The Impact of Tax Changes on Health Startups in Australia
Health startups in Australia are facing a significant challenge due to recent changes in tax policies, particularly those related to research and development (R&D) incentives. These changes have raised concerns among industry leaders, who believe that the new restrictions could hinder the growth of medical technology companies.
A ten-year limit on a component of the R&D tax incentive has sparked alarm. This change affects the ability of health startups to receive refunds for losses from the Australian Tax Office. For many startups, this is a critical issue as they often take longer than other businesses to bring their products to market.
Nine key industry bodies have joined forces to express their concerns. They have sent a joint letter to Treasurer Jim Chalmers, urging the government to reconsider some of the budget changes. The groups include Bio NSW, Life Sciences Queensland, BioMelbourne Network, Life Sciences WA, and AusBiotech. They are calling for urgent action to ensure that the R&D tax incentive and capital gains tax (CGT) are appropriately calibrated to support the continued success of Australian companies in the sector.
The letter highlights the "significant triple threat" posed by the changes. This includes the ten-year limit on refundable R&D tax incentives, the overhaul of the CGT discount, and the shift to an inflation-linked model. These changes are seen as potentially detrimental to the growth of medical technology companies.
Labor's Budget Changes and Their Implications
Labor's budget introduced several changes to the R&D incentive. While some companies may benefit from increased generosity, others face reduced refundability. Previously, companies with a turnover under $20 million could receive a refundable R&D tax offset. This allowed loss-making firms to get cash refunds rather than waiting for profits.
The 2026-27 budget increased the turnover threshold to $50 million but limited refundability to companies less than 10 years old. Businesses older than this can still access the R&D incentive, but it becomes non-refundable. This change is particularly concerning for health startups, which often require more time to develop and commercialize their products.
The letter to Mr. Chalmers emphasized that bringing health and medical technologies to market typically takes well beyond ten years. Companies spend years on discovery, pre-clinical development, evidence generation, clinical trials, regulatory approval, and manufacturing scale-up before revenue generation is possible. R&D is crucial at every stage of this process.
The Role of R&D Incentives in the Health Sector
The government has acknowledged the time it takes to bring medical products to market. For example, last year's National Health and Medical Research Strategy Issues Paper estimated the timeframe at 17 years. A spokesman for Mr. Chalmers stated that Labor is significantly boosting funding for R&D tax incentives in the budget. He emphasized the importance of these incentives for productivity, jobs, and economic growth.
Labor is also establishing a new National Resilience and Science Council to provide strategic oversight of innovation investments. This will help align the Commonwealth's over $39.1 billion investment in R&D with Australia's economic objectives.
However, the changes to the R&D tax settings were designed to increase incentives by 25 to 50 per cent and drive more investment from young and growing firms. Despite these intentions, the changes have created uncertainty for many in the biotechnology sector.
Concerns Over CGT Changes
Medical tech bodies have also warned about the removal of R&D "supporting activities." These include clinical, regulatory, and quality services, which often sit outside of startups due to cost constraints. The letter suggested that this limitation on eligibility could put world-class health and medical research support organizations at risk.
On the CGT changes, the groups advised Mr. Chalmers that they would make many medical technology businesses question whether the high-risk research and development is worth it or if staying in Australia to realize their ambitions is the right choice.
Over the past decade, biotechnology has become a significant export industry for Australia, supporting over 350,000 jobs across nearly 3,000 organizations. AusBiotech chief executive Rebekah Cassidy said the proposed changes had already created uncertainty for Australian companies making long-range decisions about where to undertake clinical developments.
Political Reactions and Consultations
Shadow Treasurer Tim Wilson accused Labor of failing to understand how the budget was a "wrecking ball" for building Australia's future economy, including medical technology. Shadow Health Minister Anne Ruston echoed these concerns, stating that the Coalition shares the medical research sector's worries about the impact of the tax changes on innovation and investment.
Labor is currently consulting with the tech sector and startups about carve-outs for the CGT changes. Treasury is conducting consultations that will inform a position paper, which the government will use to develop a second tranche of legislation on the implementation of the CGT changes.
The new tax regime is not due to begin until July next year, which has fueled criticism of Labor's rapid pace of legislation. Business groups have demanded significant changes, but Prime Minister Anthony Albanese has ruled out a "long, drawn-out process."
Speaking at the Australia's Economic Outlook 2006 summit, Mr. Albanese stated that his door has always been open to discussions with business. He emphasized the need for good faith engagement in the detailed design of the legislation that will follow.
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