The experiments continue: R&D incentive design after Budget 2026

There is a quiet but profound shift embedded in the 2026 Budget’s R&D Tax Incentive (R&DTI) reforms. It is another hypothesis in a long-running policy experiment to define what innovation is, and how much of it Government should support. It goes well beyond rates, thresholds or offsets.

Historically, the R&DTI has recognised that innovation is not confined to a laboratory moment of discovery. The incentive has supported the broader ecosystem around experimentation – the iterations, the scaling, the integration, and the often messy supporting work that tries to turn an idea into something more concrete. By removing eligibility for supporting activities, the Government would be drawing a much sharper line. The system will no longer be designed to support the ecosystem of innovation; it would be designed to just support the experiment itself.

That would be a philosophical and ecosystem change.

It reflects a clear policy judgment: the incentive has become too diffuse, too costly and too open to boundary‑pushing claims. In response, the Government would be prioritising targeting over breadth. That may well simplify administration and sharpen compliance, but it also narrows the lens of what counts as innovation for tax purposes. It also remains to be seen what effect it would have on additionality as a key goal of the R&DTI.

Many R&D projects, particularly those embedded in manufacturing, software development and large‑scale implementation, may find themselves partially or materially outside the regime.

The Budget papers show that offsetting the projected reduction in revenue against the projected reduction in refundable offset payouts gives a net $700 million improvement to the Budget bottom line over 5 years. It is clear this is intended as a cost saving measure, even with the headline increase in incentive rates.

The real question is not what type of innovation we are trying to support, but what is the Government trying to achieve in doing so?

Ambitious Australia

Earlier this year the Department of Industry, Science and Resources published the Ambitious Australia: Strategic Examination of Research and Development report (the Report) which set out 20 recommendations to overhaul and revitalise Australia’s “underperforming” and “broken” research and development system.

In 2002, it was projected that Australia’s GDP per person would grow to over 90%; in 2023, expectations were lowered to 57% growth over the next 40 years. Despite this, the cost of Australia’s R&DTI has blown out 70% in the last five years alone, to $4.4 billion in the 2023-2024 financial year. Clearly the investment has not produced the intended results, with Australia falling behind its OECD peers in terms of manufacturing and economics.

While Ambitious Australia made a compelling case that the system needed to change, the Government has taken a distinctly different route. Rather than refining and broadening the framework as proposed, it has opted for a more targeted and restrictive redesign.

Budget 2026

In the Budget, the Government announced the following changes from 1 July 2028:

• Increasing the offset rates for core R&D expenditure by 4.5% for all businesses
• Limiting eligible expenditure to core R&D only
• Limiting the availability of the refundable offset to companies in their first 10 years post-registration
• Increasing the refundable turnover threshold for small and medium entities from $20m to $50m
• Reducing the high intensity threshold for large businesses to 1.5%
• Increasing the maximum expenditure threshold to $200 million
• Increasing the minimum expenditure threshold to $50,000.

This is to be delivered in conjunction with a newly established National Resilience and Science Council, which will coordinate the Government’s response to the Report by advising on research, development and innovation objectives, priorities and performance.

While the headlines gave fanfare to the increase in the offset rate, basic modelling suggests that, assuming the definition of core and supporting activities remain unchanged, the increase in incentive rate will only be an increase for R&DTI claims where the supporting activities would have been under approximately 10% of the R&D expenditure. Where the supporting activities would have been greater than approximately 10% of the R&D expenditure, the increase in rate does not cover the reduction in scope of the incentive.

The Budget announcements trade breadth for intensity. The maths shows the trade only works for businesses where supporting activity expenditure is minimal – approximately 10% or less of core R&D. For most real-world programs, that threshold is likely to be exceeded with companies worse off.

ATO expectations

The Government has tasked the ATO with undertaking additional targeted compliance activities to specifically address fraud and other behaviours of concern in relation to the R&DTI. The ATO was quick to respond to this, publishing content flagging the “areas of concern” on its radar in respect of R&DTI claims.

The ATO is directly asking tax agents and advisers to:

• advise and educate clients on program eligibility requirements
• rigorously examine accounting data to ensure only eligible R&D deductions are claimed
• advise clients to identify and document a distinction between business-as-usual activities and R&D expenses
• let clients know that receiving a receipt for registering R&D activities with the Department of Industry, Science and Research doesn’t mean these activities are approved
• check deductions aren’t being claimed for payments to associates that are incurred but not paid.

The clear focus on tax agent and adviser conduct continues with the ATO also expressly asking taxpayers and other advisers to report “dodgy” advice and professionals, warning them to be wary of the following red flags:

• Promotion of aggressive R&D arrangements (often through unsolicited contact)
• Cold calls from tax professionals claiming they can increase the offset
• Final fees based on percentage of refund received
• Unlicenced professionals providing advice
• Aggressive sales tactics
• Advice that seems too good to be true
• Charges based on excessive commissions or contingency fees
• Registration of entire R&D projects rather than specific activities
• Limited or no advice on eligibility, or the taxpayers’ record-keeping and substantiation obligations
• No verification of facts or examination of records.

Not only are taxpayers being put on notice for their role in stamping out this behaviour, they are also being reminded they will bear the consequences of adviser conduct, which can include penalties, interest and increased go-forward scrutiny.

Where to from here?

It is plain the Government plans to reduce expenditure on the program by changing the program design and leaning on the ATO for yet greater enforcement activities.

Consistent with the usual Treasury process, the next step is expected to be the release of exposure draft legislation accompanied by a consultation paper, allowing stakeholders to comment on both the detailed drafting and the underlying policy settings. Given the scale of the proposed changes, particularly the removal of supporting R&D activities and the redesign of key thresholds, we would expect a formal consultation process including a call for submissions.

For businesses, the extended lead time is significant. It reflects that the program changes announced are yet to be settled and provides a meaningful opportunity to engage with government and shape the final form of the legislation, particularly on areas where the practical operation of the rules is likely to diverge from policy intent.

These proposed changes bring us back to a familiar place. Every iteration of the R&D tax incentive, and its predecessor concession, has grappled with the same fundamental question:  what innovation will the Government support and how far does that support go? The line looks to be redrawn again, more sharply than before and in a time of necessary fiscal restraint. But as the system evolves, the underlying tension endures. In that respect, the more things change, the more they stay the same. The R&DTI experiments continue.

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Authored by:

Amber Agustin, Partner