The R&D refundable offset is about to get more generous, and a lot harder to keep. Treasury’s exposure draft on the R&D Tax Incentive reforms, first announced in the May Budget, landed in our inbox last Friday, opening a 2-week consultation ahead of the proposed 1 July 2028 start date.
The positives:
Increased offsets for eligible core R&D activities alongside a higher turnover threshold for refundable eligibility.
All offset rates rise by 4.5 percentage points. Companies with aggregated turnover below $50 million will be able to access a refundable offset of 23% above the corporate tax rate, meaning an eligible entity on a 25% base tax rate could receive up to 48% refundable tax offset for every R&D dollar spent. Currently, only entities with an aggregated turnover below $20 million can receive a benefit up to 43.5% (i.e. 18.5% offset rate + 25% base rate).
The catch:
- Supporting R&D activities will no longer be eligible. The draft legislation makes it clear that activities that are merely related to, or undertaken to support, an eligible (previously “Core”) R&D activity will no longer qualify on their own.
- Refundability will be limited to firms up to 10 years of age. Under the new law, an entity is only eligible for the refundable offset if it sits within ten years of the earlier of the day it first started carrying on an enterprise, or the day it first registered for R&D activities. The age limit will be extended to 15 years for firms undertaking R&D related to therapeutic goods, subject to a dominant purpose test.
- It’s worth flagging that this age test isn’t assessed on the R&D entity alone. It extends to related entities. So, a newly established entity that’s connected to / affiliated with an older entity, despite not being part of a tax consolidated group, could have its refundable offset eligibility measured against the age of that older, connected/affiliated entity making it eligible only for the non-refundable tax offset, albeit at the higher refundable tax offset rate.
If you fail the age test
Entities that don’t meet the age test but remain below the $50 million turnover threshold are still eligible for a 23% offset, however it’s non-refundable, meaning you carry it forward and realise the benefit once you become profitable and start paying tax.
Entities with turnover of $50 million or more also remain eligible for the non-refundable offset based on the R&D intensity, ranging between 13% to 21% depending on their R&D intensity.
Other changes:
The above are likely the most impactful changes in terms of the number of entities affected. Other changes include an increase to the minimum R&D expenditure threshold from $20k to $50k, and an increase to the maximum expenditure eligible for the premium offset rate from $150 million to $200 million. The intensity threshold for the non-refundable offset is also reduced, from 2% to 1.5%, making the premium easier to reach.
