The research and development tax incentive (RDTI) program has undergone significant growth over the past few years. With the program forecasted to expand even further into 2025 and beyond, AusIndustry and the ATO have intensified efforts to ensure the program remains compliant, impactful, and fit for purpose.
These efforts have included an uptick in compliance reviews, new guidance for claimants, and, most recently, the release of the first inaugural transparency report.
The report, based on data from FY2021–22, provides a wealth of insights into the companies utilising the program and their claims, allowing us to infer emerging trends that will shape the program’s future.
Insights from the past: The transparency report
The report revealed that $11.2 billion in R&D expenditure was claimed under the program in FY2021–22, leading to roughly $3 billion in benefits – a ~$322 million, or 12 per cent increase on the prior year.
Many of these claims came from contemporary software-based technologies, not just the traditional sciences and manufacturing sectors. Kashcade’s independent research estimates claims from software-related companies made up over 45 per cent of the ~11,500 claimants. In particular, business/enterprise software and climate tech were most prominent. On the other hand, only 21 per cent were reported to be from the manufacturing and industrial sectors.
The report also revealed the program’s support for small businesses and new ventures, which were the largest cohort of claimants. Just under half were private companies with less than $10 million of annual revenue, and 51 per cent of companies were less than 10 years of age. Roughly 80 per cent of claimants are estimated to employ 50 staff or less.
In contrast, large enterprises made up the smallest cohort of claimants by number but dominated the total R&D expenditure. Only 14 per cent of claimants fell into this category but contributed $4.9 billion in expenditure, representing 44 per cent of the overall program. Among them, Atlassian, Cochlear, and CSL alone contributed roughly $450 million in R&D expenditure under the program.
Despite its trajectory, the program has faced scrutiny. Federal Treasurer Jim Chalmers highlighted concerns about certain industries’ use of the incentive, sparking a public debate about whether all claims align with the program’s intended purpose: fostering innovation that boosts employment and exports.
According to Bailey Phillips from R&D advisory, InCorp Advisory: "The R&D Tax Incentive remains a critical driver of innovation in Australia and is crucial to ensure that Australia becomes a global leader in research and development. However, its success hinges on ensuring claims are genuine, well-documented, and aligned with the program’s goals."
What to expect in 2025 and beyond
As we look to the future, several key trends are likely to define the R&D tax incentive landscape going forward.
1. Continued program growth
The RDTI is poised for continued growth as businesses increase their investment in innovation. Although we’re yet to have seen the effects of subdued equity markets through 2022 and 2023, expenditure claimed is expected to continue to rise in FY2024–25 and beyond.
With venture capital activity returning to normal, particularly finding its way to the biotech and artificial intelligence sectors, it is expected to flow into and increase R&D activities in Australia in the coming years. And the RDTI will play a critical role. Michael Frazis, portfolio manager of life sciences and technology investment fund, Frazis Capital Partners, said: "With the incentive lowering the cost of R&D, every dollar invested goes further. Investors then become willing to put greater amounts behind these companies.”
2. Increased compliance and integrity
The ATO has made it clear that maintaining the integrity of the R&D tax incentive is a priority. Key areas of focus include “round-robin payments” and payments to associates, both of which have been flagged in recent compliance reviews.
In addition, as advanced data analytics and AI capabilities have become more accessible, AusIndustry and the ATO (the administrators of the RDTI program) can be expected to use technologies such as these to facilitate a higher volume of program compliance.
As Jessica Olivier, national executive and partner at RSM Australia’s RDTI division, points out: “Claimants and advisors need to be audit-ready, with detailed, contemporaneous evidence, such as code repositories, technical updates, and timesheets to justify resource allocation and substantiate the eligibility of the registered R&D activities.” These measures will increase the burden of proof on businesses but also help ensure that funds are used for supporting genuine innovation.
3. Increased participation across sectors
The RDTI’s broad applicability is encouraging participation across an increasingly diverse range of industries. While traditional sectors like manufacturing still participate heavily, emerging fields such as AI, fintech, climate tech, IoT and biotech are expected to continue gaining traction.
As a result, Australia is positioning itself to be a leader in these areas, with companies like quantum computing start-up, Q-CTRL and fintech, Airwallex, demonstrating homegrown innovation on the global stage.
At the same time, there is ongoing debate about the inclusion of certain industries. Gaming companies, for example, have faced scrutiny, with some questioning whether their claims align with the program’s intended purpose. This discussion will likely continue into 2025, potentially influencing policy decisions and public perceptions of the program.
Conclusion: a program in transition
The RDTI program is gaining traction and evolving from a traditional science-based cohort to one that embraces modern industries. And despite the upcoming federal election in 2025, the program enjoys bipartisan support, with minimal changes expected regardless of the political outcome.
However, Australia’s overall R&D investment remains small and its growth is slow, relative to its OECD peers. In early December 2024, the Department of Industry, Science and Resources announced it had set up a high-calibre body of technologists, led by Telsa Chair, Robyn Denholm, to examine Australia’s R&D system more broadly and ensure its effectiveness.
The only remaining question is how Australia will continue to shape the program and its overall R&D strategy to ensure it delivers on its goal of fostering innovation and economic growth in Australia.
By Alex Simmons, co-founder and CEO of R&D lender Kashcade
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