2026-27 Federal Budget: What Businesses Need to Know About R&D Tax Incentive Changes and New Funding Programs

The 2026-27 Federal Budget landed on 12 May 2026, and if you read between the lines, the government is basically saying: We are tired of funding R&D claims that do not move anything forward. Real experimental research? This budget is good for you. Literature reviews, equipment maintenance, peripheral activities you’ve been bundling into your claims for years? That’s getting cut.

There are no massive new grant pools worth saying upfront, so you are not hunting for something that isn’t there. What the budget actually delivers is a structural overhaul of the Australian R&D Tax Incentive, a serious top-up to the Medical Research Future Fund (MRFF), $70 million in AI Accelerator grants, and a set of tax measures aimed at keeping early-stage companies liquid. The Federal Budget 2026-27 grants and tax changes add up to a reorientation, not a windfall. The businesses that plan around them now will be in a far better spot than those who wait until 2028 to figure out what changed.

As grant consultants who work with businesses across biotech, software, manufacturing, and medtech, and all other industries, we have pulled apart every relevant measure so you do not have to wade through 1,000 pages of Budget papers. Here is what matters for your organisation.

R&D Tax Incentive Reforms: The Biggest Change in Years

The Australian R&D Tax Incentive has not seen a structural overhaul like this in a long time. Starting 1 July 2028, which means it hits your FY29 tax return, the whole program gets redesigned. The direction is clear: reward genuine experimental R&D, cut the rest.

You might be wondering why the government is saving money with one hand ($650 million in savings over five years) while simultaneously increasing offset rates. The answer is simple: supporting activities, things like literature reviews, equipment maintenance, and peripheral tasks that only exist to enable core research, will no longer qualify. Those activities made up roughly 29% of all R&DTI claims. Removing them pays for the rate increases.

What Changes: Current vs. New Rules at a Glance

Refundable offset turnover threshold: It goes up from $20 million to $50 million. However, refundability is phased out for businesses that are 10 years or older. These businesses will have the offset available as a non-refundable tax offset based on 23% of their R&D expenditure.

• Core R&D offset rates: Increase by 4.5% points across all tiers. Young SMEs (under 10 years) get a refundable offset rising from 18.5% to 23%. Large firms’ high-intensity rate goes from 16.5% to 21%, and the low-intensity tier goes from 8.5% to 13%.
• R&D intensity threshold: Drops from 2% to 1.5%, letting more firms qualify for the higher offset tier.
• Minimum expenditure threshold: Rises from $20,000 to $50,000. Research below that amount still qualifies, but only if it runs through a Research Service Provider (RSP) or Cooperative Research Centre (CRC).
• Expenditure cap: Increases from $150 million to $200 million, giving large claimants a bigger slice of expenditure at the uplift rate.
• Supporting activities: Removed entirely from eligible expenditure. This is the sharpest edge of the reform.

Who Wins and Who Loses

The government estimates these changes will generate an extra $400 million per year in R&D investment by young firms. That is the intent. But the redistribution creates clear winners and losers.

Likely winners:

• Companies with aggregated turnover between $20 million and $50 million that are under 10 years old get a refundable status they previously could not access.
• Large firms spending between $150 million and $200 million on core R&D, the raised cap gives them the full uplift on a larger base.
• Biotech, pharma, and deep-tech firms that are based almost entirely on experimental work and therefore have uncertain claims.

Likely losers:

• Established companies (10+ years old) that have relied on the refundable offset transition to non-refundable at the same rate, which means cash flow changes.
• Software firms with claims heavily weighted toward incremental commercial development rather than genuine experimental work.
• Small claimants spending under $50,000 annually on R&D who do not work with an RSP or CRC.

A Note of Disagreement Worth Flagging

Not everyone agrees this is the right approach, and that’s worth saying plainly. The Ambitious Australia report, which was released in December 2025, and the document that supposedly drove these reforms, recommended scrapping the intensity threshold altogether and swapping supporting activity eligibility for a deemed rate. Simpler, cleaner, more globally competitive. The government read that report and went a different direction on both counts.

