Tax reforms threaten home-grown innovation and risk startup exodus

A collective of nine organisations representing startups and SMEs in the life sciences sector has penned a joint letter to Treasurer Jim Chalmers, raising alarm over the contentious changes to the Research and Development Tax Incentive (RDTI) announced in the Federal Budget that is scheduled to take effect from 1 July 2028.

The reforms bear little resemblance to recommendations outlined in the Ambitious Australia: Strategic Examination of Research and Development (SERD) report. While the SERD contemplated targeted and incremental refinements developed through consultation with stakeholders and industry, the reform package unveiled by the government represents a far more aggressive intervention and has been introduced without any consultation.

According to the collective, the consequences could be severe for Australia’s biotech, medtech and health tech sectors, disproportionately impacting startups and forcing the exodus of home-grown companies to overseas markets.

“This is not an argument against tax reform nor against the effective targeting of public investment,” said the co-signed letter to Dr Chalmers. “Rather, policy settings need to reflect the realities of the industries they are intended to support. We and our members are deeply concerned that the proposed changes to both the RDTI and CGT fail to do this.”

At the centre of the controversy is the proposal to limit refundable RDTI support to biotech, medtech and health tech startups that are less than 10 years old. Industry leaders describe the threshold as highly arbitrary and fundamentally disconnected from the realities of commercialising innovative health technologies.

Unlike many technology sectors, life sciences companies often require well over a decade to navigate clinical trials, regulatory approval processes and market access pathways before generating revenue. A ten-year cap on refundability, the sector argues, ignores the long development cycles required to bring life-changing and life-saving health technologies to market.

The government itself has previously acknowledged these timelines. Last year’s National Health and Medical Research Strategy Issues Paper estimated the average timeframe for bringing a medical product to market at 17 years.

The timing of the proposed changes has also raised questions about the government’s priorities.

RDTI costs reached approximately $4.5 billion in 2023–24, with supporting activities understood to be a major contributor to that growth. Budget Paper 2 reinforces that the government expects significant savings from the RDTI program over the forward estimates, with the bulk of those savings occurring in 2029-30. For critics, this points to a government more focused on budget repair than addressing Australia’s increasingly fragile innovation ecosystem.

Of the 160 companies in the ASX Biotech Index, approximately 100 generate less than $50 million in annual revenue, while fewer than 20 will be under 10 years old by 2027. Crucially, health and medical technology companies are among the most capital-intensive businesses in the economy. It is often after the ten-year mark that they enter their most expensive phases, investing heavily in late-stage clinical development, advanced manufacturing and commercial readiness. The proposed changes would therefore exclude a significant portion of the sector despite many companies remaining heavily dependent on research and development investment.

The proposed changes are already creating uncertainty in capital markets.

Multiple clinical-stage biotech companies have reportedly indicated that existing R&D loan structures have been thrown into doubt. Many pre-revenue ASX biotechs borrow against anticipated future tax refunds to finance active clinical trials. Losing refundable status could effectively render those companies un-bankable for specialised debt products that have become a critical source of funding.

Further concern is being driven by the proposed removal of eligibility for R&D “supporting activities”.

Many of the functions underpinning successful product development including clinical, regulatory and quality services are typically outsourced because startups and SMEs cannot afford to build those capabilities internally during their first decade. Industry stakeholders argue that excluding these activities ignores the operational realities of the sector.

The contentious changes to the RDTI would place Australia out of step with other OECD nations and could encourage companies to redirect investment into competing jurisdictions. Critics further argue the reforms abandon the definition of R&D established by the Frascati Manual, which underpins RDTI frameworks across OECD countries, including Australia.

“Cumulatively, biotechnology has been Australia’s largest value-add export industry outside primary industries since 2016 and it supports more than 350,000 jobs across almost 3,000 organisations,” said AusBiotech CEO Rebekah Cassidy. “We are struggling to understand why the government would jeopardise that by making changes that are fundamentally misaligned with long held understanding of the commercial, regulatory and market access realities of this important sector.”

Countries including the United Kingdom, Germany, Singapore, Japan and South Korea have all strengthened policy settings designed to attract and retain health and medical research investment. Against that backdrop, critics warn the reforms will weaken Australia’s competitiveness at a time when other nations are moving aggressively in the opposite direction.

The proposed CGT changes have only intensified those concerns.

For founders, investors and entrepreneurs who spend years navigating the high-risk path from laboratory research to commercial success, the changes raise fundamental questions about whether remaining in Australia is worth the risk. Industry groups argue the reforms directly contradict the government’s stated ambitions to build globally competitive innovation industries.

“Companies in our sector spend years dedicated to the development of new medical products that help people in Australia and around the world,” added Cassidy. “They bridge multiple commercial ‘valleys of death’ as they spin out of research into pre-clinical development, clinical trials, regulatory approval and manufacturing scale-up before revenue generation through market access is even possible.”

The sector’s assessment of the combined reforms is blunt: RDTI removes support during development, while CGT removes the post-tax reward at the end.

The nine organisations, including Pathology Technology Australia, MTPConnect, ANDHealth, ARCS Australia, Life Sciences Queensland, Life Sciences WA, BioNSW, BioMelbourne Network and AusBiotech, are now calling on the government to introduce exemptions and policy carve-outs, warning that without intervention these reforms will result in offshoring home-grown innovations early in their development cycle.

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