Here is a number that is about to change how a lot of company tax returns look: 1.5%. That is the new R&D intensity threshold the Australian Government wants to set, down from the current 2%.
It is one line item inside a much longer list of R&D Tax Incentive 2026 changes coming out of the Federal Budget R&D tax reform. If your business claims the non-refundable R&D tax offset, this could be the line item that moves your numbers the most.
None of this is law yet. Treasury announced the change in the 2026-27 Budget. Draft legislation is expected sometime in 2027, with a start date for income years beginning on or after 1 July 2028. The direction is set, though and for businesses caught by it, 2028 is closer than it looks.
Who This Actually Affects
The proposed change only hits non-refundable claimants: Australian companies with turnover above $50 million, claiming the offset against tax payable rather than as a cash refund. Businesses under that mark, or claiming the refundable offset, are not directly targeted. Plenty of scale-ups plan to cross $50 million eventually, and the rules waiting on the other side of that line are worth knowing before they get there.
What R&D Intensity Actually Means
R&D intensity sounds technical because it’s supposed to. It is your eligible R&D spend divided by your total company expenditure for the year. That percentage decides how much of your R&D spend earns the base offset rate and how much earns the higher, “premium” rate.
Right now, the split works like this:
- Spend up to 2% of total expenditure earns the base rate: your corporate tax rate plus 8.5%.
- Spend above 2% earns the premium rate: your corporate tax rate plus 16.5%.
For a standard 30% tax rate company, that’s a 38.5% offset on the first slice and a 46.5% offset on everything past it.
Under the proposed rules, both the threshold and the rates move:
- The threshold drops to 1.5% of total expenditure.
- The base rate rises to corporate tax rate plus 13%.
- The premium rate rises to corporate tax rate plus 21%.
Same 30% tax rate company, new numbers: 43% base, 51% premium. And you reach that premium rate at a lower R&D spend than before.
What This Looks Like in Dollars
Numbers on a page do not tell you much until you run them against a real business. So imagine you are running a mid-size manufacturing business with $40 million in total annual expenditure. You spend $700,000 a year on eligible R&D. Solid investment, but not huge relative to your total costs.
Under the current 2% rule, your threshold sits at $800,000. Your R&D spend never reaches it, so your entire $700,000 gets taxed at the base rate. That is $700,000 x 38.5%, an offset of $269,500.
Under the proposed 1.5% rule, your threshold drops to $600,000. Now $600,000 sits in the base tier at 43%, and the remaining $100,000 moves into the premium tier at 51%. Work through the math and your offset lands at $309,000.
That is $39,500 more, and you did not spend a single extra dollar on research to get it. The rate rise and the lower threshold did the work between them.
Run your own numbers before you take our numbers as gospel. Every business’s spend split looks different, and the gap between your current and proposed outcome depends on how close your R&D spend already sits to that threshold.
The Catch Nobody is Talking About
Many reports have presented the lower threshold as simply positive news. But there is a downside to this. The same reform package that lowers the threshold also removes eligibility for supporting R&D activities! Activities such as testing, data collection, or admin work that backs up core experiments without being the experiment itself.
That matters because R&D intensity is worked out using your eligible R&D spend. If supporting activities drop out of what counts as eligible, that spend figure shrinks for a lot of businesses. And it shrinks at the same time the threshold gets lower. One change helps you reach the premium rate sooner. The other shrinks the spend that’s doing the reaching. Advisers are still waiting on the exact definitions here, and how the two forces balance out will depend on your business.
There is also a fairness question doing the rounds in the accounting press. Take Meera as an example; she runs an advanced manufacturing company with heavy plant, logistics, and equipment costs. Meera spends $2 million a year on genuine R&D, more in absolute dollars than plenty of software companies claiming the premium rate. Her total expenditure is $200 million, though, so her intensity ratio sits at 1%, under even the new 1.5% mark.
She misses the premium tier entirely. Not because her research effort is small, but because her overhead is large.
Intensity is a decent rough measure. It is not a perfect one. If your business runs high fixed costs, do not assume a lower threshold guarantees you a bigger offset.
What To Do Before 1 July 2028
You have got time, but not an excuse to wait until 2028 to look at this.
- Work out your current R&D intensity under today’s 2% rule, then run it again at 1.5% to see where you’d land.
- Split your R&D spend into core and supporting categories now. You will need that split regardless of how the final legislation reads.
- Track your total company expenditure trend, not just your R&D spend. Your intensity ratio moves if total costs grow, even when R&D spend stays flat.
- Watch for draft legislation in 2027. Rates and definitions could still shift before this becomes law.
- Get a proper model built before the start date, not after it. The businesses that plan ahead of a threshold change are the ones that end up on the right side of it.
The Takeaway
A lower threshold is not the same promise as a bigger offset. This reform bundles a gift and a squeeze into the same package. We have spent more than three decades helping Australian businesses get every dollar they are entitled to from this scheme. The ones who come out ahead of a change like this are never the ones who wait for the legislation to pass before they look at their numbers.
If you want to know exactly where your business sits under both the current and proposed rules, get in touch with Pattens Group. Let’s run the numbers together before 2028 does it for you.
