Businesses could lose $590 million in R&D tax breaks under changes before the Senate. What’s the plan?

Each year, more than 13,000 Australian companies – half of which are small businesses – claim a tax break for doing research and development work through the “R&D tax incentive”. That cost the federal budget A$4.3 billion in foregone revenue in 2024–25 alone. The federal government is now trying to change the tax break to save $590 million by 2030. That proposal is about to go before the Senate. It’s already passed the lower house of Parliament – though not without criticism. If it passes, it would be the most significant change to the incentive scheme since it was introduced in 2011. Here’s what’s being proposed, and which businesses would be most affected if the tax incentive does change. What’s being proposed? In this year’s budget, the federal government announced it wants to stop small businesses accessing a generous refundable tax offset once they have been in business for ten years. For firms developing therapeutic goods, the limit is 15 years. At the same time, the incentive rates would become more generous. Small firms would also be able to access the highest refundable tax offset rate for longer, by lifting the eligibility from companies with turnover of $20 million up to $50 million. But the overall changes would make it harder for companies to access tax breaks. That’s because the government plans to stop companies claiming tax breaks for activities that only indirectly support their main R&D work. For example, a company developing a new cancer treatment drug could still claim an incentive for experiments testing whether a new drug kills cancer cells. But it may no longer be able to claim the costs of cleaning and maintaining the laboratory equipment used in those experiments. All of the changes would begin from June 1 2028. Startup companies with a long road to success would be most affected by these proposed changes. Refundable tax offsets can provide crucial funding for their research. The proposed ten year age limit was increased to 15 years for companies producing therapeutic goods because these goods take a particularly long time to bring to market. That increase was a response to lobbying from the biotechnology industry. While that longer time frame has been welcomed, many startups, research organisations and politicians want the age limit scrapped altogether. The removal of tax breaks for supporting R&D activities will also affect innovative companies. Some Australian life science companies – doing work such as developing medicines, vaccines and medical technologies – have said they might have tax offsets reduced by up to 60% if the changes pass. Pressure on the budget The federal government is under pressure to cut spending to help fight inflation, which has stayed persistently high despite five interest rate hikes this year. However, both business and government spending on R&D here is much lower than the OECD average. The proposed changes could worsen this position by reducing government research support for innovative companies. Outspoken Labor backbencher and former industry and science minister Ed Husic recently argued Treasury and the Department of Finance “do not look at Australian R&D as an investment. They see it as a cost”, adding: If we want the country to be stronger longer term […] in a changing world, we need to not only back our scientists and researchers; we absolutely have to back those startups, those early-stage companies, to make sure that they can succeed in the best possible way. Heading to the Senate The bill containing the proposed R&D tax incentive changes passed the House of Representatives at the end of October. It’s due to go before the Senate this month. Coalition MPs voted against the bill in the House of Representatives, so they’re unlikely to support it in the Senate. If that’s the case, Greens votes could prove decisive. The Greens have signalled they will not support the R&D tax changes unless large oil and gas producers are restricted from claiming hundreds of millions of dollars in tax offsets under the incentive each year. If the government is willing to compromise with the Greens on this, the savings to revenue could be significant. However, doing so would mean the government faced a backlash from oil and gas companies. Another major point of contention is likely to be the ten year age limit for most companies. If a limit is kept, it should arguably be increased to 15 years to be consistent with other government proposals. The new changes aim to decrease the cost of the R&D incentive and make sure companies are not taking advantage of tax breaks without producing tangible benefits to Australia. However, the government needs to be wary of setting back Australian startup companies and homegrown innovation.