So the intensity threshold stays. It drops from 2% to 1.5%, which helps, but it’s not the clean single-rate system the report pushed for. If you were expecting that, you won’t find it here.

What You Should Do Before 2028

The reforms do not bite until 1 July 2028, but you should start preparing now. Here is why: reclassifying R&D activities takes time, and ATO compliance scrutiny on the new, narrower definition will be sharper. The ATO has been allocated approximately $2.8 million over three years from 2027-28 specifically to implement and police the new settings.

• Register your current R&D activities now; do not wait. Every year you delay is a year of lost claims under the current (more generous) rules.
• Audit your project classifications. Identify which activities are genuinely core experimental R&D versus supporting work. The sooner you know your exposure, the better you can restructure.
• Model the new offset rates against your turnover and company age. The new rules are more favourable if you are a young firm under the $50 million threshold. For established SMEs, compare the benefits of non-refundable tax credits against provisions like loss carry-backs.
• Consider RSP/CRC partnerships if your annual R&D spend sits below $50,000. These arrangements preserve your eligibility and often bring research quality benefits too.

R&D Tax Incentive – Old vs New Rules (Effective 1 July 2028)

Aspect	Current Rules (Pre-2028)	New Rules (from 1 July 2028)	Key Implications for Businesses
Core vs Supporting Activities	Both core and supporting R&D are eligible	Only core/experimental R&D is eligible. Supporting activities are largely excluded.	Significant impact on incremental software development, commercial innovation & overheads. Stronger focus on genuine experimental work.
Offset Rates (Core R&D)	Base rates (Refundable ~43.5%, Non-refundable ~38.5%)	Increased by 4.5 percentage points (≈25–50% uplift on the offset value)	Higher cash benefit or tax savings for qualifying core R&D activities.
R&D Intensity Threshold	2% (for intensity premium)	Lowered to 1.5%	More companies will qualify for the higher offset rates.
Minimum Expenditure Threshold	$20,000 per year	Increased to $50,000	Smaller claims are restricted. Amounts below $50k only eligible via Registered Research Service Providers (RSPs) or CRCs.
Expenditure Cap	$150 million	Increased to $200 million	Benefits large R&D performers and capital-intensive projects.
Refundable Offset Turnover Threshold	$20 million aggregated turnover	Increased to $50 million	Growing companies can access a refundable (cash) offset for longer.
Refundability Age Limit	No age limit	Limited to companies under 10 years old (older firms below $50m turnover get higher non-refundable offset only)	Major change for scale-ups and established SMEs.
Overall Objective	Broad support for R&D	Better targeted at high-impact, experimental R&D + support for young innovative firms	Expected to drive +$400m additional R&D investment annually by young firms while delivering budget savings.

Key Federal Budget 2026-27 Grants and Funding Programs

Medical Research Future Fund: $508.5 Million More

The MRFF is heading toward $1 billion in annual disbursements by 2030, up from roughly $650 million now. The $508.5 million provisioned in this budget gets it there. For health, biotech, and medtech companies, this is the most straightforward funding opportunity, and the budget grants are competitive. However, the fund is growing, and the pipeline of rounds is predictable.

If you are in medical research, you should have MRFF on your grant calendar for the next four years. Watch for targeted program announcements through the Department of Health and Aged Care, particularly in clinical trials, medical devices, and translational research.

AI Accelerator Grants: $70 Million

Up to $70 million is available through upcoming rounds of the Cooperative Research Centres program, specifically badged as an ‘AI Accelerator.’ The focus is on industry-led collaborative research, meaning you will likely need a university or research organisation as a project partner.

The reaction on budget day from the innovation community was split. Solo founders and small AI startups pointed out pretty quickly that the CRC structure benefits consortia that need university partners, established relationships, and the whole apparatus. That’s a fair read. CRC-style grants have always rewarded people who already have a seat at the table. If you’re building alone, this round probably is not built for you. If you’re a scale-up with university connections or willing to put in the work to build them, get your collaborative project scoped out now.

