Federal Budget 2026/27: R&D Tax Incentive Developments
May 2026
Overview
On Tuesday, 12 May 2026, Treasurer Jim Chalmers handed down the 2026-27 Federal Budget, marking his fifth Budget. Among the key tax-related measures announced is a proposed overhaul of the Research and Development Tax Incentive (R&DTI). The R&DTI plays a central role in encouraging businesses to undertake innovative activities that support productivity and economic growth in Australia.
However, the Government has identified that the current program is both complex and increasingly costly, particularly for smaller claimants navigating administrative requirements. Over the five-year period from 2019-20, the cost of the R&DTI has risen by approximately 70%, reaching $4.4 billion in 2023-24.
In response, the Government intends to simplify the R&DTI and better target support towards high-value R&D activities. The reforms aim to reduce compliance burdens, strengthen program integrity, and ensure funding delivers stronger economic outcomes. While detailed changes are yet to be released, the proposed overhaul signals a significant shift, and businesses should monitor developments to understand the potential impact on their R&D claims.
Key R&D Tax Incentive Reforms
Increased R&D Offset Rates
The Government will increase the offset for core R&D expenditure through a 4.5 percentage point uplift in the core rates. This is intended to enhance Australia’s international competitiveness and improve after-tax benefits on business-led R&D.
Lower R&D Intensity Threshold
The intensity threshold will be reduced from 2% to 1.5%, allowing more businesses undertaking core R&D to access higher offset rates. This broadens eligibility for firms with growing, less capital-intensive R&D programs.
Our Observations
This measure is a positive development, as it enhances the financial incentive for undertaking core R&D and is likely to improve after-tax benefits for claimants. It may also strengthen Australia’s competitiveness in attracting and retaining R&D investment.
However, the overall benefit will depend on the extent to which businesses can align their expenditure with core R&D activities under the revised rules.
This represents a favourable outcome, as it enables a wider range of businesses to access higher offset rates, particularly those with lower relative R&D spend or less capital-intensive programs, thereby improving the effective return on investment and supporting continued participation in R&D activities.
Removal of Supporting R&D Expenditure
Supporting R&D activities will no longer be eligible under the R&DTI. Going forward, only core R&D expenditure will qualify,narrowing the scope of claims and strengthening alignment with primary experimental activities.
Expanded Access for Growing Firms
The turnover threshold for accessing the highest (refundable)offset will increase from $20 million to $50 million, enabling scale-up businesses to retain refundable benefits for longer.
Targeted Support by Business Stage
For companies with turnover below $50 million, higher offset rates will remain available; however, refundability will be limited to firms under 10 years of age. More mature businesses will transition to nonrefundable offsets, targeting support towards earlierstage innovators while maintaining incentives for established R&D performers.
This represents a significant tightening of the regime, narrowing the scope of eligible claims and likely reducing the overall benefit for many taxpayers.
This change may have a particularly adverse impact during the early stages of the R&D lifecycle, where businesses typically rely on supporting activities to facilitate core experimentation, meaning a greater proportion of costs may no longer be claimable.
As a result, businesses will need to reassess how activities are structured, identified and documented, as well as consider the potential funding gap created by the exclusion of these supporting expenditure types.
This is a positive change, as it allows growing businesses to retain access to refundable offsets at a larger scale, supporting cash flow during key expansion phases.
It also recognises that many scaling companies continue to rely on the incentive to reinvest in ongoing R&D.
This introduces a more targeted approach to the regime, directing refundable support towards early-stage innovators while scaling back cash benefits for more established businesses.
However, it may materially impact mature companies with longer R&D life-cycles, which often do not realise commercial returns until many years into development and have historically relied on refundable offsets to fund ongoing investment.
As a result, these businesses may need to reassess funding strategies, as the transition to non-refundable offsets reduces immediate cash flow support despite continued R&D activity.
Higher Expenditure Cap
The cap on eligible R&D expenditure will increase from $150million to $200 million, providing additional support for large-scale R&D investments in Australia.
Increased Minimum Claim Threshold
The minimum R&D expenditure threshold will increase from $20,000 to $50,000. Claims below this threshold will only qualify if activities are conducted with a registered Research Service Provider or Cooperative Research Centre. This measure is intended to reduce low-value claims and improve overall claim quality.
This is a positive change, providing greater support for large-scale R&D investment and reinforcing Australia’s attractiveness for high-value projects.
However, its practical impact will be limited to a relatively small number of large claimants with substantial R&D expenditure.
This represents a modest tightening of the regime, likely to disproportionately impact early-stage or bootstrap businesses with lower levels of R&D spend.
While the use of registered Research Service Providers or CRCs may improve the quality of claims and provide access to specialist expertise, the associated costs may limit practical access for smaller claimants, potentially reducing participation at the early stages of the innovation lifecycle.
Let’s Talk
If you’d like to further discuss the latest R&D Tax Incentive developments 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
Senior Tax Accountant
p +61 7 3222 8444 e nho@pitcherpartners.com.au
Access our full Federal Budget analysis here