities are removed, the definition should explicitly cover the complete systematic body of work directed towards resolving an identified scientific or technical unknown. This should include relevant basic research, applied research and experimental development, including investigation, hypothesis development, experimental design, testing, analysis and iteration.
Another area of concern is around the proposed 10-year refundability limit, measured from the earlier of the commencement of an enterprise and the entity’s first R&D registration. Enterprise age is a poor proxy for financing need, additionality or R&D impact. The period may also begin while a business is raising the capital required to commence substantive R&D, materially shortening the period during which refundable support is available.
If a time limit is retained, the 15-year therapeutic-goods exception should be applied universally. Long development periods also arise in critical minerals, advanced manufacturing, clean energy, energy storage, defence, quantum technology and other sectors.
Program integrity and fiscal sustainability would be better addressed through clearer expenditure rules. We recommend prescribed expenditure categories, a clearer nexus to eligible R&D, objective apportionment rules and optional safe harbours for indirect costs, employment on-costs, contractors and mixed-use assets.
BDO is preparing a response to Treasury, due Monday 28 September. Businesses that claim or plan to claim the RDTI should consider how the draft rules could affect refundable cash flow, activity eligibility, documentation and project planning from 1 July 2028.
For more information on the proposed reforms or to find out more about how we can help you access R&D tax incentives, please contact our team.