One thing that did not get much attention but probably should: the government is rolling out AI internally to cut through approval bottlenecks in environmental assessments, medicine approvals, and the National Construction Code. That is not a grant, but it does signal a real appetite for AI in regulated industries. Procurement and piloting opportunities tend to follow that kind of internal adoption, often before any formal program gets announced.

Science and Research Institutions: $1.5 Billion

CSIRO alone receives an extra $387.4 million, bringing total institutional science funding to approximately $1.5 billion across CSIRO, the National Measurement Institute, and the Australian Space Agency. These funds primarily go to institutional capability, but they flow outward through collaborative projects, contracts, and co-investment with industry partners.

If you work in deep tech, space, precision measurement, or agriculture, CSIRO partnerships offer access to infrastructure and expertise your business can not replicate alone. The new National Resilience and Science Council, established to coordinate across approximately 200 existing government innovation programs, should eventually make it easier to find and access those pathways. Watch for its program priorities as they are announced.

Other Grant Programs Worth Watching

The Australian Renewable Energy Agency (ARENA) administers up to $13 billion in grants for renewable projects, including low-cost solar and renewable hydrogen. This is not new money from this budget, but if you are in clean energy, it remains one of the largest accessible grant pools in the country.

Australia’s Economic Accelerator and CRC Programs continue to operate. For advanced manufacturing and regional innovation, community infrastructure programs, including Thriving Suburbs and Growing Regions ($841.7 million extended), offer project-level funding for the right applicants.

Startup and Early-Stage Business Support

The budget packages several measures specifically for startups and early-stage companies. Taken together, they address three things young businesses always struggle with: cash flow, risk capital, and tax complexity.

• Loss refundability for startups (from 2028-29): Small companies with turnover under $10 million can convert tax losses in their first two years into refundable tax offsets capped at the amount of FBT and withholding tax paid on wages. It is not a cash windfall, but it helps early-stage companies recover some working capital tied up in tax.
• Permanent $20,000 instant asset write-off: This is now locked in. It will not transform your balance sheet, but for small businesses buying equipment, it reduces the time value cost of that spend.
• Loss carry-back reintroduced: Companies can now carry tax losses back against prior years’ profits. This creates an interesting planning interaction with the R&D Tax Incentive; sometimes the immediate refund from carry-back is more valuable than the non-refundable R&D offset—model both before deciding.
• Expanded venture capital incentives (from 2027): Asset and fund size caps for Venture Capital Limited Partnerships (VCLPs) are being adjusted for inflation. The goal is to release more patient capital for growing firms. This is particularly relevant for startups in AI, deep tech, and biotech that need patient, long-horizon investment.

One cloud over the startup picture: some commentary on budget day flagged changes to CGT treatment and ESOPs as potentially negative for startup employees and early-stage investors. The phrase ‘tax on a sale just doubled’ appeared in startup forums. We would encourage you to get specific legal advice on how these changes interact with your equity structure before concluding.

Sector-Specific Opportunities

Software and AI Development

This sector faces the most complexity from the R&D reforms. The Australian R&D Tax Incentive has historically been used extensively by software firms, many of whom claimed supporting activities alongside core development work. Under the new rules, incremental commercial software improvements, the kind that are widespread in SaaS businesses, will struggle to qualify as core experimental R&D.

The $70 million AI Accelerator grants help, but they require collaborative structures. Software businesses with genuine research problems, novel algorithms, new approaches to machine learning, and unexplored technical territory are fine. Those using the R&DTI primarily for commercial product development need to reassess their position now, not in 2028.

Medical Research and Biotech

This is the best-positioned sector in this budget. The MRFF expansion toward $1 billion annually is a genuine multi-year tailwind. Biotech firms doing experimental research on novel therapeutics, medical devices, or diagnostics will also benefit from the R&D Tax Incentive reforms, as their work maps well onto the core experimental definition.

NHMRC also receives attention in the budget. Combined with the CSIRO boost, the overall science funding environment for health-adjacent research is arguably the strongest it has been in a decade. The combination of Federal Budget 2026-27 grants through MRFF and R&D offsets for experimental clinical work creates a stacking opportunity, more on that below.

