Sweeping reforms to R&D tax incentive ‘inconsistent’, ‘arbitrary’: BDO

Announced in the 2026 budget, reforms to the research and development tax incentive (RDTI) will undermine its integrity and intent, rather than strengthen it, BDO has argued.

As covered last week, reforms announced in the 2026 budget include a reduction in the intensity threshold, removal of supporting R&D expenditure eligibility, changes to the turnover threshold and refundability, and changes to the expenditure threshold.

Acknowledging that some taxpayers will look on the increased benefit rate, decreased intensity threshold and expanded program cap favourably, the advisory firm argued that the structural reforms reshape eligibility rather than quantify productivity, potentially reducing accessibility for Australian businesses and disincentivising participation due to an evidentiary focus.

This was anticipated to be especially impactful for early-stage and research-intensive industries.

Friction between the government and innovation sector first emerged following the Ambitious Australia report, and is likely to increase; while the Strategic Examination of Research and Development (SERD) looked at the effect of targeted and incremental refinements through industry and stakeholder consultation, there was reportedly no consultation on the significant scale of the proposed measures.

According to BDO, the removal of expenditure incurred to support R&D activities, in particular, would have a significant impact.

It is predicted this will reduce the scope of qualifying activities, and risk turning the measure into a “Development Tax Incentive.” Not only does this ignore the definition of research and development which countries in the Organisation for Economic Co-operation and Development (OECD) base their RDTI on, but it may push countries to invest in other jurisdictions.

The firm also discussed further impacts, including a potential limitation on R&D that excludes background research and contextual evidence, despite it being an eligibility requirement.

With the program being legislated to encourage riskier investments that would otherwise not be undertaken, companies may now be disincentivised from undertaking the research in the first place.

Ambiguity was also identified as a potential issue for companies and a regulatory burden that may further disincentivise taxpayer investment.

For example, the proposed changes could affect the validity of the Advanced Overseas Finding.

"These Findings provide certainty on the eligibility of core and supporting activities which is binding on the commissioner of taxation," said BDO.

"Some companies have sought a Finding on a supporting activity, such as overseas drug manufacturing, before committing to a significant investment in those activities. It is unclear how the proposed changes will interact with existing Findings."

The move to limit refundability to companies less than 10 years old, BDO said, is both highly arbitrary, considering it has no relationship to the value of their R&D, and impractical, given companies can take over this period of time to even complete research, or choose to invest at any time during their existence.

BDO said such a decision unfairly punishes companies, does not align with the program's intent, and may even push companies into different business models to become eligible for the refundable offset.

In this vein, the loss carryback rules could similarly allow companies to carry back the full loss rather than claim the non-refundable tax offset.

Finally, BDO noted that lifting the minimum expenditure threshold will make approximately 6 per cent of claimants ineligible and will likely impact the Early-Stage Innovation Company (ESIC) regime by locking out eligible businesses either through the higher threshold or by excluding supporting activities.

As such, the firm did welcome a number of changes, but suggested that many seem to be proposed for cost recovery despite an uncalculated or unconsidered effect on businesses and associated regulatory burdens.

BDO recommended businesses review their R&D strategies and plan early to navigate changes before the proposed 1 July 2028 start date.