Client Update
Proposed R&D Tax Incentive Reform What the exposure draft could mean for your business October 2026
Overview Treasury has released exposure draft legislation to give effect to the 2026-27 Federal Budget reforms to the Research and Development Tax Incentive (R&DTI). The proposals would increase several offset premiums and thresholds, while narrowing the activities that may qualify and introducing time-based limits on access to refundable offsets. For R&D claimants, the reforms could affect both the value and timing of future benefits. In particular, businesses may need to reassess whether each identified activity satisfies the proposed R&D activity requirements and whether the claimant remains within the relevant refundable-offset eligibility period. The reforms are proposed to apply to income years commencing on or after 1 July 2028 but remain subject to amendment and enactment.
Key takeaway for R&D claimants Higher offset premium rates may apply to expenditure that remains eligible, but the activity base would be narrower. The removal of supporting R&D activities, the higher $50,000 minimum expenditure threshold and the proposed time limit on refundable offsets mean some businesses may see a different outcome even where overall R&D investment is unchanged. Early modelling at an activity and expenditure level will be important.
What is proposed to change from the current R&DTI? Area
Current Legislation
Exposure draft proposal Supporting category removed. Existing ‘core R&D activities’ are renamed ‘R&D activities’
Eligible Activities
Core + supporting R&D activities
Minimum expenditure
$20,000
Each identified R&D activity would need to satisfy the substantive experimental and new-knowledge requirements, rather than qualifying solely because it supports another eligible activity
Indicative client impact
High - may reduce eligible expenditure and increase the importance of activity scoping, cost attribution and contemporaneous records
$50,000
May affect smaller claimants and early-stage R&D programs
Refundable turnover threshold
< $20m aggregated turnover
< $50m aggregated turnover
Positive for growing businesses between $20m and $50m turnover, subject to the proposed refundable-offset eligibility period
Refundableoffset eligibility period
No time-based limit on refundable access if other conditions met
Generally limited to the first 10 years (15 years for qualifying therapeutic-goods R&D)
Potentially significant cash-flow impact for established claimants
Refundable offset premium
18.5 percentage points above corporate tax rate
23 percentage points above corporate tax rate
Positive where the entity remains eligible for a refundable offset
Largecompany intensity threshold
2.0% of total expenses
1.5% of total expenses
Positive - lowers the threshold for access to the higher nonrefundable rate
Nonrefundable premiums
8.5% / 16.5% above corporate tax rate
13% / 21% above corporate tax rate
Positive - potentially higher benefit for eligible expenditure
Premium-rate expenditure cap
$150m
$200m
Positive for very large R&D programs
What this means for R&D Claimants Early-stage and scaling businesses under $50 million turnover
1
For businesses that remain within the proposed 10-year refundable-offset eligibility period, the changes may increase the value of the incentive. The turnover threshold would increase from $20 million to $50 million and the refundable premium would increase to 23 percentage points above the corporate tax rate. The overall benefit will, however, depend on the level of expenditure that remains eligible after the proposed removal of supporting R&D activities and the increase in the minimum expenditure threshold to $50,000.
Established businesses under $50 million turnover
2
The proposed 10-year limit on refundability will be a key consideration for established claimants. The precise start year and application of the transitional rules will need to be determined for each entity under the final legislation. Once outside that period, an otherwise eligible entity below the $50 million turnover threshold may still access the highest 23 percentage point premium, but as a non-refundable offset. This may change the timing of the benefit and should be factored into tax-payment, cash-flow and R&D funding forecasts. Therapeutic-goods R&D potentially eligible for the extended refundable-offset eligibility period
3
Qualifying R&D related to therapeutic goods may access an extended refundableoffset period of up to 15 years, but the concession is subject to specific conditions. The relevant R&D activity must have the dominant purpose of generating new knowledge about therapeutic goods or their therapeutic use, in addition to the turnover, timing and registration requirements. AusIndustry may require a formal finding about that dominant purpose, increasing the importance of clear project purpose and contemporaneous technical evidence. Larger R&D claimants and groups
4
For non-refundable claimants, the proposed settings are generally more favourable. The R&D intensity threshold would reduce from 2.0% to 1.5%, the premium rates would increase by 4.5 percentage points and the premium-rate expenditure cap would increase from $150 million to $200 million. Subject to eligibility, these changes may increase the benefit available to businesses undertaking significant Australian R&D.
