R&D Changes: Opportunity or Risk?

The 2026 Federal Budget delivered the most significant shake-up to Australia’s Research and Development Tax Incentive since 2020. For some businesses the changes represent a genuine opportunity. For others they could mean a meaningful reduction in what they are entitled to claim.

The challenge is that most businesses have not yet worked out which side of that line they sit on and with the changes not taking effect until 1 July 2028, many are assuming there is plenty of time to figure it out.

There isn’t. The planning window is now.

Let’s break down what changed, what it means for different types of businesses and what is worth doing before 2028 arrives.

1. What Is the R&D Tax Incentive and Who Uses It

The Research and Development Tax Incentive (commonly referred to as the R&DTI or RDTI) is a federal government program that provides a tax offset to eligible companies that invest in research and development activities in Australia.

In simple terms, it means that a portion of what a business spends on qualifying R&D activities comes back as either a tax offset or a cash refund depending on the size and circumstances of the business.

There are two types of offset:

Refundable offset: Available to companies that have an aggregated turnover of less than $20 million. If the offset exceeds the company’s tax liability, the difference is paid back as a cash refund. This is particularly valuable for companies that are pre-profit or loss-making and investing heavily in innovation.

Non-refundable offset: Available to larger companies (i.e. companies that have an aggregated turnover of $20 million or more). The offset reduces tax payable but any excess is carried forward rather than refunded as cash.

The R&DTI is commonly used by businesses in software development, construction technology, manufacturing, biotech, medtech, agtech and any industry where companies are investing in genuine experimental work to solve technical problems.

Note: to be eligible, a business must be an incorporated company the R&DTI is not available to sole traders, partnerships or trusts.

2. What the 2026 Federal Budget Actually Changed

On 12 May 2026, as part of the 2026–27 Federal Budget, the Government announced a significant redesign of the R&DTI. According to the ATO, the reforms are intended to better target support toward core experimental R&D while moderating the overall cost of the program.

The changes are proposed to take effect from 1 July 2028 and it is important to note that as at the time of writing, these changes are proposed only. Legislation has not yet been introduced and the final design may differ from what was announced.

With that context, here are the seven key changes proposed:

1. Minimum spend threshold rises from $20,000 to $50,000
   Businesses spending less than $50,000 on R&D will lose eligibility unless the work is conducted through a registered Research Service Provider or Cooperative Research Centre.
2. Supporting R&D activities lose eligibility entirely
   Only core experimental R&D will qualify for the offset. Supporting activities such as background research and project management will no longer be eligible.
3. Core R&D offset rates increase by 4.5% across each category (for example from 43.5% to 48% for start-up clients)

Businesses with genuine core experimental R&D may receive a higher offset on that activity.

4. Refundable offset turnover threshold rises from $20 million to $50 million
   More growing and medium-sized businesses will be able to access the refundable cash offset.
5. Refundability restricted to companies under 10 years old
   Established companies that have been operating for more than 10 years will lose access to the refundable offset regardless of turnover.
6. R&D intensity threshold drops from 2% to 1.5%
   Larger companies will be able to access higher offset rates at a lower R&D-to-total expenditure ratio.
7. Annual R&D expenditure cap rises from $150 million to $200 million
   A positive change for large R&D investors who were previously capped at $150 million.

3. The Change Most Businesses Are Underestimating

Of all the changes announced, the removal of supporting R&D activities from eligibility is the one that could have the most significant impact on the widest range of businesses and it is the one receiving the least attention.

Under the current rules, an R&D claim can include both core and supporting activities. Core activities are the experimental work itself from the hypothesis, the testing to the iteration. Supporting activities are everything else that enables that work to happen such as the trials, the integration, the process development, the testing infrastructure.

For many businesses, particularly those in mining and technology, supporting activities make up a meaningful portion of the overall claim. From 1 July 2028, those activities will no longer be eligible. The offset will only apply to core experimental R&D expenditure. For businesses that have not reviewed what proportion of their current claim is core versus supporting, this change could result in a significant reduction in their entitlement and that reduction could arrive without warning if they have not planned for it.

The practical action here is to review current R&D claims now and understand clearly what is core, what is supporting and what the claim might look like under the new rules. That review is considerably more useful done in 2026 than in 2027.

4. What This Means for Smaller Claimants

For businesses currently spending between $20,000 and $50,000 on R&D activity, the new minimum threshold is a significant change. Under the current rules, a business spending $25,000 on eligible R&D activity can claim the offset. From 1 July 2028, that same business would no longer be eligible unless the R&D activity is conducted in partnership with a registered Research Service Provider or Cooperative Research Centre.

For smaller businesses and early-stage companies investing in innovation, this raises a few practical questions worth working through now:

• Is it possible to scale R&D activity above the $50,000 threshold by 2028?
• Would partnering with a registered research organisation make sense for the business and the type of work being done?
• If neither of those is realistic, what does that mean for the business’s tax planning and cash flow assumptions going forward?

These are not urgent questions today but they are questions that become much harder to answer well if they are left until 2027.

5. Who Could Actually Benefit From the New Rules

It would be easy to read this blog and conclude that the 2026 reforms are purely negative. They are not and it is worth being clear about that.

