Important: The R&D Tax Incentive reforms announced in the 2026 Federal Budget are proposed, not yet legislated. All changes are scheduled to take effect on 1 July 2028. Seek tailored advice before restructuring any R&D claim strategy.
The 2026 Federal Budget proposes the most significant redesign of the R&D Tax Incentive in over a decade. Seven structural changes take effect simultaneously from 1 July 2028. Some benefit innovative businesses. Some reduce the value of claims that have been running successfully for years.
The net impact on any specific business depends on two factors: the age of the company and the composition of current R&D expenditure. Understanding that distinction now, not in 2028, determines the difference between a well-positioned claim and an avoidable loss of cash flow.
What the 2026 Budget Proposes for the R&D Tax Incentive
Seven changes are proposed under the reforms, all taking effect from 1 July 2028.
The core R&D offset rate increases by 4.5 percentage points. The refundable rate rises from the company tax rate plus 18.5% to the company tax rate plus 23%. For a base rate entity, this moves from 43.5% to 48%.
Supporting R&D activities are removed from eligibility entirely. Only expenditure on core experimental activities qualifies. Supporting activities, previously claimable where their dominant purpose supported core R&D, are cut from the program completely.
The refundable offset threshold rises from $20 million to $50 million in aggregated turnover. This appears to expand access. The full picture requires two conditions to be satisfied simultaneously, which is addressed below.
Refundability is restricted to a company’s first 10 years of operation. Businesses older than 10 years retain access to a non-refundable offset but lose the cash component regardless of turnover.
The intensity premium threshold falls from 2% to 1.5%, benefiting non-refundable claimants with turnover above $ 50 million. The minimum expenditure threshold rises from $20,000 to $50,000. Below $50,000, businesses can only access the incentive by partnering with a registered Research Service Provider or CRC. The annual expenditure cap rises from $150 million to $200 million, benefiting only the largest R&D investors.
The Change That Will Cost Established Claimants the Most
The removal of supporting R&D activity eligibility carries the widest practical impact and the least coverage relative to its significance.
Under current rules, supporting activities directly related to core R&D qualify alongside core expenditure. These include literature reviews, testing protocols, process documentation, and equipment maintenance specific to R&D programs. For many businesses, supporting activities represent 30–50% of total R&D claim value.
From 1 July 2028, that expenditure produces no offset.
A business currently claiming $500,000 in core R&D and $300,000 in supporting R&D receives an offset on $800,000 at 43.5%, producing a $348,000 cash refund. Under the proposed rules, the same business claims $500,000 in core R&D only at 48%, producing $240,000. The net reduction is $108,000 per year, despite this business sitting within the category the budget intends to support.
Businesses with core-heavy R&D, biotech, pure software development, and advanced manufacturing face a smaller reduction or a genuine improvement. Businesses with high supporting activity ratios face a material reduction regardless of the rate increase.
Why the $50 Million Threshold Increase Is Not a Win for Every Business
The threshold increase from $20 million to $50 million is generating the most optimism. That optimism is justified for some businesses and misplaced for others.
The refundable offset under the proposed regime requires two conditions simultaneously. The business must have aggregated turnover below $50 million. The business must also be in its first 10 years of operation. Both conditions must be met. Neither alone is sufficient.
A business with $35 million in turnover and 12 years of operating history currently qualifies for the refundable offset because turnover is below $20 million. Under the new rules, the same business fails the 10-year age test despite being under the new threshold. The cash refund disappears entirely.
This is not an edge case. Many middle-market innovative businesses sit in this bracket, established companies with meaningful R&D programs that have built financial planning around the annual cash refund. For these businesses, the shift from a refundable offset to a non-refundable credit is a structural cash flow change requiring immediate modelling.
The non-refundable offset carries forward indefinitely. It does not disappear. But for businesses in a tax loss position, the distinction between a cash payment and a future credit is significant.
What Your Business Should Do Before 1 July 2028
The 2028 start date does not mean action in 2028. R&D expenditure decisions made in the 2026–27 and 2027–28 financial years shape the base from which the new rules apply. Three actions are worth taking now.
Review the composition of your current R&D claim. Identify what proportion is core versus supporting. The higher the supporting ratio, the more material the impact, and the more urgent the structural review.
Assess the 10-year age test for your entity. Businesses approaching the 10-year mark should model cash flow under both the refundable and non-refundable scenarios now. Waiting until 2027 reduces the options available.
Align documentation practices with core-only definitions. The shift to core-only eligibility increases ATO scrutiny on what qualifies as experimental activity. Documentation adequate for a mixed claim may not be sufficient for a core-only claim post-2028. The time to build compliant documentation is before the rules change, not after.
If your business exports innovative products, also review EMDG eligibility. The Export Market Development Grant and R&D Tax Incentive are two separate programs that can be claimed simultaneously.
Blackwattle Tax advises clients on both. A business investing in innovative product development for international markets may qualify for combined government support, an interaction most accounting firms do not assess together.
Frequently Asked Questions
Can I still claim supporting R&D activities before 1 July 2028?
Yes. Current rules remain fully in operation until 30 June 2028. Supporting activities that meet existing eligibility criteria can be claimed in full for the 2026–27 and 2027–28 income years.
Will a business over 10 years old receive nothing from 2028?
No. Businesses over 10 years old retain the non-refundable offset. The change is from a cash refund to a tax credit that offsets income tax liability. Unused credits carry forward indefinitely against future tax payable.
My business spends $35,000 on R&D annually. Am I still eligible after 2028?
Under the proposed changes, businesses spending below $50,000 must partner with a registered Research Service Provider or Cooperative Research Centre to maintain eligibility. Identifying the right research partner for your industry requires early planning; this is not a process that can be completed at short notice.
Does the legislation change what counts as a core R&D activity?
No. Core R&D activities remain experimental activities whose outcome cannot be determined in advance, conducted via a systematic progression from hypothesis to experiment, observation, and evaluation. The definition is unchanged. Only the removal of supporting activities alters what qualifies for the offset.
The R&D Planning Window That Closes in 2028
The 2026 Federal Budget does not weaken the R&D Tax Incentive for all businesses. For young, fast-growing companies with core-heavy expenditure, the proposed changes may increase the cash return on eligible R&D. For established businesses with mixed claims and a decade or more of operating history, the same changes reduce cash flow. A structural review of claim composition is required.
The planning window is open now. The legislation is not yet finalised. Scenarios can still be modelled, claim structures reviewed, and documentation practices aligned with the post-2028 framework before the changes take effect.
Blackwattle Tax works with innovative Australian businesses to assess R&D Tax Incentive eligibility and prepare claims across all eligible industries. Our team also navigates compliance requirements with AusIndustry and the ATO. Book a complimentary R&D eligibility assessment session with Blackwattle Tax to understand how the proposed changes affect your specific claim. To explore our full government grants advisory, including EMDG, visit our R&D Tax Incentive services page.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.