As our readers will be aware, the Australian Government announced a ‘Patent Box’ tax incentive scheme in the 2021-2022 Federal Budget. The Patent Box was subsequently introduced as part of the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 to the Australian Parliament on 10 February 2022. The Patent Box scheme introduces tax incentives for income resulting from R&D in relation to medical and biotechnology patents that is conducted in Australia. The scheme was aimed at encouraging companies to innovate locally and retain their operations in Australia, rather than going abroad.
Requirements included R&D activities concerning medical or biotechnology patents granted or issued after 11 May 2021 in respect of income years commencing on or after 1 July 2022. Income derived from eligible patents is taxed at a concessional corporate tax rate of 17% (instead of the standard corporate tax rate of 30%, or 25% for SMEs).
What do eligible patents include? Well in good news, this does not only extend to standard Australian patents, but also to United States utility patents and European patents. For a patent to be eligible, it must also be granted or issued after 11 May 2021. Medical or biotechnology patents are also eligible if they are “linked” to a therapeutic good on the Australian Register of Therapeutic Goods. A therapeutic good is “linked” to a patent if the therapeutic good incorporates an invention that is disclosed and claimed in that patent.
The “R&D entity” must be an Australian resident or a foreign resident operating through a permanent establishment in Australia and a patentee who “holds” rights over an eligible medical or biotechnology patent. In other words, the company or entity must be the patentee. This means that an exclusive licensee of a patent does not fall under this definition.
There is also a formal ‘opt-in’ process where you would be required to make an election to access the patent box regime – this election will then apply prospectively to all of your eligible patents, including for subsequent income years starting on or after 1 July 2022. The following list summarises the exact income stream inclusions from the Bill:
- The sale or dealing with a therapeutic good linked to one or more eligible patents;
- Royalties or licence fees payable for the grant of rights to exploit an invention in respect of an eligible patent;
- A balancing adjustment event for an eligible patent; and
- Damages or compensation payable in respect of an eligible patent.
In the recent 2022-2023 Federal Budget, the Patent Box scheme was extended to patents for low emissions innovations and agricultural and veterinary chemical products listed on the Australian Pesticides and Veterinary Medicines Authority, the Public Chemicals Registration Information System, or eligible Plant Breeder’s Rights and to patents granted or issued after 29 March 2022, and for income years on or after 1 July 2023. Again, the relevant R&D must take place in Australia. The 140 new applicable technology areas are listed in the Government’s 2020 Technology and Investment Roadmap Discussion Paper.
It is also noted that “Green Energy” is not included in the present Patent Box scheme, and therefore may not encourage initial discovery and “Blue Sky” research staying in Australia. Another potential problem with the present scheme is the difficulty in valuing patents, especially where transfer pricing is to be considered. We therefore strongly suggest professional valuations be obtained if you wish to access the Patent Box scheme and subsequent tax incentives. Finally, the owner of an eligible patent is often different from the entity which is generating revenue (the “R&D Income Stream”) from the patent and accordingly, the present scheme may not be accessible to many companies.
Whilst the introduction of the Patent Box scheme should encourage more companies to register and exploit new patents, it should be noted that the Bill still needs to be passed by the House of Representatives and Senate to become an Act of Parliament in due course. We are hopeful that this occurs before the upcoming federal election in May 2022.