Treasurer Jim Chalmers is expected to use next week’s federal budget to boost support for research and development (R&D). But the move risks being overshadowed by a growing concern over possible changes to the capital gains tax (CGT).
As first reported by the AFR, the government is looking to raise the current $150 million cap on eligible R&D expenses as part of a broader productivity push in the budget.
Bigger R&D tax breaks expected
The reported R&D changes would stop short of recommendations made in the Robyn Denholm-led Ambitious Australia review, which called for the current cap to be removed entirely.
Instead, the government is likely to lift the threshold to between $250 million and $300 million.
The review warned Australia’s innovation system is falling behind global peers, with business expenditure on R&D declining over the past 10 years.
However, it’s worth noting that change would primarily benefit larger R&D-heavy companies. The latest ATO transparency data shows Atlassian recorded more than $220 million in eligible R&D expenditure in 2022-23. Other major beneficiaries included Fortescue, Cochlear, CSL and ResMed.
For smaller startups, however, the current model for the R&D Tax Incentive remains one of the federal government’s most significant innovation measures. This is because businesses with a turnover below $20 million can access refundable offsets.
Warnings over CGT changes
Meanwhile, the government’s broader tax reform agenda is already causing concern across the startup ecosystem.
Chalmers is widely expected to make changes to the 50% CGT discount, with reports suggesting the government is considering replacing it with an inflation-indexed model.
The concern for startups is that equity is often used to attract founders, talent, and investors willing to take significant risks in exchange for the possibility of a future payout if a company is acquired or goes public.
That model becomes a harder sell if the eventual tax treatment of those gains becomes less attractive, particularly in a market already competing internationally for talent and capital.
The issue is that both measures are being framed through the same productivity lens.
On one hand, lifting the R&D cap is designed to encourage more local research, commercialisation, and high-value activity in Australia.
On the other hand, startup investors argue changes to CGT could make Australia less attractive for exactly the kind of risk-taking the government says it wants to encourage.
The budget is also expected to include other business-focused measures, including a possible permanent extension of the $20,000 instant asset write-off for small businesses, an earned income offset, and a minimum 30% tax rate on trust distributions.
This story first appeared on SmartCompany. You can read the original here.
