Key takeaways
- The R&D Tax Incentive will be restructured from 1 July 2028, shifting support towards core experimental R&D through higher offset rates, while removing eligibility for supporting activities
- Outcomes will vary across the claimant base – younger, innovation-led companies with clearly demonstrable experimental activity are likely to benefit, while more established companies and those relying on supporting R&D activities may see reduced claim values
- The reforms are accompanied by a tightening compliance environment, with increased scrutiny on R&D claims and a greater emphasis on documented, evidence-based substantiation of experimental activity
- Removal of CGT discount to significantly impact founders and ESOP participants, but upcoming consultation may lead to better outcomes
- Startups can turn their tax losses in their first two years into cash refunds
- Eligibility thresholds expanded for the VCLP and ESVCLP regimes
R&D Tax Incentive (R&DTI) reforms reshape eligibility, funding and compliance landscape from FY2029
The Federal Budget introduces the most significant reform to the R&D Tax Incentive (R&DTI) since the 2020 amendments. From 1 July 2028, the reforms are expected to:
- Increase offset rates for core experimental R&D activities (by approximately 4.5% for eligible companies – this will result in a 48% rebate instead of the current 43.5%)
- Remove eligibility for supporting activities, which currently make up a material proportion of claims
- Increase the turnover threshold for refundable offsets to $50m
- Limit refundability to companies less than 10 years old
- Reduce the intensity threshold for companies over $50m turnover from 2% to 1.5%
- Increase the maximum expenditure threshold to $200m
- Increase the minimum claim threshold to $50,000
These changes represent a structural re targeting of the programme toward core experimental R&D, driven by concerns around cost and the effectiveness of supporting activity claims.
In practice, outcomes will vary, with younger, innovation-led companies and those with clearly defined experimental activity more likely to benefit, while established businesses and those reliant on supporting activities may see reduced claim values and access to refunds.
At the same time, the regime is expected to become more complex and tightly regulated, with the Budget signalling increased scrutiny of R&DTI claims through enhanced integrity and anti fraud measures for the income years ending 30 June 2027 and 30 June 2028. This will place greater emphasis on concurrent documentation, technical substantiation and clear identification of experimental activities, requiring many businesses to strengthen internal processes to ensure claims remain defensible.
Impact on different categories of R&D claimants
All claimants:
The removal of supporting activities is expected to be the most significant change, likely resulting in reduced eligible expenditure for many companies. This will require a fundamental reassessment of how R&D activities are identified, documented and substantiated.
- Young companies (<10 years, <$50m turnover):
These companies are expected to benefit the most from the reforms. Higher offset rates and an expanded turnover threshold mean that more growing companies will retain access to premium refundable support, providing meaningful improvements to cash flow. - Established SMEs (≥10 years):
While offset rates may increase, the loss of R&DTI refundability represents a major impact on loss-making companies. These companies will need to reassess their reliance on cash refunds and consider how R&D funding is structured going forward. - Large R&D companies (>$50m turnover):
The reduction of the intensity threshold from 2% to 1.5% offers some additional support to larger companies engaged in substantial core R&D.
Timing and transitional considerations
Importantly, the R&DTI reforms will not take effect until 1 July 2028, providing a transitional period for businesses to adapt.
This creates a clear planning horizon:
- Short term (FY2027–FY2028): opportunities to maximise claims under existing rules
- Medium term: transition toward more narrowly defined R&D claims focusing on clearly demonstrable experimental activity, with reduced incentives for supporting activities.
Businesses that proactively review their R&D strategy during this period will be best placed to navigate the changes.
A mixed bag for the technology sector
Capital Gains Tax (CGT) changes for Tech companies
The removal of the 50% CGT discount from 1 July 2027 will have a major impact on founders of tech companies, whose tax burden in a successful exit will effectively double. It will also have a significant impact on employee share scheme participants and change the way startups incentivise employees with shares and options.
Should these measures be legislated, Startup Concession Employee Share Ownership Plans (ESOP) will lose much of their attractiveness, as will loan-backed share plans and premium-priced options. Deferred tax share and option plans, including Zero Exercise Price Options (ZEPOs), will likely become the default path to reward employees of startups and scaleups.
However, the Budget paper also notes that the Government ‘will consult with stakeholders on key details of the capital gains tax reforms, including the treatment of early-stage and startup businesses given the unique features of the tech and startup sector.’
Loss refundability for startup companies
From 1 July 2028, loss-making startup companies with a turnover of less than $10m can utilise their tax losses in their first two years of operations to generate a refundable tax offset.
The offset will be capped at the value of Fringe Benefits Tax and PAYG withholding on employee wages paid in the loss year.
When combined with the R&D tax incentive, this could be a powerful funding strategy for startups.
Expansion of venture capital tax incentives
The venture capital tax incentives will be expanded to better facilitate investment by both Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs) into early-stage businesses:
- VCLP investee asset cap to increase from $250m to $480m
- ESVCLP investee asset cap at time of investment to increase from $50m to $80m
- ESVCLP tax exemption asset cap to increase from $250m to $420m
- Maximum ESVCLP fund size to increase from $200m to $270m
This is welcome news for the tech sector as it should broaden the pool of eligible investee companies and allow the ESVCLPs to raise larger funds supporting scaling rounds.
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