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Federal Budget 2026/27: R&D Tax Incentive Developments May 2026
Overview On Tuesday, 12 May 2026, Treasurer Jim Chalmers handed down the 2026-27 Federal Budget, marking his fifth Budget. Among the key tax-related measures announced is a proposed overhaul of the Research and Development Tax Incentive (R&DTI). The R&DTI plays a central role in encouraging businesses to undertake innovative activities that support productivity and economic growth in Australia. However, the Government has identified that the current program is both complex and increasingly costly, particularly for smaller claimants navigating administrative requirements. Over the five-year period from 2019-20, the cost of the R&DTI has risen by approximately 70%, reaching $4.4 billion in 2023-24. In response, the Government intends to simplify the R&DTI and better target support towards high-value R&D activities. The reforms aim to reduce compliance burdens, strengthen program integrity, and ensure funding delivers stronger economic outcomes. While detailed changes are yet to be released, the proposed overhaul signals a significant shift, and businesses should monitor developments to understand the potential impact on their R&D claims.
Key R&D Tax Incentive Reforms Budget Proposal
Our Observations
Increased R&D Offset Rates
This measure is a positive development, as it enhances the financial incentive for undertaking core R&D and is likely to improve after-tax benefits for claimants. It may also strengthen Australia’s competitiveness in attracting and retaining R&D investment.
The Government will increase the offset for core R&D expenditure through a 4.5 percentage point uplift in the core rates. This is intended to enhance Australia’s international competitiveness and improve after-tax benefits on business-led R&D.
Lower R&D Intensity Threshold The intensity threshold will be reduced from 2% to 1.5%, allowing more businesses undertaking core R&D to access higher offset rates. This broadens eligibility for firms with growing, less capital-intensive R&D programs.
However, the overall benefit will depend on the extent to which businesses can align their expenditure with core R&D activities under the revised rules. This represents a favourable outcome, as it enables a wider range of businesses to access higher offset rates, particularly those with lower relative R&D spend or less capital-intensive programs, thereby improving the effective return on investment and supporting continued participation in R&D activities.