Australia’s most innovative industries are cashing in on the R&D Tax Incentive

From manufacturing to medtech, the sectors reinventing themselves the fastest are also the ones claiming the most out of a $16 billion-a-year tax incentive scheme, and the news is that the rules are about to change.

Almost half of Australian businesses (about 46%) were innovation-active in 2024–25, unchanged from the previous survey but reflecting a sharp jump in AI adoption, according to the Australian Bureau of Statistics’ Business Characteristics Survey.

Just over one in ten businesses (12%) reported using artificial intelligence in the workplace in 2024–25, up from 1% two years earlier. “Adoption of AI accelerated in 2024–25,” said Tom Lay, ABS head of business statistics.

AI take-up was heavily skewed by size: 35% of large Australian businesses reported using it, against 22% of medium businesses and 11% of small and micro businesses.

The businesses doing the most experimenting are also the ones lodging the most claims under the federal government’s R&D Tax Incentive, a scheme that returned more than $16 billion in claimed expenditure across 12,900 companies in the 2022–23 income year, according to the Australian Taxation Office’s transparency report.

Manufacturing rebuilds around sovereign capability

Australian manufacturers are shifting towards advanced production and local supply chains, backed by the federal government’s National Reconstruction Fund, which is directing investment into medical products, renewable energy, value-added agriculture, transport and critical technologies.

Innovation in the sector is showing up in:

• 3D printing and additive manufacturing for rapid prototyping and low-waste production
• AI-powered manufacturing tools that optimise processes and predict maintenance needs
• Automated sensors, robotics and smart-factory systems that reduce errors and improve safety
• Advanced materials and composites that improve durability, performance and sustainability
• Digital twins and simulation tools that let manufacturers test designs before production

Metal-manufacturing company Titomic and medical-device makers Cochlear and ResMed are among the local firms showing how engineering and scientific expertise can produce globally competitive products.

Manufacturers in Australia face higher logistics, labour and energy costs than many overseas competitors, given Australia’s size and geography. Automation and data-led production are increasingly the tools used to offset that disadvantage.

ICT keeps growing faster than the rest of the economy

Australia’s technology sector contributed $248.5 billion to the economy in 2025, equal to 8.9% of GDP, according to the Tech Council of Australia. This is going to hit a $250 billion target five years ahead of the 2030 deadline originally set for it.

“Tech is no longer just an industry,” said Dr Ilana Feain, head of research at the Tech Council of Australia.

Tech employment has grown by close to 200,000 people since 2021, taking the sector to nearly 1 million workers. Close to half of the sector’s economic contribution now comes from tech used inside other industries like banking, agriculture and aged care, among them, rather than from tech companies themselves.

Innovation inside ICT includes:

• Cloud computing and virtualised environments
• AI and automation tools that streamline workflows and decision-making
• Cybersecurity technologies that protect data, businesses and critical infrastructure
• High-performance networks supporting the expansion of the digital economy
• Software platforms that help Australian companies sell and operate globally

Canva, Atlassian and WiseTech Global built globally scaled software businesses out of Australia, while Airwallex and Afterpay used cloud infrastructure and digital payments to reshape how money moves.

Retail and e-commerce chase frequency over basket size

Australians spent a record $82.6 billion online in 2025, up 13.9% on the year before, according to Australia Post’s 2026 eCommerce Report. Online sales now make up 24% of total retail spend, and 9.8 million households shopped online during the year, which is more than four in five nationally.

Basket sizes are shrinking even as total spend climbs: the average online transaction fell to $96, down from $106 five years ago, as shoppers spread purchases across more retailers and wait for sales events. “Australians are shopping smarter,” said Gary Starr, Australia Post executive general manager of parcel, post and e-commerce services.

