The 2026–27 Federal Budget delivers the most significant rewrite of the R&D Tax Incentive (RDTI) program since 2011. The changes are structural, they affect every claimant, and they all are due to commence from 1 July 2028. There will be winners and losers – and which side of that line a business falls on will depend heavily on the details still to be confirmed in the exposure draft.
The program is being reshaped: higher rates for core experimental R&D, tighter eligibility, and a refundability framework that rewards younger and faster-growing businesses while removing cash benefits from others. The removal of supporting R&D activities and the 10-year company age cap are the most significant changes.
Beyond the RDTI, the Budget pairs these changes with an expansion of Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs) alongside broader capital gains tax (CGT) reform – a combination that has the potential to materially shift the economics of structured start-up investment.
FY26 and FY27 RDTI claims are unaffected, however, the planning runway for FY28 RDTI claims needs your attention.
Get in touch with our specialist team to understand where your business sits with these proposed reforms and what action you can take now.
The offset rate for core experimental R&D activities increases by approximately 4.5 percentage points across both the refundable and non-refundable tiers. The intensity threshold that unlocks the higher-tier premium drops from 2 per cent to 1.5 per cent, meaning more businesses will access the higher rate. For businesses whose claims are built on genuine, well-documented experimental work, this is a real and welcome improvement.
This is one of the most consequential changes in the package. From 1 July 2028, supporting R&D activities will no longer attract the R&D offset. The Government has confirmed this is an abolition of the supporting activity category, not a re-characterisation.
The critical question – which will not be answered until the exposure draft is released – is whether the definition of core R&D activities remains unchanged.
It is clear that the businesses best placed to absorb this change are those whose claims have had a strong focus on core R&D activity, supported by robust contemporaneous evidence. If that describes your business, the new rules likely improve your relative position. If your claim has relied significantly on supporting activities, the next 18 months are the time to start reviewing your R&D programs and determine where your activities might be refocused towards core R&D initiatives.
The aggregated turnover threshold for the refundable R&D offset rises from $20 million to $50 million. For scaling businesses that currently lose cash refundability the year they cross $20 million in turnover, this is a meaningful improvement. A business growing from $15 million to $25 million in turnover retains the cash benefit under the new rules.
At the same time, the minimum expenditure threshold for a claim rises from $20,000 to $50,000. Businesses spending less than $50,000 on eligible R&D activities will need to engage a registered Research Service Provider (RSP) or Cooperative Research Centre (CRC) to remain eligible. The Government has deliberately set the floor below the $150,000 recommended by the Strategic Examination of Research and Development (SERD), but the intent is clear: smaller claims will face a higher entry threshold.
Another change that deserves careful attention from businesses in sectors with long R&D program timelines.
Refundability is now conditional not just on turnover but on the age of the business. Only entities operating for fewer than 10 years will be eligible for the refundable R&D offset. Businesses past that threshold retain the offset rate, but as a non-refundable R&D offset – a deferred benefit against future tax, not a current cash payment.
The reference date for “10 years” has not yet been defined. Whether it runs from incorporation, first commercial trading, or first R&D registration will materially affect which businesses are caught. We will update clients as soon as that is confirmed.
For businesses in biotechnology, life sciences, Medtech and Deep-tech sectors, this is a structural concern. Clinical trial protocols routinely span a decade or more. The pathway from discovery science to commercialisation in biotech often takes 12 to 15 years – sometimes longer. A business that has been conducting genuine, high-quality experimental R&D throughout that period, is still pre-revenue or loss-making, and crosses the 10-year threshold from FY28 will lose cash refundability at precisely the point its capital requirements are often highest.
The annual cap on R&D expenditure eligible for the offset rises from $150 million to $200 million. The Strategic Examination of Research and Development (SERD) recommended removing the cap entirely; the Government has chosen a moderate lift. For the handful of Australia’s largest R&D spenders, this restores offset access to a portion of expenditure that currently falls outside the cap.
As noted above, the minimum claim threshold rises from $20,000 to $50,000. The carve-out for RSP and CRC-engaged work means the door is not closed for smaller spenders, but it does redirect them toward formal research collaboration structures. The second-order effect is positive: CRC and RSP partnerships are generally associated with stronger R&D outcomes and better claim quality.
The RDTI changes do not sit in isolation. Several other Budget measures are directly relevant to R&D-active businesses and their investors.
Companies with aggregated turnover below $1 billion can carry back tax losses against tax paid in the previous two income years from 1 July 2026. For businesses that sit marginally above the refundable offset turnover threshold, or that will lose refundability under the new 10-year age cap from FY28, loss carry-back provides a different but meaningful form of cash recovery. The two mechanisms are not identical, but they partially substitute for each other from a cash-flow perspective.
From 1 July 2028, eligible start-ups with turnover below $10 million in their first two years of operation can access a refundable tax offset equal to the value of their FBT and wage withholding tax. This stacks with RDTI refundability for qualifying businesses and directly links the incentive to employment costs – a deliberate design choice that favours early-stage businesses hiring and growing.
This is the connection that most commentary has missed.
The CGT discount changes – the removal of the 50 per cent discount from 1 July 2027 and its replacement with cost base indexation and a 30 per cent minimum tax – have attracted significant criticism as a drag on founder and investor returns. That concern is legitimate in many contexts. But for investors deploying capital through Early Stage Venture Capital Limited Partnerships (ESVCLPs) or Venture Capital Limited Partnerships (VCLPs), the CGT discount changes are largely irrelevant: returns from eligible investments through these structures are already tax-exempt.
