Key Highlights

  • The proposed turnover threshold would rise from $20 million to $50 million.
  • Claims below $50,000 would require a research partner under the proposal.
  • The bill proposes increases of up to 50% in core R&D offset rates.
  • The bill has passed the House and still requires Senate approval.

Mid-sized companies that spend on Research and Development could get Cash Back from the tax system for the first time under Labor's Tax Reform No. 4 bill. The legislation would lift the turnover ceiling for the refundable R&D tax offset from $20 million to $50 million. But it also adds a new $50,000 test for smaller claims. With the bill now before the Senate, here is what is proposed and who it could affect.

What the bill proposes for the refundable offset

Treasury Laws Amendment (Tax Reform No. 4) was introduced on 27 October and passed the House of Representatives on Thursday 29 October. It is a bill, not law, and still needs to pass the Senate.

According to Treasurer Jim Chalmers' second reading speech, the turnover threshold for the refundable R&D offset would rise from $20 million to $50 million. Core R&D offset rates would rise by up to 50%.

The government says the changes are expected to lift R&D by young firms by $400 million a year. The speech presents the measures as part of $3.8 billion in relief for businesses and start-ups.

The proposed R&D changes are due to start on 1 July 2028, subject to the final legislation.

Why refundability matters for companies in tax losses

Under current law, broadly, the R&D tax incentive works in two tiers.

Companies with aggregated turnover under $20 million can access a refundable offset. If the offset exceeds their tax bill, the excess can generally be paid out in cash. That matters for companies that are not yet profitable.

Larger companies get a non-refundable offset. It reduces tax payable, but a company in a tax loss generally cannot turn it into cash straight away. Unused amounts can usually be carried forward to future years.

For a growing technology, Manufacturing or life sciences company with turnover between $20 million and $50 million, the difference is about timing and cash flow, not just the headline rate.

The government's argument is that cash in hand helps young firms keep investing while they are still building revenue. Critics of the package have described parts of it as narrow and complex, and much will depend on the detail of the final rules.

Hypothetical example: a $35 million company in a tax loss

Hypothetical example: a manufacturing company has aggregated turnover of $35 million, is in a tax loss and spends $600,000 on eligible R&D. Assume it is a Base Rate entity with a 25% company tax rate and R&D intensity of 2% or less.

Under current law, broadly, its non-refundable offset rate would be the 25% tax rate plus an 8.5 percentage point premium, or 33.5%. That gives an offset of $201,000 (33.5% of $600,000). Because the company is in a loss, it would generally carry that amount forward rather than receive it now.

If the bill passes and the company sits under the new $50 million threshold, its offset would be refundable. Even holding the rate at 33.5% for illustration, that is $201,000 that could come back as cash in the year of the claim.

The actual rate would depend on the final legislation, including the proposed increases of up to 50%. This example does not reflect those changes and is for illustration only.

The new $50,000 test for smaller claims

The second change cuts the other way for the smallest claimants. According to the second reading speech, claims under $50,000 would need a Partnership with a Research Service Provider or a Cooperative Research Centre.

Under current law, broadly, a company generally needs at least $20,000 of R&D expenditure to claim on its own, unless it uses a Research Service Provider or Cooperative Research Centre. The bill would lift that effective floor to $50,000.

Hypothetical example: a start-up with $35,000 of eligible R&D spending, using the current refundable rate for a 25% base rate entity of 43.5% (25% plus 18.5 percentage points), could claim an offset of about $15,225 today. Under the bill, unless it partnered with a Research Service Provider or Cooperative Research Centre, that claim would fall below the new threshold.

Gemma Heaney of Heaney Business Group criticised the $50,000 minimum threshold. Industry was also still finalising safe harbour arrangements.

How many companies use the incentive now

The ATO's third R&D tax incentive transparency report, covering the 2023–24 income year, found that 13,490 companies claimed $16.7 billion of R&D expenditure.

Small businesses made up 6,920 of those claimants, or 51%. The report does not show how many would fall below the proposed $50,000 floor, and no official estimate of that number has been published.

The Greens want fossil-fuel companies excluded from R&D rebates, a change reported to be worth about $350 million a year. That is a proposal, not part of the bill as passed by the House.

The bill also gives the Treasurer power, after consulting the Industry Minister, to prescribe activities as integral to core R&D. How that power is used could affect which projects qualify.

The R&D changes sit alongside other measures in the same bill. These include an option for quarterly PAYG instalment payers to elect monthly instalments and changes to the Fringe Benefits tax treatment of electric cars from April 2029. A start-up Capital Gains Tax concession also cleared the House as part of the package.

What to watch: the Senate and the start date

- Friday 13 November 2026: the Senate Economics Legislation Committee is due to report on the trust tax bills. The government is reportedly seeking passage of its tax bills in the third week of November.

- Senate negotiations: watch whether the Greens push for a fossil-fuel exclusion, and whether the $50,000 threshold changes.

- Safe harbour arrangements: industry is still finalising these, and details may affect smaller claimants.

- December 2026: MYEFO may update costings for the R&D and start-up package.

- 1 July 2028: the reported start date for the R&D changes, subject to the final law.

Companies near the $20 million or $50 million turnover marks, or with claims just under $50,000, may wish to discuss the proposed changes with a registered tax agent once the final law is known. Nothing changes unless and until the bill passes the Senate and receives royal assent.