Retailers have responded with:

• Same-day delivery and advanced logistics
• Automated checkouts and seamless payment technology
• AI-driven customer service and personalised recommendations
• Buy-now-pay-later services and mobile wallets
• Social commerce and data-led marketing

Marketplaces such as Amazon and Temu accounted for $19 billion of 2025’s online spend, 23% of the total, while Afterpay helped establish Australia as a testing ground for digital payment innovation.

Advanced manufacturing and engineering go high-tech

Advanced manufacturing combines engineering expertise with robotics, automation, digital twins, material science and modern construction methods. In Australia, that combination is being applied across medical technology, defence, aerospace, mining equipment, renewable energy and transport.

Areas of rapid innovation include:

• Autonomous and robotic assembly systems
• Low-carbon manufacturing processes
• Sensor-driven monitoring for predictive maintenance
• Simulation and digital modelling to reduce waste and improve safety
• Advanced metal production and composite materials

CSIRO helps businesses test new technologies and commercialise products in this space. As labour shortages, supply-chain disruption and decarbonisation pressures continue, the sector’s role in building sovereign capability and lifting productivity is only growing.

Clean energy hits a renewables milestone

Renewables generated 42.7% of Australia’s electricity in 2025, up from 39% the year before, according to the Clean Energy Council’s Clean Energy Australia 2026 report. In the December quarter, clean energy outproduced fossil fuels for the first time in the country’s history.

Home battery installations surged 260% year-on-year, with more than 268,000 units installed by the end of 2025, while committed large-scale battery capacity grew. 233% to 4.3 GW. Investment in new large-scale wind and solar, however, fell 46% over the same period, one of the lowest levels of new commitments in a decade.

Innovation in the sector spans:

• Large-scale solar and wind generation
• Battery storage and virtual power plants
• Green hydrogen production and distribution
• Smart-grid and demand-management technologies
• Carbon capture, recycling and resource-recovery systems

Solar technology developer SunDrive and mining group Fortescue are among the companies investing in hydrogen, electrification and lower-emissions industrial processes, while the Australian Renewable Energy Agency continues to back demonstration projects in smart appliances and flexible demand.

Agritech tackles Australia’s toughest farming conditions

Australia’s large farms, variable climate and exposure to drought, heat and biosecurity risk make innovation central to keeping agriculture productive. More than 2,500 agrifood tech enterprises are now operating in the sector.

Innovations include:

• Precision farming and real-time data monitoring
• AI-powered crop and weed detection
• Drones and robotics for harvesting, mustering and crop management
• Controlled-environment agriculture and vertical farming
• Smart irrigation and soil-moisture sensors

SwarmFarm Robotics builds autonomous farm machinery, while InFarm’s AI weed-detection platform has helped farmers cut herbicide use by up to 95%. CSIRO’s RISE Accelerator and Innovate to Grow programs connect agrifood startups with research expertise to help commercialise new farming technology.

Biotechnology and medtech turn research into global exports

Australia has a strong research base in biotechnology, pharmaceuticals, medical devices and health technology, with universities, hospitals, research institutes and commercial businesses working together on new treatments and diagnostics.

Innovation in this sector includes:

• New medicines, vaccines and biological treatments
• Genomics and personalised medicine
• Medical imaging and digital health platforms
• Wearable devices and remote patient monitoring
• Implantable and assistive technologies

CSL, Cochlear and ResMed have built products with global reach out of this research base. Collaboration with CSIRO, the Medical Research Future Fund, universities and Cooperative Research Centres is what typically moves a discovery from the lab bench to commercialisation, and the sector’s expertise is increasingly being applied beyond human health into sustainable agriculture, biosecurity and environmental restoration.

Professional, scientific and technical services fund the innovation economy

This category covers scientific R&D, engineering design, architectural services, software development, consultancy and technical advisory work. These businesses are often central to innovation elsewhere, helping other organisations test, validate, commercialise and scale new ideas.

