While the measures passed the lower house at the end of 2013, it struggled to pass through the Senate, opposed by both Labor and the Greens. The government agreed to amendments from PUP which now change the conditions upon which the tax break can be claimed. Under the deal with the PUP, the amended legislation states that the laws will apply retrospectively – backdating to July 1 last year – and that there will now be a reduced tax offset rate for companies with expenditure above $100 million. KPMG's head of R&D, David Gelb, said the changes would not impact targeted revenue collection, but would bring pharmaceutical and manufacturing industries into the mix of companies now facing limited R&D tax concessions. "While the number of companies might seem to be insignificant, companies in these industries are the ones that employ a lot of the people in research," he said. "It may unfortunately discriminate against Australian companies as there will be foreign companies that get their full entitlements for R&D tax concessions."

An Australian company spending $150 million on R&D, whose claim is now limited to $100 million, of which the tax reduction is $10 million, is disadvantaged against a foreign company spending $80 million on R&D and getting the full $8 million tax reduction, he said. "As they move into next year's budget they will have no choice but to reduce next year's headcount and take their R&D offshore where there are better incentives," he said. He said the decision to apply the laws retrospectively was "unprecedented globally". "Companies have already spent the money and done the R&D on basis they will have that entitlement there," he said. "Each company will have to make their own decision as to whether they reduce headcount between now and end of the year." Mr Gelb said the Abbott government would have been better off examining these issues as part of its innovation review and tax white paper. "They should have put things on hold until there had been proper consultation," he said. "There's been no consultation and industry is entitled to feel hard done by."

The changes come as other countries increase tax incentives aimed at drawing new investment including patent box regimes in Britain. PwC tax partner Sandra Boswell said the annual R&D spend cap was "better than a blanket exclusion" based on turnover, but agreed that it could deter investment by companies effected. "They may chose other countries in the region where spend levels are uncapped," she said. "These amended laws are the lesser of two evils." Of the roughly $9 billion dollars the government spends on science, research and development a year about $2 billion comes from R&D tax offsets. Les Field, from the Australian Academy of Science, said cuts to these benefits would be a disincentive for business and industry to work with researchers. Australia already has one of the lowest rates of collaboration between science and business in the OECD, something the Prime Minister has promised to correct.

The government has said cuts to R&D tax breaks would be offset by the 1.5 percent cut to company tax from July this year. But the head of biotech industry group BioMelbourne Network, Krystal Evans, said that would not help small biotech companies which were pouring money into research and development but yet to make any money. Small innovative companies that are not making revenue receive R&D tax incentives as cash. "Every $1 from the R&D tax incentive counts. Some of our companies have said that by reducing it by 1.5 percent equates to one fewer patient recruited onto a clinical trial," she said. Greens MP Adam Bandt said cutting support for research and development was a short-sighted way to balance the budget. "[It] will help drive the country's investment in research to a 30-year low," he said.

"Big companies contract out a lot of their research to smaller businesses and public institutions, so removing the tax breaks will be felt right across the board." The legislation was being debated in Parliament on Tuesday.