In brief
On the heels of the Ambitious Australia report released in December 2025, this year’s budget contained a range of measures related to the Research and Development (R&D) tax incentive.
Key takeaways
The Government has announced several changes to the R&D tax incentive aimed at simplifying the regime and better targeting support for business R&D. These reforms represent the first stage of the Government’s response to the Ambitious Australia: Strategic Examination of Research and Development Final Report (released in December 2025).
The following measures apply from 1 July 2028:
- In positive news for taxpayers claiming the refundable R&D tax offset, the aggregated turnover threshold will increase from AUD 20 million to AUD 50 million. Consistent with the Report’s recommendations, this will allow more medium‑sized businesses to qualify for the refundable offset and will also align the refundable offset threshold with the base rate entity threshold for the lower corporate income tax rate.
- However, the Government has announced that refundability will only be available to businesses operating for less than 10 years, with older businesses eligible for an equivalent, non-refundable offset. The Government has stated that this measure is intended to provide greater support to young, fast‑growing businesses.
- For taxpayers claiming the non‑refundable R&D tax offset, the R&D intensity threshold will be reduced from 2% to 1.5%. Under the current rules, an additional 8% uplift applies to the extent R&D expenditure exceeds 2% of total expenditure. Lowering the threshold is expected to allow more firms engaging in substantial core R&D activities to access higher offset rates. This approach diverges from the Report’s recommendation that the intensity threshold be removed entirely to simplify the regime and deliver a single, globally competitive offset rate.
- The eligibility of supporting R&D activities will be removed. This differs from the Report’s recommendation to introduce a deemed rate for supporting activities relative to the amount of core R&D expenditure claimed, in order to reduce ambiguity in self-assessment of supporting activities.
- At the same time, the offset for R&D expenditure on core R&D activities will be increased by around 25% to 50%, through a 4.5% increase in core R&D offset rates. Alongside the removal of supporting activity eligibility, the Government expects this to simplify and better target R&D support for businesses.
- The maximum R&D expenditure threshold will be increased from AUD 150 million to AUD 200 million. Notably, the Report had recommended that the cap be removed entirely.
- The minimum expenditure threshold will be lifted from AUD 20,000 to AUD 50,000, with research activities valued below this amount required to be undertaken with recognised research organisations to be eligible for the R&D tax incentive.
The measures are estimated to decrease receipts by AUD 910 million and payments by AUD 1.6 billion over the next five years. The Government intends to use the savings from these changes to help fund tax reforms that support innovation and investment by small businesses.
A copy of the Federal Budget papers can be found here.
Jeremy Hyman, Head of Communications, and Sky Friend, Business Development Consultant, have contributed to this legal update.