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Strategic Examination of Research and Development: Swanson Reed comments on issues paper released on R&D Tax Incentives

In the May 2024 federal budget, The Albanese Government announced a strategic examination and review of Australia’s Research and Development (R&D) system to align it with national priorities and to improve outcomes.

In late 2024, then Industry Minister Ed Husic announced specific details to launch the review. It was noted that the review will assess how to maximise the value of R&D investments, strengthen industry linkages, and support national priorities, and that the review will examine existing systems, such as the Research and Development Tax Incentive (RDTI), and explore broader strategies to ensure Australia remains competitive in global innovation.

A general discussion paper for Strategic Examination of Research and Development was released in February 2025, and Swanson Reed made a submission to this in April 2025.

Over recent weeks, the independent panel has been consulting by releasing issues papers to inform the examination. Previous issues papers have been released on the topics of National Coordination and Scaling the System.

The specific issue paper that interests Swanson Reed and our clients was released on 4 September 2025, titled: RD&I incentives: Incentivising breakthrough innovation and ambitious R&D

Some notable extracts from this issues paper includes the following:

• Incentives for RD&I should be designed to achieve the greatest impact while also reflecting the needs and contribution of each of the diverse contributors.
• Incentives should spur more of what matters – R&D and innovation activity – not introduce unnecessary complexity that requires third party consultants.
• Incentives should position Australia as an internationally competitive destination to conduct high value RD&I.
• Incentives should also drive effort towards achieving the goals established under the RD&I focus areas to support national outcomes (see also National coordination for RD&I impact paper).
• The core proposal is a new approach to the R&D Tax Incentive. This focuses on targeting growth and support calibrated to the needs of firms at different stages of growth.
• For scaling startups, a proposal to Reform the RDTI to include a startup specific RDTI stream:
  • Create a simplified eligibility test, R&D definitions and/or assessment processes (e.g. points test focussed on growth characteristics) to reduce reliance on consultants
  • Remove RDTI clawback so that success in public funding grant processes is accelerated by support for RDTI
  • Premiums for startups developing products and services in focus areas (refer National Coordination Paper)
  • Enable advanced payments on a quarterly basis
  • Extend support to include eligibility for development and deployment activities, and activities to support usability and adoption of new products & services
  • Design an eligibility ‘off-ramp’ e.g. companies with greater than $5m ARR can apply to the SME stream.
• For small to medium enterprises, a proposal to Reform the RDTI to better support SMEs focused on growth through R&D including:
  • Simplify R&D definitions and/or assessment processes to reduce reliance on consultants
  • Base ongoing eligibility on outcomes including significant revenue growth from RD&I activity
  • ‘On and off’ ramps and conditions to ensure support is targeted toward high-growth firms
  • Premiums for continuing eligibility for SMEs developing products and services in focus areas (refer National Coordination paper).
• For large enterprises, a proposal to Reform the RDTI for corporates through:
  • Increasing or removing ceilings and thresholds in return for requirements on activity to promote engagement with broader ecosystem
  • Reducing complexity through a points test for corporate activity that biases local effort and drives engagement
  • Incentivising local purchase (M&A) or in-house R&D versus buying innovation from overseas
  • Incentivising collaboration with scaleups and startups (e.g. collaboration premium)
  • Link incentives with access to other benefits (e.g. visas and PhD programs)
  • Remove the impact of RDTI rebates from franking credit calculations
  • Premium for larger firms undertaking collaborative RD&I activities in focus areas (refer National Coordination paper).
• R&D incentives, including tax incentives, should be structured to assist likely high-growth, high-innovation entities at key points in their development.
• Government support for R&D is commonly categorised into direct and indirect mechanisms. Both types of support can play important roles in a government’s policy mix. They address different aspects of market failures and provide complementary benefits. Direct support for R&D most commonly involves government grants and public procurement of R&D services. Indirect support for R&D primarily involves using the tax system to induce more R&D activity.
• The R&D Tax Incentive would be more impactful with clearer eligibility criteria
  • Department of Industry, Science and Resources (DISR) analysis reveals that 86% of businesses surveyed rely on third-party intermediaries, such as R&D tax consultants, to access the RDTI. This dependence indicates the program remains overly complex, creating barriers for participation and reducing the net benefit of the incentive.
  • The current definition of R&D used for RDTI eligibility is considered too complex by many. Similarly, many consider the current definition does not adequately reflect the modern reality of business R&D processes.
  •  Some businesses seek loans from third party financiers to fund early-stage R&D, highlighting the importance of timely financial support. Reliance on third party support limits the impact of the RDTI.

Swanson Reed agrees with some of the comments in this issues paper, but we have concerns about others.

