In the Federal Budget handed down on 12 May 2026, The Government proposed major structural changes to the R&D Tax Incentive (RDTI) proposed to commence on 1 July 2028.

Proposed reforms announced in May 2026 include:

• Increasing the offset for experimental ‘core’ R&D by around 25 to 50 per cent and removing eligibility for expenditure that only supports R&D. The intensity threshold will reduce from 2 per cent to 1.5 per cent, providing higher offsets to firms undertaking substantial core R&D.
• Expenditure on supporting activities – such as literature review and equipment maintenance – will no longer be eligible.
• Changing the eligibility criteria for the Refundable R&D Tax Offset by increasing the turnover threshold to $50.0 million. Refundability was also proposed to be limited to firms operating less than ten years, with older firms eligible for an equivalent, non-refundable offset.
• Increasing the maximum expenditure threshold to $200 million to allow large businesses to claim more expenditure.
• Increasing the minimum expenditure threshold to $50,000, with R&D below this required to be undertaken with a Research Service Provider or Cooperative Research Centre.

The proposd changes were not received well by industry, particularly the measure proposing to limit eligibility for the Refundable R&D Tax Offset to firms operating less than ten years.

On September 11, 2026, The Government has now released an exposure draft for the legislation to enact their proposed changes titled ‘Better targeting the Research and Development Tax Incentive’.

Based on an initial review, the proposed measures in the exposure draft generally align with the May 2026 Announcement; however, the Government has made one change regarding the most controversial element of the proposed measures:

• The proposal to limit Refundability of the proposed measures to firms operating less than ten years, has been modified slightly to be:

• • A limit of refundability to firms up to 10 years of age, with an extension for up to 15 years for eligible firms undertaking R&D activities related to therapeutic goods.

The release of the draft legislation also provided insight into how the refundability limit is proposed to be implemented, and it is noted as being:

• Access to the refundable offset is restricted to entities depending on their age or length of time accessing the R&D Tax Incentive. 

• • Specifically, an R&D entity is entitled to the refundable offset where its aggregated turnover for the income year is less than $50 million and any day in that income year occurs before the tenth anniversary of the earlier of: 

• • • the day the R&D entity first started carrying on an enterprise; or
    •  the day the R&D entity is first registered for R&D activities under Part III of the IRD Act.  

The term ‘carrying on an enterprise’ does not appear to be defined in the exposure draft for the legislation however in other tax rulings and guidance.

Swanson Reed is encouraged and grateful that The Government listened to Industry and shifted somewhat from its original position of the blanket 10-year limit.

However, we maintain our strong opposition to and concerns over the reform package, particularly regarding the 10 year limit on refundability (or 15 years for eligible firms undertaking R&D on therapeutic goods). Our concerns remain:

• There will be a number of companies outside of the therapeutic goods development sector who will be severely impacted by the limit of refundability to firms up to 10 years of age including:

• • Firms in deep technology or advanced manufacturing who may take more than 10 years to generate taxable income;
  • Established or mature companies (such as those in the manufacturing industry) that may be experiencing tough times/tax losses to be able to use the R&D Tax Incentive to pivot into new or enhanced product lines or business streams.

• There will be many companies developing therapeutic goods who are older than 15 years whose survival will now be in jeopardy given denial of access to Refundable R&D Tax Offsets.
• The increase in the turnover threshold to $50M may have limited applicability if companies only have ten years of access to Refundable R&D Tax Offsets. Very few companies would reach $50M turnover within 10 years, and this change will benefit only a very small number of high growth companies.
• Denial of eligibility for Supporting Activities is a move that needs careful consideration or understanding before legislating.

Potential alternatives to the proposal to limit access to the Refundable R&D Tax Offset to firms operating less than ten years include:

• Remove the proposal to limit access to the Refundable R&D Tax Offset to firms operating less than ten years altogether.
• Or, if a budget measure needs to be implemented, some alternate savings measures that could be considered include:
• • Maintain refundability after 10 years but increase the turnover threshold from $20M to around $35M (which would probably reflect something close to the original $20M threshold, but adjusted for inflation from FY12 when the $20M threshold was originally set);
  • Remove the proposal to limit access to the Refundable R&D Tax Offset to firms operating less than ten years, but implement a cap on refundable R&D tax offsets that commences after ten years. This cap could be set at a notional level such as $1M for most entities, with an increased cap of $3M for life sciences entities that have an approved finding; OR
  • Remove the proposal to limit access to the Refundable R&D Tax Offset to firms operating less than ten years, but implement a cap on refundable R&D tax offsets that applies to all entities, regardless of age. This cap could be set at some notional level such as $5M for most entities, with an increased cap of $8M for life sciences entities that have an approved finding;

Consultation on the exposure draft for the legislation is open until 28 September and Swanson Reed plans to make a submission to voice our concerns.

Swanson Reed will continue to advocate for a sustainable and stable R&D Tax Incentive.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.