Last Friday, the Federal Government released exposure draft legislation containing the most significant proposed changes to the Research and Development Tax Incentive (RDTI) in years. The reforms, first announced in the 2026-27 Federal Budget and proposed to commence from 1 July 2028, are based on the premise that innovation support can be more effectively targeted towards younger, high-growth innovators while improving the long-term sustainability of the program.
The key proposed changes include:
- Increasing R&D tax offsets by 4.5 percentage points for eligible core R&D activities and removing supporting R&D activities.
- Increasing the refundable R&D tax offset turnover threshold from $20 million to $50 million aggregated turnover.
- Limiting refundability to firms up to 10 years of age, with an extension to 15 years for eligible firms undertaking R&D activities related to therapeutic goods.
- Entities with aggregated turnover below $50 million that are outside the refundable period will continue to access the highest R&D tax offset rate, although the offset will be non-refundable.
- Increasing the maximum R&D expenditure threshold from $150 million to $200 million.
- Reducing the R&D intensity threshold for the non-refundable offset from 2% to 1.5%.
- Increasing the minimum annual R&D expenditure threshold from $20,000 to $50,000.
One notable refinement since Budget night is Treasury’s recognition of the extended development and regulatory approval pathways often faced by biotechnology and medical technology companies. Under the revised proposal, eligible therapeutic goods innovators would be able to access refundable benefits for up to 15 years, compared with the standard 10-year limit proposed for other industries.
The Government’s stated objective is to better target support, simplify administration and improve the effectiveness of public investment in innovation. While several elements of the package are welcome, including the higher refundable turnover threshold, increased offset rates, lower intensity threshold and expanded expenditure cap, MJA remains concerned that aspects of the proposed changes may create unintended consequences for businesses undertaking R&D.
Key Concerns with the Proposed Reforms
The first concern is the proposed 10-year refundability limit. The measure assumes innovation is primarily the domain of younger companies, despite many mature Australian businesses undertaking significant technology transitions, product redevelopment programs and process transformation initiatives well beyond their first decade of operation. Alternative approaches may better balance fiscal sustainability and innovation outcomes, including a cap on the cashback component of the refundable offset or limiting the total number of years a taxpayer can access refundability rather than imposing a strict age-based threshold.
The second concern is the proposed removal of supporting R&D activities. Although presented as a simplification measure, the change may have the opposite effect in practice. Under the current framework, the distinction between core and supporting activities is often of limited practical significance outside certain excluded activities and specific production-related provisions. By removing supporting activities, however, that distinction would become a central eligibility test.
Businesses, advisers and regulators would be required to dissect integrated R&D programs into individual tasks and determine whether each task forms part of the requirements of a core R&D activity. This risks increasing compliance costs, interpretative uncertainty and the likelihood of disputes.
If fiscal sustainability is the primary policy objective, maintaining the current framework may represent a more effective solution. The existing core and supporting activity construct is well understood by businesses, advisers and regulators, has been refined over the first 15 years of the Incentive, and generally strikes an appropriate balance between encouraging innovation and maintaining program integrity. In MJA’s view, retaining the current treatment of both core and supporting activities, along with the existing offset rates, is likely to deliver a better overall outcome than introducing a more complex eligibility framework with uncertain practical benefits.
Finally, the therapeutic goods carve-out raises broader questions about the RDTI’s long-standing sector-neutral design. While MJA acknowledges the unique challenges faced by life sciences companies, providing preferential treatment for one industry sector builds on recent sector-specific legislative changes excluding tobacco and gambling-related activities. For more than 40 years, the RDTI and its predecessor program, the R&D tax concession, have been underpinned by the foundational principle that support is provided on a sector-neutral basis and does not seek to make judgements regarding the relative merit of different forms of R&D. The introduction of sector-specific concessions and exclusions risks moving the program away from this foundational principle by creating different outcomes for otherwise comparable R&D activities based solely on industry classification.
Innovative Business CGT Concession (IBCC)
Treasury has also released exposure draft legislation for the new IBCC. The revised proposal includes a 15-year eligibility period for innovative companies, a reduced three-year minimum holding period for investors, and the removal of the previously proposed lifetime cap on concessional gains. While the revisions represent an improvement on the original proposal, uncertainty remains regarding the operation of the innovation tests and whether the concession will provide sufficient certainty to investors and innovative businesses seeking to access the regime.
Consultation on both the RDTI and IBCC exposure draft legislation closes on 28 September 2026. Given the significance of the proposed changes, businesses undertaking R&D activities, investors and industry stakeholders should consider reviewing the draft legislation and participating in the consultation process before the reforms are finalised.