Innovation here is driven by:

• Scientific discovery and experimentation
• Advanced modelling and simulation
• Digitalisation of complex knowledge work
• Engineering design and technical testing
• Bespoke problem-solving for clients across multiple sectors

It’s also the single biggest claimant of the R&D Tax Incentive by number: the professional, scientific and technical services industry made up 44% of all claims in the 2022–23 income year, ahead of manufacturing in second place, according to ATO data.

Why innovation matters for every industry, not just these

These sectors have benefited the most from innovation, but they are not the only ones. Innovation shows up in any industry, through new systems, processes, services or products, or the improvement of existing ones.

In 2024–25, 46% of Australian businesses were innovation-active, a share that has climbed steadily from 36% in 2006–07, according to the Department of Industry Science and Resources. Medium-sized firms with 20 to 199 staff are the most likely to innovate, at 64%, against 39.7% for small firms.

Innovation can take time and money a business does not always have spare. That’s what the R&D Tax Incentive is designed to offset.

What qualifies as innovation under the tax law

To claim the R&D Tax Incentive, a company must be conducting eligible core or supporting R&D activities, experimental work where the outcome can’t be known in advance and that generates new knowledge, following a systematic progression of experimentation, observation, evaluation and learning.

Eligible companies must be incorporated under Australian law or be a foreign company with a permanent establishment in Australia and must spend at least $20,000 a year on qualifying activities to claim (with an exception where a registered Research Service Provider is used). Sole traders, partnerships, trusts and exempt entities can’t claim the offset.

Activities generally have to be carried out in Australia, with limited overseas exceptions where there’s a scientific link to core R&D done locally. Companies self-assess their eligibility, register with the Department of Industry, Science and Resources through the AusIndustry portal within 10 months of the end of their income year, then claim the offset through their company tax return.

How the R&D Tax Incentive pays out right now

Companies with aggregated turnover under $20 million currently receive a refundable tax offset of the company tax rate plus an 18.5% point premium as a genuine cash refund, even for a company in a tax loss position.

Larger companies receive a non-refundable offset instead: the company tax rate plus 8.5 percentage points on R&D spend up to 2% of total expenditure, rising to plus 16.5 percentage points on spend beyond that threshold. There’s a $150 million cap on eligible expenditure, above which the premium no longer applies.

Bigger changes are coming from 1 July 2028

The 2026–27 Federal Budget locked in a substantial overhaul of the scheme, due to take effect from 1 July 2028. Every offset rate rises by 4.5 percentage points: the refundable offset moves from 18.5% to 23%, the low-intensity non-refundable rate from 8.5% to 13%, and the high-intensity rate from 16.5% to 21%.

Other changes include:

• The intensity threshold that unlocks the higher non-refundable rate drops from 2% to 1.5% of total expenditure
• The turnover threshold for the refundable offset rises from $20 million to $50 million
• Access to the refundable (cash-back) offset is restricted to a company’s first 10 years of operation; older companies still get the higher rate, but only as a non-refundable credit
• The minimum eligible R&D spend rises from $20,000 to $50,000
• The expenditure cap lifts from $150 million to $200 million
• Supporting R&D activities such as administrative tasks, literature reviews and equipment maintenance will no longer be eligible — the incentive is being concentrated on core, experimental R&D

More small and mid-sized businesses will qualify for the cash-refund version of the scheme once the turnover threshold lifts, provided they are still within their first decade of operation.

Find out if you qualify for innovation incentives

Here at Pattens, I can introduce you to the world of innovation tax relief. Incorporated Australian companies of any size and industry can benefit from the R&D Tax Incentive, whether that’s a refundable cash offset for smaller companies or a non-refundable offset reducing tax payable for larger ones.

To access it, a company needs to identify its eligible R&D activities and expenditure, keep proper technical and financial records, register with AusIndustry within the required window and claim the offset through its company tax return. The ATO administers the tax-offset side; the Department of Industry, Science and Resources handles registration and activity eligibility.

If you want to check where your business stands, contact us today for a quick check to see if you qualify for the R&D Tax Incentive or other innovation incentives.

Bruce Patten