From the outset, we note that within the issues paper, there seemed to be an emphasis on reducing the reliance on R&D Consultants and R&D Advisors, and we would like to note the following regarding the role of R&D Tax Advisors:

• In a perfect world, the R&D Tax system would function whereby companies fully understand their entitlements under the law and are able to accurately report their activities and expenditure without needing R&D Consultants and R&D Tax Advisors. This would allow all resources generated from the R&D Tax Process to be deployed into further R&D Activity conducted by the company.
• We also acknowledge there have been some bad actors in the R&D Tax Incentive industry that have caused well publicised issues.
• Unfortunately, there are imperfections and complexities in the system, meaning that quality and credible R&D Tax Advisors play an important role in:
  • Enhancing the quality of claims lodged for government assessment;
  • Guiding business through complex legislation;
  • Providing resources to assist in claim collation where a company may not have their own capacity to facilitate claim preparation;
  • Advising companies not likely to be eligible to refrain from registering. Swanson Reed fields enquiries from many businesses who would like to claim, but which are not likely to be eligible (or not suitably documented). Our frank assessment informing them to not register plays a role in system integrity and to reduce consumption of government resources and taxpayer funds.
• Just like reform (or simplification) of the general tax system will not mean that businesses start terminating their general tax advisors and filing their own tax returns, we believe that there is a place for quality and credible R&D Tax Advisors in any long-term reform to the R&D Tax Incentive programme.

 In terms of specific comments about proposals within the issues paper:

• We agree with the general propositions that:
  • The simpler the better.
  • The R&D Tax Incentive would be more impactful with clearer eligibility criteria.
  • Both types of government support (Grants and Tax Incentives) play important roles in a government’s policy mix.
• While the proposals in the issues paper are sound in principle, we have concerns that their practical implementation may introduce significant and additional complexity and would require additional resources. For example:
  • Having different systems for pre-revenue, start up, SME and large firms will add to complexity.
  • Some of the proposals for premiums, quarterly payments, points tests and off-ramps also introduce complexity and the risk of misapplication (e.g. a start up receiving quarterly payments who is not aware of sudden depletion in tax loss balances may overclaim on quarterly credits).
  • The following proposals, while promising in theory, carry a significant risk of  increasing programme costs beyond what may be sustainable:
    • Eligibility for development and deployment activities, and activities to support usability and adoption of new products and services;
    • Removing the impact of RDTI rebates from franking credit calculations;
    • Removing clawback;
    • Quarterly credits;
    • Premiums (if not adequately targeted).

We have specific concerns that radical reform to the R&D Tax Incentive would create a period of significant uncertainty for businesses, which may jeopardise investment in long-term R&D projects.

As outlined in our original submission, Australia’s R&D Tax System has been unstable and perpetually under review. The R&D Tax Incentive’s brief history has seen constant change proposed by successive governments from both sides of politics.

This instability includes:

• Amendments to the R&D Tax Incentive legislation that were passed as law:

• • A $100m cap on annual expenditure from FY2014-15 (Tax Laws Amendment (Research and Development) Act 2015);

• • A uniform 1.5% reduction in the R&D Tax offset rates from FY2016-17;

• • The 2020 amendments from FY2021-22.
• Several other changes that were proposed but not passed as law;
• A widely publicised tightening on the application of existing R&D Tax legislation (with some of this being justifiable and in response to mischief from some bad actors).

The R&D Tax Incentive is not perfect, but it now has a firmly established infrastructure, and we remain of the view that the best and most efficient approach would be to enhance the existing system, rather than significantly overhaul or introduce a new system.

As outlined in our original submission, the following modest changes to the R&D Tax Incentive could further encourage business investment in R&D:

• An increase in the turnover threshold for the refundable offset:

• • The $20 million turnover threshold for the R&D Tax Incentive established in 2012 is now outdated. Many argue that, when accounting for inflation and growth, the definition of a “small business” from FY12 is vastly different from what it is today in FY25.

• • Perhaps the turnover threshold could be extended to $25M, along with a provision for future indexing.

• An increase to the R&D Expenditure Cap:

• • The Business Council of Australia and notable large claimants such as Cochlear have recently renewed their calls for removal or extension of the $150M annual expenditure cap on claims.

• • Changes to the cap could provide additional incentive for large companies to undertake more R&D.

• Collaboration premium:

• • A collaboration premium that provides enhanced tax benefits for expenditure with Research Service Provider (RSP) or University organisations was originally proposed in the Ferris, Finkel and Fraser review and may be worth exploring.

• Stability provisions or undertakings:

• • If changes to the criteria are made, it would be ideal if somehow a bi-partisan consensus could be reached that no further detrimental changes to the R&D Tax Legislation are to be made in the near term. If not within the law, this could be stated as a policy document to provide businesses with confidence to undertake R&D Activity.

Swanson Reed has made a submission to the consultation process reflecting the above and will continue to advocate for a stable and sustainable 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.