Advanced Manufacturing and Clean Tech

ARENA’s $13 billion in grants for renewable energy continues to be the most significant pool for clean energy businesses. Advanced manufacturers with genuine R&D programs in materials, process engineering, or industrial decarbonisation stand to benefit from the reformed offset rates, particularly if their R&D intensity exceeds the new 1.5% threshold.

Key Grant & Funding Announcements (2026–27 Budget)

Program / Initiative	Funding Details	Target Areas	Best For
Medical Research Future Fund (MRFF)	Increased disbursements – path to $1 billion p.a. by 2030 (from ~$650m)	Health, biotech, medical innovation	Medical research, clinical trials, medtech
AI Accelerator Grants	$70 million (via CRC-P and related rounds)	AI development & commercialisation	AI companies, industry-research collaborations
Cooperative Research Centres (CRC)	Boosted funding streams	Industry-led research	Collaborative R&D projects
Other Innovation Support	Reprioritisation + new National Resilience and Science Council	Cross-sector innovation	Startups & scale-ups

Strategic Recommendations and Risks

Stack Your Funding Sources Where You Can

The most effective funding strategies combine the Australian R&D Tax Incentive with direct grants. An MRFF grant that funds a clinical research project can sit alongside an R&D tax offset claim for the experimental work within that project. ARENA grants and R&D claims can coexist for clean energy R&D. The interaction rules are complex; you cannot double-dip on the same expenditure, but the principle of stacking is valid and worth planning for.

Compliance Risk Is Rising

The ATO funding for R&DTI implementation signals that compliance pressure will increase. Tighter eligibility definitions invite more disputes about what counts as ‘experimental.’ If your current R&D claims rely on a broad interpretation of supporting activities, you should expect that interpretation to be contested. Get your documentation in order now.

Strong contemporaneous documentation, such as lab notes, technical reports and hypothesis-experiment-result records, is the best protection against ATO scrutiny. If your record-keeping is not tight, fix it before 2028.

Your Timeline for Action

Right now:

• Register FY26 R&D activities before the 30 April 2027 deadline.
• Map your current claim against the new core/supporting distinction.
• Check your eligibility for AI Accelerator grants if you have an AI research project.
• Start building MRFF grant relationships if you are in health or biotech.

By the end of 2026:

• Model the impact of the 2028 changes on your R&D tax position.
• Assess whether RSP or CRC partnerships make sense if your spend is below $50,000.
• Consider whether the loss carry-back or the new startup loss refundability scheme is more valuable than a non-refundable R&D offset.

From 2027:

• Watch VCLP changes for capital-raising implications.
• Monitor National Resilience and Science Council announcements for new program priorities.
• Prepare transition documentation for FY29 claims under the new rules.

A Reform Budget That Rewards Genuine Innovation

This is not a budget that throws money at innovation broadly. It rewards ambition specifically, the kind of ambitious, uncertain, experimental work that the R&D Tax Incentive was always designed to support. Businesses doing real research will find more generous offset rates and a better-structured incentive waiting for them in 2028.

The Federal Budget 2026-27 grants landscape MRFF, AI Accelerator, ARENA, CSIRO partnerships run parallel to the tax reforms and offer direct funding for businesses willing to compete for it. The businesses that come out ahead will be the ones who plan across both streams: stacking grants on top of R&D offsets where possible, and building the documentation and partnerships that make both claims defensible.

The window between now and 1 July 2028 is your runway. Use it.

Book a complimentary review of your R&DTI claim with our team at Pattens Group to assess how these changes affect your business. We will map your current R&D claims against the new rules, identify relevant grant opportunities for 2026-27, and build a funding plan that works across all streams. Do not leave 2026-27 funding on the table.

All figures and measures cited in this article are drawn from Australian Federal Budget papers (12 May 2026) and professional analyses of Budget measures. Refer to budget.gov.au and ATO guidance for official details. This article does not constitute tax or legal advice.