Businesses could lose $590 million in R&D tax breaks under changes before the Senate. What’s the plan?

The Australian government is proposing significant changes to the R&D tax incentive, which could result in businesses losing up to $590 million in tax breaks by 2030. Currently, more than 13,000 companies, including half of them small businesses, claim the R&D tax break annually, costing the federal budget $4.3 billion in lost revenue in 2024-25 alone.

The proposed changes, which have already passed the lower house of Parliament, include stopping small businesses from accessing a tax offset after ten years, and raising the limit for firms developing therapeutic goods to 15 years. Small firms would also be able to access the highest tax offset rate for longer by increasing the eligibility threshold from $20 million to $50 million.

However, these changes would make it harder for companies to access tax breaks, as the government plans to stop claiming tax breaks for activities that only indirectly support their main R&D work. Startup companies would be most affected by these proposed changes, as they rely heavily on refundable tax offsets for funding their research.

If the changes pass, they would be the most significant modification to the R&D tax incentive since it was introduced in 2011. The federal government is under pressure to cut spending to combat persistently high inflation, despite the R&D spending being much lower than the OECD average. Labor has criticized the government for not recognizing R&D as an investment, and called for support for startups and early-stage companies.

The bill passed the House of Representatives, but its fate in the Senate remains uncertain, with the Greens signaling they will not support the changes unless oil and gas producers are restricted from claiming tax offsets.