Home » News » May 2026 Federal Budget Update: Significant future changes proposed to R&D Tax Incentive

May 2026 Federal Budget Update: Significant future changes proposed to R&D Tax Incentive

Leading up to the May 2026 Federal Budget there were reports of modest changes likely to be made to the R&D Tax Incentive (mainly around increases to expenditure thresholds) however there was not expected to be any major reforms announced given that:

• The Government had only recently (in March 2026) received the final report from The Strategic Examination of R&D;
• It was anticipated that The Government would conduct consultation before proposing any major changes to th R&D Tax Incentive.

Surprisingly, in the Government’s budget handed down on 12 May 2026, some major future changes were proposed to the R&D Tax Incentive.

An extract from the Budget Papers is as follows:

‘Better targeting the Research and Development Tax Incentive

The Research and Development Tax Incentive (R&DTI) encourages innovative activities that support Australia’s productivity. However, the current program is complex and expensive. Over the five years from 2019–20, the cost of the R&DTI has grown by around 70 per cent to be $4.4 billion in 2023–24.

The recent Ambitious Australia Report found that the R&DTI can be reformed to better target its objectives and to address concerns around program complexity and cost. In response, from 1 July 2028, the Government will simplify and better target the R&DTI to focus support to where it is most effective at encouraging additional research and development.

Key reforms include:

• increasing the offset for experimental ‘core’ R&D – uncertain, experimental work conducted to generate new knowledge – 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.
• providing greater support to young, fast-growing firms by increasing the turnover threshold for the higher, refundable offset to $50.0 million. Refundability will 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 $200.0 million, encouraging Australia’s largest R&D businesses to keep their R&D onshore, and
• improving assurance around small claims by 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.

These reforms to the R&DTI will improve the sustainability and impact of the program. The reforms are estimated to provide savings of $650.0 million over the five years from 2025–26 while delivering an estimated $400.0 million increase in R&D by young firms each year. The savings from these reforms will help fund business tax reforms that support the wider innovation and business investment ecosystem.’

Swanson Reed’s initial reaction to the 12 May 2026 Budget announcement is:

• The budget proposals were quite a surprise, however we are glad that the proposed start date (1 July 2028 for FY29) is still some time away to allow for the impact to be better understood and for consultation with Industry to occur;
• We have previously commended The Government for initiating the Strategic Examination of R&D with intention of increasing business investment in R&D;
• We are however alarmed about the proposal for companies to lose access to Refundable R&D Tax Offsets after 10 years and are concerned this has not been thought through. In particular:
  • This may have an enormous adverse impact on companies in the Biotech and Life Sciences sector that may take more than a decade to generate revenue, and are still heavily reliant on access to the refundable R&D tax offset. Many of the biotech companies currently receiving refundable R&D tax offsets would have been around longer than 10 years and will simply not be viable without a refundable R&D tax Offset;
  • In addition there are many mature companies (in existence for greater than 10 years) that may use the R&D Tax Incentive as a capital source during a period of tax loss to refocus or change their business by undertaking R&D Activity. Additional non-refundable tax offsets may be of little benefit or incentive for such companies to undertake R&D Activity as a means to pivot or enhace their business;
• We commend the increase in the turnover threshold to $50M (as was proposed by the Strategic Examination of R&D) however we feel this may have limited applicability if companies only have 10 years access to refundable R&D Tax Offsets. Very few companies would reach $50M turnover within 10 years which may limit the benefit of this change;
• We are neutral at this stage on the proposal to remove eligibility for Support activities and enhance the eligibility for Core activities. This needs to be better understood;
• We agree with the proposal to increase the minimum expenditure to $50,000. By FY29, the existing threshold of $20,000 will be too low.

Swanson Reed will provide updates as information becomes available and we 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.