Treasury’s R&D Tax Incentive exposure draft: what changes, what should be reconsidered and what action you can take now

| Background

Ambitious Australia, the Strategic Examination of R&D, reported in March 2026 that the R&D Tax Incentive had become complex and poorly targeted. The Government responded in the 2026-27 Budget on 12 May 2026 with seven reform measures. Treasury released for consultation, the exposure draft on these reforms on 11 September 2026. 

The draft follows the May announcement almost without softening. Claimants should plan on these settings rather than wait for the Bill. 

| What is proposed?

In our opinion two structural changes do most of the detrimental work. Supporting R&D activities would be removed entirely, leaving only activities that meet an “R&D activity” test in their own right. The refundable offset would be limited to a company’s first 10 years, or 15 years for eligible therapeutic goods R&D.

Rates are premiums above the corporate tax rate, not flat rates on R&D spend.

| Two measures that warrant careful consideration

Removing supporting R&D activities

Experiments rarely stand alone. It may be that a test rig exists only to run the experiment; background research and literature reviews must often be undertaken before a hypothesis can be tested. These initial activities are also required to be undertaken and documented in support of the current “significant technical unknown” core R&D activity eligibility criteria. Under these proposed reforms, any benefit attributable to these critical steps in the R&D lifecycle will be lost in full.

The higher headline offset rates do not compensate for the narrower base. An uplift in rate applies only to whatever expenditure remains eligible, and complete removal of supporting activities contracts that base by considerably more than the rate rises. Where supporting activities make up a material share of eligible expenditure, as they commonly do in advanced manufacturing, clinical drug manufacturing, and data-intensive software, claimants are worse off under the draft than under current law despite the headline increase. Removing the category outright is a reduction in support for those claimants, not a rebalancing of it and needs revision.

The effect on onshore clinical drug manufacture deserves particular attention. Manufacture of trial quantities of a drug compound is generally claimed as a supporting activity, on the basis of its direct, close and immediate link to a clinical trial that is itself a core activity under the Industry Research and Development (Clinical Trials) Determination 2022. Removing the supporting limb would leave the trial eligible while the good manufacturing practice (GMP) batches the trial depends on attract no benefit at all, and the choice between local and overseas supply is already finely balanced on cost. Work pushed to overseas contract drug manufacturers takes the capability with it: process development, scale-up and fill-finish expertise sits in people and accumulated know-how rather than in plant, and once those skills leave they are slow and expensive to rebuild. This is an industry that needs to be supported in order to thrive in Australia, and it should not be given a reason to send that work, and the expertise behind it, offshore.

The 10-year cliff……and the 15-year one

The draft concedes that some development cycles exceed 10 years, extending refundability to 15 years for therapeutic goods development activities only. Long development cycles are not confined to therapeutics: grid-scale storage, hydrogen, advanced materials manufacture, aerospace qualification, space technology and genetic breeding programs routinely run longer.

Three features compound the problem:

• Refundability is lost for the whole anniversary year, not from the anniversary date
• It appears that the clock runs from when the business began, not when the R&D began, so a manufacturer pivoting into deep technology at year 12 gets no access at all
• The new test extends to connected entities, so a new venture inside a mature group will likely inherit the group’s start day.

The 15-year concession for therapeutic goods development activities is also tighter than it first appears. A single drug candidate can take 10 years or more to move from pre-clinical work through the three clinical phases. A developer that begins investigating a second therapeutic candidate even a few years into the first, will strike the 15-year limit part-way through that program, and one that moves into therapeutics after establishing another business will strike it sooner again. The practical effect is to discourage companies from taking on new therapeutic candidates in the later part of the window, which runs against the intent of the extension and the R&D Tax Incentive program as a whole.

A purpose-based extension, available on the same finding basis as the therapeutic goods concession but open to any long-cycle field or industry, would preserve the policy intent without favouring one sector.

| Winners and losers

Better off:

• Companies with turnover between $20 million and $50 million, reaching the refundable offset for the first time and falling under the 10-year age cap
• Claimants with R&D intensity between 1.5 and 2 per cent, who move up to a premium rate that has itself risen
• Companies spending above $150 million on eligible R&D activities – unfortunately an insignificant number of Australian companies will see this benefit

Worse off:

• Loss-making companies past 10 years, who keep the highest rate but lose refundability
• Therapeutic goods developers with clinical programs exceeding 15 years and those intending to investigate multiple therapeutic assets
• Supporting-heavy claimants – felt most in advanced manufacturing, energy, clinical drug manufacturing, and data-intensive software
• Holders of advance findings extending into FY29
• Claimants below the $50,000 minimum notional deduction – the subset most in need of financial support

| Next steps

We are seeking input from companies in preparing a submission to Treasury particularly focused on the two detrimental measures above. Worked examples from real-life scenarios carry far more weight than general commentary. If these changes affect your business, we would be keen to hear from you in advance of the consultation submission deadline of 28 September 2026.

If you are expecting to claim after 1 July 2028, our specialist R&D Incentives & Grants team can help you gauge the impact of the proposed reforms. That includes modelling how the draft legislation may affect your claim base, refundability and cash timing, testing how your current activities and record keeping would hold up if supporting activities fall away, and planning project scope and structure so that eligible work is positioned well before the reforms are enacted. Get in touch now to arrange an FY29 impact and readiness review.

Based on the exposure draft and explanatory materials of 11 September 2026. Proposed measures only and subject to change. General information: please speak to your adviser before acting.