2026 Addendum to Background Paper
In May 2026, the Australian Government announced proposed changes to the R&D Tax Incentive (RDTI) in the Federal Budget. These changes, if enacted, will have implications for the issues set out in our attached Background Paper on R&D Tax Incentive legal/IP issues for offshore early-stage life sciences companies.
The proposed changes:
- are not yet law;
- will not become law unless amending legislation is passed by both houses of Parliament; and
- if passed, are intended to:
- take effect from 1 July 2028;
- increase the rate of RDTI and the scope of eligible firms; and
- reduce the scope of eligible activities and entitlement to receive RDTI as an offset (cash, as opposed to future tax credit).
The proposed changes are intended to retarget and simplify the RDTI to increase R&D by companies that have been operating for less than 10 years, and to focus on high potential companies. The proposed changes most relevant to offshore early-stage life sciences companies are outlined below.
| Current | Proposed | |
|---|---|---|
| Turnover threshold | < AU$20m | < AU$50m |
| SME < 10 yrs | Offset 18.5% (refundable) | Offset 23% (refundable) |
| SME > 10 yrs | Offset 18.5% (refundable) | Offset 23% (non-refundable) |
| Eligible expenditure | Core and Supporting Activities | Core Activities only |
| “Option 1” effective rate | 43.5% or 48.5% | 48% or 53% |
| “Option 2” effective rate | 18.5% | 23% |
The RDTI provides tax offsets for eligible R&D at premium rates above a company’s applicable tax rate (currently 25% or 30%). The Government’s response is intended to focus the scheme for greater impact by increasing the rate for Core Activities spending and removing Supporting Activities from eligibility entirely. Claims would have to be based solely on clearly substantiated Core Activities.
The Government proposes a 4.5% increase for all offset rates for Core Activities and to make refundable (i.e. cash) offsets available to companies with annual turnover up to AU$50 million. Refundable offsets would only be available during a company’s first 10 years of operation, with claims after that time being payable as a credit against future tax payable (if any).
Relevantly for offshore early-stage life sciences companies, no changes have been announced to the mechanics of Option 1 and Option 2 as described in our Background Paper. Accordingly, as things currently stand, the proposed changes will increase the effective rate of tax offset under Options 1 and 2 respectively, by 4.5% in broad terms, and will make the RDTI available to companies with annual turnover up to AU$50m. However, RDTI will cease to be available for Supporting Activities and, for companies operating for greater than 10 years, will be payable as a future tax credit only.
The measures are not yet enacted and, if implemented, are currently proposed to be effective from 1 July 2028. For some offshore early-stage life sciences companies, there may be a significant difference in RDTI benefit depending upon whether clinical development is undertaken in Australia before or after that date. Further, it is not yet known whether there will be transitional provisions included in any enacting legislation, nor how the “operating for 10 years” criterion will be calculated.
Please do not hesitate to contact us if you wish to understand the potential implications of the proposed changes applicable to your circumstances.