From 1 July 2027, the Government simultaneously expanded those structures materially:
This direction we’re hoping is deliberate and an indication that the Government is not anti-entrepreneurship; instead it is shifting the focus to structured, VC investment. Capital flowing through ESVCLP and VCLP structures into early-stage, R&D-active companies benefit from a combination of tax-exempt returns, expanded investee eligibility, and the improved RDTI rates and refundability runway those same portfolio companies will access from FY28. For businesses in their first 10 years conducting genuine experimental R&D, the combined economics of these structures have likely improved under this Budget.
The Budget signals a deliberate rebalancing of government grant funding away from legacy and uncommitted program allocations toward a more tightly targeted set of national priority areas. While not a reduction in overall grant support, it does change where the money flows.
The most significant reallocation involves $1.3 billion repurposed from uncommitted funding across three programs: the Battery Breakthrough Initiative, Solar Sunshot, and Hydrogen Headstart. A further $164.4 million has been redirected from the Powering the Regions Fund. The $1 billion cut to Round 2 of Hydrogen Headstart in particular represents a meaningful pivot away from hydrogen as a near-term funding priority, with that capital redeployed toward fuel security and other national resilience measures.
In their place, the Budget reinforces funding toward programs with clearer national priority alignment, including:
It is apparent that alignment to funded national priorities – energy security, supply chain resilience, critical minerals, emissions reduction, regional development, MedTech and defence capability – will be the determining factor in competitive grant rounds. Programs that were previously well-funded but sat outside these priorities face a harder environment. Applicants should review their project pipeline against the current priority framework and, where genuine alignment exists, ensure it is clearly articulated in any application.
The Budget Paper confirms $86.3 million over four years from 1 July 2026, and $9.7 million per year ongoing from 2030–31, to continue delivery of the ATO’s Counter Fraud Strategy.
Critically for RDTI claimants, the Budget Papers explicitly identifies the R&D Tax Incentive as a target for additional compliance activity from 2026–27. This is not new territory for the ATO, but the explicit budget allocation and the naming of the RDTI signals continued and intensified scrutiny.
This should be read in the context of the broader reform direction: the Government is investing in the ATO’s capacity to detect and pursue non-compliant claims, calibrated to match the intent of a narrower, higher-quality program. For businesses with well-structured, well-documented claims built on genuine experimental activity, this need not be a concern. For businesses whose claims have relied on broad activity characterisation or incomplete contemporaneous records, it is a prompt to act before the new compliance activity commences.
Strong documentation and defensible activity characterisation are not optional – they are the foundation on which RDTI claims will be assessed under the new regime.
One detail that cuts through the innovation-positive framing: the RDTI reform package is a net savings measure for the Budget records a $910 million reduction in tax receipts over five years, more than offset by a $1.56 billion reduction in government payments – a net Budget improvement of approximately $650 to $690 million.
The rate uplift costs money. The removal of supporting activity eligibility and the 10-year refundability cliff save more. The package is internally-funded by redistribution: from supporting heavy claimants and mature loss-making businesses toward core experimental R&D and young, fast-growing firms.
That is not a criticism of the policy direction. Redistribution toward ‘Core’, high-intensity experimental R&D is arguably the program’s original intent. But it is a useful reality check on the framing. Businesses that have always built claims on strong experimental foundations will benefit. Businesses whose claims were broader in scope should model the impact now.
The Budget responds to the Strategic Examination of Research and Development (SERD) – but selectively. Several recommendations were not adopted, including:
The Budget explicitly frames the RDTI changes as the “first stage” of its SERD response. Further reform is anticipated. Businesses and advisers that engage in the consultation process on the exposure draft will have a genuine opportunity to shape what comes next – particularly on the 10-year refundability cap and the core activity boundary questions.
The right response to this Budget depends on your business’s profile. Here is our summary assessment by segment.
Young, fast-growing businesses (under 10 years, sub-$50 million turnover): The net winners. Higher core rates, retained and extended refundability, improved loss carry-back, and an improved ESVCLP/VCLP investment environment. Focus on core R&D activity investment and documentation now, so FY28 claims are well-positioned for the proposed changes.
Scaling businesses approaching $20 million turnover: The refundable offset threshold increase to $50 million is directly relevant. Model the FY28 impact on your cash position and plan accordingly.
Mature businesses, over 10 years old, still loss-making (biotech, deep-tech, capital-intensive R&D): The most exposed cohort under these reforms. Loss of cash refundability from FY28 is a structural change to your financial position. Contact us now to model the impact. We will also be making representations in the consultation process on this specific issue and the detrimental impact this will have on industries with long R&D activity timelines.
Software-heavy businesses with high supporting-to-core ratios: The outcome will depend substantially on the exposure draft. Begin the process of re-baselining your activity characterisation towards a focus on core R&D activity and experimentation.
Large R&D spenders ($150 million to $200 million): The cap lift restores offset access to a meaningful tranche of expenditure. Assess whether group structuring decisions made under the previous cap should be revisited from FY28.
Sub-$50,000 R&D expenditure claimants: The program is no longer accessible without RSP or CRC engagement at this level. Speak to us about the right research collaboration pathway for your business.
The consultation process on the exposure draft is the next critical milestone. We will be monitoring it closely and updating our clients as details are confirmed.
If you want to understand how these changes affect your specific situation – or if you want Gild R&D Incentives & Grants to make representations on your behalf in the consultation process – get in touch with our team at incentives@thegildgroup.com or call 1300 843 453.
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