For businesses doing genuine core experimental R&D, the reforms could actually improve the R&D outcome

Higher offset rate on core activities
The increase in rate of 4.5% on core R&D expenditure is a meaningful improvement for businesses whose claims are genuinely built around experimental work. To put it in perspective, a business spending $500,000 on core R&D would receive $22,500 more back under the new rate than they do today. At $1 million in core R&D spend that becomes $45,000. The more a business invests in genuine experimental activity, the more the higher rate works in their favour.

Broader access to the refundable offset
Lifting the refundable offset turnover threshold from $20 million to $50 million opens up cash refund eligibility to a wider range of growing businesses. For scaling companies that were previously just above the threshold and missing out on the refundable offset, this is genuinely positive.

Lower intensity threshold
The reduction in the R&D intensity threshold from 2% to 1.5% means more businesses can access the higher offset rates at a lower ratio of R&D spend to total expenditure. For companies that invest meaningfully in R&D but where R&D does not dominate the cost base, this could open up access to rates that were previously out of reach.

The reforms are designed to reward genuine, well-documented experimental innovation. Businesses that fit that description may find themselves better off not worse.

6. The Refundable Offset: Who Loses Access and Why It Matters

One of the more consequential changes in the 2026 reforms is the restriction of refundability to companies under 10 years old.

Under the current rules, any company with less than $20 million in aggregated turnover can access the refundable offset, meaning if the offset exceeds what is owed in tax, the difference comes back as cash. From 2028, that refundability will only be available to companies that have been operating for fewer than 10 years. For established businesses that have been claiming the refundable offset for a decade or more, this change could mean losing access entirely regardless of their turnover or financial position.

The cash flow implications are real. The refundable offset is particularly valuable for companies that are pre-profit or that carry losses while investing heavily in long-cycle innovation. Biotech and deep-tech businesses are among the most exposed these industries often have development cycles that extend well beyond 10 years and losing access to cash refunds during that period could affect how they fund ongoing research.

For businesses in this position, understanding the impact of this change and modelling what it means for cash flow and tax planning over the next several years is something worth doing with an adviser well before 2028.

7. Why 2028 Feels Far Away but the Planning Window Is Now

The most common response to hearing about the 2028 changes is to put them on the list for later. It is understandable two years feels like a long time when there are more immediate things to manage.

But there are two reasons why waiting is a mistake.

First: the ATO is already tightening compliance on current claims.
The compliance crackdown is not waiting for 2028. Right now, the ATO and AusIndustry are applying greater scrutiny to R&D claims being lodged today. Contemporaneous records, clearly documented technical uncertainty and well-evidenced experimentation are no longer considered best practice they are the baseline expectation. Public transparency reporting also means that R&D expenditure is now on the record in a way it was not previously.

Businesses that have relied on loosely documented claims may find that the current compliance environment creates issues well before the 2028 changes arrive.

Second: The planning window is closing.
Understanding how the new rules affect a specific business by reviewing the split between core and supporting activities, assessing eligibility under the new threshold, modelling the impact on the refundable offset takes time. And the decisions that flow from that review, whether to restructure activity, partner with a research organisation or adjust financial plans still take longer.

Businesses that begin that process in 2026 have options. Businesses that begin it in late 2027 may find those options have narrowed considerably.

8. What Good R&D Documentation Looks Like Going Forward

Given the tighter compliance environment and the shift toward a regime that only rewards core experimental activity, documentation has never mattered more.

What the ATO expects to see in a well-supported R&D claim includes:

• Contemporaneous records: Documentation created at the time the R&D activity was being conducted, not reconstructed later
• Documented technical uncertainty: A clear record of the specific technical problem the company was trying to solve and why the answer was not known or could not be worked out from existing knowledge
• Evidenced experimentation: Records showing that the company followed a systematic progression of work, hypothesis, testing, evaluation rather than simply developing a product or process in the ordinary course of business
• Clear separation of core and supporting activities: Particularly relevant from 2028 when only core activities will be eligible

For many businesses, the gap between what their current documentation looks like and what the ATO expects is larger than they realise. Closing that gap and building documentation habits that become part of how R&D work is managed day to day is one of the most practical things a business can do right now regardless of the 2028 changes.

Final Thoughts

The 2026 R&D Tax Incentive reforms are not straightforwardly good or bad for Australian businesses. They are both, depending on the nature of the business, the composition of its current claim and how well positioned it is to adapt.

What is clear is that the businesses best placed to navigate the changes are the ones that understand them early, review their current position honestly and take practical steps while there is still time to make a difference.

The changes take effect in 2028. The planning starts now.

How Carbon Can Help

Carbon’s R&D team works with businesses across Australia to review existing claims, assess the impact of the 2026 reforms on current and future eligibility and develop a practical plan for positioning the business correctly ahead of the 2028 changes.

Whether you are an existing R&D claimant trying to understand what the reforms mean for your claim or a business considering the R&DTI for the first time, we would be happy to have a conversation about your specific circumstances.

Get in touch with your local Carbon team today.

Disclaimer: The changes outlined in this blog are proposed reforms announced in the 2026–27 Federal Budget. As at the time of writing, legislation has not yet been introduced and the final design of the reforms may differ from what was announced. This blog is general information only and does not constitute tax advice. Please speak with your Carbon adviser or a qualified tax professional about how the changes may affect your specific circumstances.