All R&D claimants - activity scoping becomes more important
5
The proposed removal of supporting R&D activities will require many claimants to revisit how R&D activities and expenditure are identified, scoped and documented. Under the exposure draft, an activity would not qualify merely because it is directly related to, or undertaken for the purpose of supporting, another eligible R&D activity. Work currently treated as supporting should therefore be reviewed to determine whether any discrete activity independently satisfies the R&D activity test. That assessment must be based on the substance of the activity and the available evidence, rather than a change in terminology.
Technical focus: core vs supporting activities Why this matters: under the current legislation, both core and supporting R&D activities can give rise to eligible expenditure where the relevant statutory tests are met. The exposure draft would remove the supporting category. As a result, activity scoping and the legal characterisation of the work performed would become central to whether expenditure remains eligible.
Current Concept
Current-law test
Exposure draft effect
Eligible Activities
Experimental activity where the outcome cannot be known or determined in advance and can only be determined through a systematic progression of work based on established science, proceeding from hypothesis to experiment, observation and evaluation, for the purpose of generating new knowledge.
Renamed an “R&D activity”. The substantive experimental and new-knowledge test remains the gateway to eligibility.
Supporting R&D activity
Activity directly related to a core R&D activity. Certain excluded or production-related activities must also be undertaken for the dominant purpose of supporting core R&D.
Category removed. A direct relationship to another R&D activity - or a dominant purpose of supporting it - would no longer be sufficient by itself.
Previously supporting work that is itself experimental
A workstream described as supporting may include a discrete activity that, on its facts, independently satisfies the core R&D test. This depends on the activity actually conducted, not the description applied to it.
May remain eligible only to the extent the activity itself satisfies all elements of the R&D activity test. The exposure draft does not provide a pathway to eligibility through reclassification alone.
Can a supporting activity simply be reframed as a core activity? Not by changing the label. The explanatory materials state that expenditure previously eligible under either the supporting or core category would only remain eligible if it meets the criteria for an “R&D activity”. Businesses should therefore review how activities are scoped. Some work currently recorded as supporting may, on its facts, comprise or form part of a discrete experimental activity that independently satisfies the test; other enabling or ancillary work would not qualify merely because it supports eligible R&D. What to consider: does the activity itself address an outcome that could not be known or determined in advance; does it form part of the systematic progression from hypothesis through experiment, observation and evaluation; and is it conducted for the purpose of generating new knowledge? Contemporaneous technical records should demonstrate how the activity satisfies the proposed eligibility requirements, while financial and project records should support the attribution of expenditure to that activity.
Therapeutic goods: the 15-year window has a purpose test Paragraph 1.16 of the explanatory materials sets out an extended refundable-offset pathway for entities below the $50 million turnover threshold where the relevant R&D activity has the dominant purpose of generating new knowledge about therapeutic goods or their therapeutic use and the 15-year timing test is satisfied. Relevant R&D registration is also required within the first 10 income years. Paragraph 1.22 gives the Board a specific role in determining purpose: the Board may make a finding as to whether all or part of an activity was undertaken for that dominant purpose. This increases the importance of contemporaneous records showing why the activity was undertaken and the new knowledge it was intended to generate. Client implication: the 15-year pathway should not be treated as a blanket extension for biotechnology or medical technology businesses. Eligibility will depend on the purpose and design of the relevant R&D activities, registration history and the timing rules. Businesses approaching the 10-year refundability boundary should assess these requirements early. Treasury is also separately consulting on whether clinical manufacturing R&D expenditure should be eligible.
What are the Next Steps
Although the proposals are not intended to apply until income years commencing on or after 1 July 2028, businesses may benefit from reviewing activity definitions, project records and cost-capture processes before the proposed commencement date. Review the current claim Quantify expenditure attributed to core and supporting activities and the amount that depends on the supporting-activity rules.
Reassess activity boundaries and documentation Determine whether supporting work independently satisfies the proposed R&D activity test and ensure contemporaneous records support the uncertainty, experimental process and new knowledge.
Model refundability and cash flow Identify the relevant start date and model refundable versus non-refundable outcomes.
Let’s Talk If you’d like to further discuss the latest R&D Tax Incentive reforms and how it might affect you, please get in touch with our team.
Simon Chun Partner p +61 7 3222 8447 e schun@pitcherpartners.com.au
Murugesh Sheekar Tax Director p +61 7 3222 8332 e msheekar@pitcherpartners.com.au
Natalie Ho Supervisor p +61 7 3222 8444 e nho@pitcherpartners.com.au
Lachlan Tran Tax Accountant p +61 7 3222 8444 e ltran@pitcherpartners.com.au
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