SERD’s unanswered questions on business incentives

Dr John H. Howard, 10 April 2026

First published in InnovationAus, 7 April 2026

The centrepiece proposals in the Strategic Examination of Research and Development (SERD) report – known as Ambitious Australia – would redefine what counts as R&D, leave the fiscal cost unexamined, and concentrate benefits on a very small proportion of Australian innovative businesses.

In Ambitious Australia, SERD has delivered a thorough diagnosis of what ails Australia’s R&D system. Chapters three and four of the report prescribe a treatment built around a substantially expanded R&D Tax Incentive and a new venture‑capital architecture. The diagnosis is basically sound, but the prescription leaves three questions unanswered.

First, the stealth redefinition of R&D

Since 2011, the RDTI has rested on a clear principle: eligible expenditure must involve genuine technical uncertainty that can only be resolved through systematic investigation based on established science (Income Tax Assessment Act 1997, s. 355). This definition follows the OECD’s Frascati Manual and is consistent with the design of R&D tax incentives across every comparable economy. It is the primary integrity mechanism in the program.

The SERD’s premium RDTI startup stream in recommendation 5b would extend eligibility to cover development and deployment, early commercialisation, and user testing and adoption research. These activities occur after the core technical uncertainty has been resolved.

The remaining uncertainty is commercial, not technical. In a typical technology startup, the experimental phase may account for 15 per cent to 25 per cent of total expenditure. Expanding eligibility to product development and commercialisation opens the offset to the remaining 75 per cent to 85 per cent.

No OECD country subsidises deployment, early commercialisation, and user testing through its R&D tax incentive. Countries that support these activities do so through separate instruments with their own eligibility criteria and fiscal controls.

Israel, the OECD’s most R&D‑intensive economy, does not even use an expenditure‑based R&D tax incentive; it provides R&D grants through the Innovation Authority at up to 50 per cent of approved expenditure.

Proposals to build commercialisation into the RDTI are not new. Industry groups and startup advocates have argued for this expansion for years. But acting on these proposals has major implications.

The SERD presents the change as an “implementation pathway,” when it is, in substance, a conversion of the startup stream from an R&D incentive into an early‑stage business subsidy delivered through the tax system.

At face value, the approach has considerable merit, but the report should have acknowledged the significant departure from a long‑held OECD benchmark and openly debated the implications.

Of course, once development and commercialisation become eligible in the startup stream, the pressure to extend the same treatment to SMEs and large firms will be immediate. This precedent effect could progressively expand the RDTI’s scope and cost in ways the panel has not anticipated.

The expanded expenditure definition would also create strong incentives for the tax advisory industry to leverage the vaguer boundary to construct aggressive claims, increasing both the cost to the budget and the compliance burden on the ATO.

Second, the missing costings

The minister’s Innovation and Technology Roundtable at CSIRO Eveleigh in August 2025 set a clear standard: reform opportunities should be “in the national interest, budget positive or neutral, specific and practical.” The minister repeated the budget neutrality expectation in his speech to the National Press Club on 17 March.

Notwithstanding, the SERD report includes several potentially very costly tax expenditures: higher RDTI offset rates, expanded refundability thresholds, removal of the $150 million expenditure cap, a production tax credit, and expanded ESIC and ESVCLP concessions. None has been costed in the report.

Put simply, a tax expenditure is revenue that the government forgoes by providing concessional tax treatment. They do not appear as line items in the May budget.

Instead, they are reported separately in Treasury’s annual Tax Expenditures and Insights Statement, typically released the following January. The TEIS receives a fraction of the scrutiny that budget night generates.

This means that tax expenditures of the kind proposed in the SERD can be expanded without triggering the immediate fiscal scrutiny that would accompany an equivalent increase in direct spending.

Tax expenditures such as the RDTI are, of course, included in the annual DISR Science Research and Innovation Budget Tables, usually published six months after the May budget. For 2025‑26, the “budget” in the tables totalled $15.1 billion.

It would seem from the Minister’s speech that this is the budget benchmark that he was referring to. On any reasonable calculation, the cumulative cost of the SERD tax expenditure recommendations would be considerable and well above fiscal neutrality.

In public finance language, a dollar of revenue forgone through an RDTI offset has exactly the same effect on the Commonwealth’s public sector fiscal balance as a dollar spent on a research grant.

While the accounting treatment differs, the macroeconomic effect is identical. Without forward estimates, it is impossible to judge whether the proposed benefits justify the commitment of public revenue.

The SERD panel supported by a secretariat, presumably with Treasury consultation, should have been able to produce forward costings of the tax expenditures. Their absence is possibly the single greatest weakness of the report.

Third, the narrow distribution of benefits

The premium RDTI’s startup stream’s eligibility is determined by a 100‑point test that privileges venture capital backing, accelerator participation, IP holdings, and university collaboration. Venture capital investment in Australia is less than 0.2 per cent of GDP.

Within that small window, NSW and Victoria together account for roughly three‑quarters of funding, with AI, fintech, and biotech/medtech receiving the largest proportions of capital. Manufacturing and deep tech remain marginal, although change is starting to emerge.

This and other data reflect Australia’s deep institutional weaknesses in support for early stage innovative companies. The 100‑point start-up stream test could channel the SERD’s most generous support to a cohort defined by these very concentrations.

Under the expanded definition of the RDTI under the startup stream, a VC‑backed software startup spending $5 million a year on research concerned with adoption, application and use could plausibly claim $3 million to $4 million in eligible expenditure.

At the proposed premium offset rate of 48.5 per cent (the 25 per cent corporate rate plus the 23.5 per cent premium in Recommendation 5b), this would generate a refundable offset of approximately $1.5 million to $1.9 million in cash from the Commonwealth.

Meanwhile, the 46 per cent of Australian businesses that are innovation‑active (ABS, 2024) but do not conduct formal R&D receive nothing from any element of the RDTI, current or reformed.

There is a separate discussion to be had about institutional strengthening across the financial sector to support new and potentially high‑growth firms, including venture capital backed startups.

The ecosystem continues to face a significant growth gap in late‑stage capital depth, particularly for physical technology such as robotics, renewables, medical devices, and aerospace hardware, which requires longer‑term, capital‑intensive scale‑up support.

Strategic investments through the National Reconstruction Fund have begun to address this, but the SERD’s premium stream, anchored as it is to venture capital eligibility criteria, does not.

A better path

These three questions address instrument design, fiscal transparency, and distributional equity. Together they point to a conclusion: the expanded RDTI and associated venture capital architecture proposed in Chapters 3 and 4 would have required more work, or perhaps starting from a different design premise.

An alternative might have been to leave the RDTI to do what it does well: reduce the cost of genuine experimental research and create a separate commercialisation instrument for the transition from lab to market, open to firms regardless of their investor profile and funded through a capped direct appropriation at $300 million to $500 million per year.

Its design should support the diverse pathways through which innovation actually reaches the Australian economy. This work is still to be done.

The simpler RDTI reforms proposed in the SERD, including deemed rates, reduced documentation, and quarterly cash advances, could proceed within the existing legislative framework, subject to the budgetary situation. They would make a tangible difference to firms already in the system.

The expanded expenditure definition should not proceed without the costing, the distributional analysis, and the public debate around tax policy that a commitment of this scale demands.

All of this at a time when Commonwealth Departments are operating in a climate of fiscal austerity, and the Cabinet Expenditure Review Committee is looking for expenditure savings.

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Dr John H. Howard is Executive Director at the Acton Institute for Policy Research and Innovation in Canberra. He can be contacted at john@actoninstitute,au