Government provides detail on R&D tax incentive reforms

Treasurer Jim Chalmers has released the federal budget for 2026–27, announcing changes to better target the research and development tax incentive.

The government plans to increase the offset for core R&D expenditure by around 25 to 50 per cent, through a 4.5 percentage-point increase in core R&D offset rates.

It also intends to reduce the intensity threshold from 2 per cent to 1.5 per cent, which it said would enable more firms that engage in substantial core R&D to qualify for higher offset rates.

Other proposed changes include removing eligibility for supporting R&D expenditure for the R&DTI and enabling growing firms to retain access to the refundable tax offset for longer by increasing the turnover threshold for the highest offset rate from $20 million to $50 million.

For firms below the $50 million turnover threshold, Treasury said the government would maintain older firms’ eligibility for the higher offset rate while limiting refundability to firms under 10 years of age.

The government will also lift the maximum R&DTI expenditure threshold from $150 million to $200 million; and lift the minimum expenditure threshold from $20,000 to $50,000, with research activities valued below this amount required to be undertaken with a registered Research Service Provider or Cooperative Research Centre to be eligible for the R&DTI.

As part of the changes, the ATO will receive $2.8 million in funding over three years from 2027–28 to support implementation of the measure, to be held in the Contingency Reserve pending finalisation of administrative arrangements.

The government also plans to expand venture capital tax incentives to better facilitate venture capital investment and support early-stage and growth-stage businesses.

Treasury said that from 1 July 2027, the venture capital limited partnership (VCLP) cap on the asset size of the investee business at the time of investment will be increased to $480 million, from $250 million.

The early-stage venture capital limited partnership (ESVCLP) cap on the investee business's asset size at the time of investment will be increased to $80 million from $50 million, it added.

The ESVCLP tax incentive cap on the asset size of the investee business, at which investment returns can be fully tax exempt, will also be increased to $420 million, from $250 million, and the maximum fund size of ESVCLPs will be increased to $270 million, from $200 million.

The government said the increases will apply to new and existing funds and to new investments they make, including further investments in businesses already held.

"ESVCLPs must remain in compliance with their existing investment plans or seek approval for a replacement plan. The eligible venture capital investor program will be closed to new applications from 7.30PM (AEST) 12 May 2026," the budget papers said.

In his budget speech, Treasurer Jim Chalmers said incentivising investment and innovation through the tax system for businesses, start‑ups and venture capital would help boost productivity for Australia.

"This is all part of our plan to boost innovation and investment, support job creation and create a more productive and resilient economy for everyone," said Chalmers.

The budget also confirmed other important tax changes, including the minimum 30 per cent tax on discretionary trusts and changes to the CGT discount and negative gearing.

Treasury confirmed that the minimum tax would not apply to other types of trusts, such as fixed and widely held trusts, including fixed testamentary trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

It also said that some types of income, such as primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at the time of announcement, would also be excluded.

Under the changes, the government will also provide expanded rollover relief for three years, from 1 July 2027, to support small businesses and others who wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust.

The government has also confirmed that it will scrap the 50 per cent discount on capital gains and return to the pre-1999 model, which indexed gains for inflation.

The budget papers said that from 1 July 2027, the 50 per cent CGT discount will be replaced by cost base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains. These changes will apply to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts and partnerships.

Treasury said that transitional arrangements would limit the impact on existing investments by ensuring that the changes apply only to gains arising on or after 1 July 2027.

"The 50 per cent CGT discount will continue to apply to gains arising before 1 July 2027. Capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT," it said.

"To maintain incentives for new housing supply, investors in new residential properties will be able to choose either the 50 per cent CGT discount, or cost base indexation and the minimum tax. Income support payment recipients, including Age Pension recipients, will be exempt from the minimum tax."

The government will also limit negative gearing for residential property to new builds.

The budget papers outlined that from 1 July 2027, losses from established residential properties will only be deductible against rental income or the capital gains from residential properties.

"Excess losses will be carried forward and able to be offset against residential property income in future years. These changes will apply to established residential properties acquired from 7:30PM (AEST) on 12 May 2026," the papers said.

"Properties acquired prior to this time, including contracts entered into but not yet settled, will be exempt from the changes until disposed of. Eligible new builds will be exempt from the changes, ensuring the benefits of negative gearing are directed to investment that increases the housing stock.

Treasury outlined that properties in widely held trusts and superannuation funds will be excluded under the changes, alongside targeted exemptions for build-to-rent developments and private investors supporting government housing programs.