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Allens Biotech News is a fortnightly news service to keep you on top of developments in this fast-moving industry.

Feature article: The Commonwealth Research and Development Tax Concession

In brief: Partner Peter Allen (view CV) and Paralegal Karla Drinkwater provide an outline of the Federal Government's scheme encouraging eligible Australian companies to increase their research and development activities by providing tax incentives.

An overview

The growth and development of knowledge-based industries is of increasing importance to Australia's economy. To promote Australia's reputation as a major global contributor of innovative products, processes and services, the Federal Government operates a scheme encouraging eligible Australian companies to increase their research and development activities by providing tax incentives. In offering a tax concession for research and development expenses, the Government aims to promote the growth, productivity and competitiveness of export-oriented Australian industries by compensating industry participants for the higher commercial risks associated with research and development activities.

The R&D Tax Concession focuses on R&D-related expenditure incurred in conducting activities forming part of a broader R&D project and is largely contained in section 73B of the Income Tax Assessment Act 1936 (ITAA) (and related provisions) and the Industry Research and Development Act 1986 (IR&D Act).

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R&D activities

The R&D Tax Concession provides eligible Australian companies (companies only) with a 125 per cent deduction on (GST exclusive) eligible expenditure incurred in relation to R&D activities. To be eligible to claim at the concessional rate of deduction a company must meet the following requirements:

  • The company is registered with the Industry Research and Development Board (IR&D Board) for that year of income.
  • The company's aggregate R&D expenditure exceeds a $20,000 threshold in that income year, unless the R&D activities are contracted out to a Registered Research Agency.
  • The company has undertaken the R&D activities on its own behalf.

R&D activities will be undertaken on behalf of a company where that company bears the financial risk associated with the R&D project, retains control over the project and effectively owns the project results. A company will not bear the risk of expenditure where that expenditure is subsequently recouped. Recoupment may occur in various circumstances, including where expenditure is reimbursed by other group companies, where a loan guarantee on R&D expenditure is paid with no requirement on the company to reimburse the guarantor, or where the expenditure is funded by way of debt which is forgiven, abandoned, waived, released or written off by the lender.

Additional requirements an eligible company must satisfy before becoming entitled to the Tax Concession include that the R&D project is exploited on normal commercial terms and for the benefit of the Australian economy. That is, any transaction exploiting the project results is conducted with 'arm's length' parties, and the profits or gains accruing directly to the Australian economy from the exploitation of a significant aspect of the result must be commensurate with the R&D expenditure. The project must also have adequate Australian content, meaning key people involved in the project are Australian citizens or permanent residents and plant, technology or know-how used are of Australian origin.

Thus the Concession is not generally available for R&D activities conducted overseas. However, where certain conditions are satisfied and the IR&D Board is notified in advance, a company may be able to claim up to 10 per cent of the total R&D project costs for foreign expenditure.

The Concession regime provides for a number of allowable deductions for different categories of R&D -related expenditure. In relation to most of these categories, where the R&D -related expenditure is not incurred to an arm's length entity, the Australian Tax Office Commissioner has the discretion to limit the concessional deduction accordingly.

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R&D expenditure

A major category of expenditure is 'research and development expenditure' which comprises:

  • contracted expenditure eg to a body other than an associate of the company, such as a registered research agency;
  • salary expenditure;
  • other expenditure directly liked to the R&D activities carried on by, or on behalf of, the company, including directly related overheads and administrative costs; and
  • eligible feedstock expenditure related to R&D activities. This refers to the net expenditure incurred in a year of income where the materials that are to be the subject of processing or transformation by the company in R&D activities (feedstock input) exceed the market value of products obtained from processing or transforming the materials (feedstock output). The excess is included in the company's R&D expenditure.

Other categories include core technology expenditure (incurred in acquiring technology or the right to use technology for R&D activities), interest expenditure, residual feedstock expenditure or expenditure incurred in the acquisition or construction of plant or pilot plant or a building or extension, alteration or improvement to a building.

All items of eligible expenditure are required to have been incurred in conducting eligible 'research and development activities' carried out under an R&D plan complying with guidelines established under the IR&D Act. The requirement to produce R&D plans was introduced to encourage strategic R&D planning by eligible companies. In addition to the R&D plan, it is important that companies keep proper records of R&D activities carried out and the expenditure incurred. Failure to do so means a company may be denied deductions under the Tax Concession and may incur a penalty.

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Necessity for innovation or technical risk

The term 'research and development activities' is defined as a two -tier concept consisting of 'core R&D activities' and 'supporting R&D activities'. Core R&D activities are regarded as systematic, investigative and experimental activities involving 'innovation' or 'high levels of technical risk' which are carried on for the purpose of acquiring new knowledge or creating new or improved materials, products, devices, processes or services. Excluded from core R&D activities are matters such as market research, quality control, efficiency surveys, pre-production activities and legal and administrative aspects of patenting, licensing or other activities. However, these activities may qualify as supporting activities if they are directly related to the conduct of core R&D activities.

The process of obtaining patent protection is generally regarded as subsequent to the completion of the R&D activities and is therefore excluded from the definition of core R&D activity. Where a patent is acquired to facilitate existing R&D activities, however, it may be classified as a supporting R&D activity.

Supporting R&D activities are activities carried on for a purpose directly related to the performance of the core R&D activities. These may include industrial design, engineering design and production engineering.

A purpose of the concession scheme is to compensate companies for the commercial risks associated with R&D activities. Thus, where an eligible company receives a government grant or subsidy, or recoups its R&D related expenditure, such grant or recoupment will be regarded as assessable income for which the company is deemed not to be at risk.

Consequently, where an eligible company receives a benefit under the Tax Concession regime and subsequently recoups the expenditure in respect of which the benefit was granted, the benefit will be 'clawed back'. Under the clawback procedure, the R&D related expenditure for which a concessional deduction has been claimed will be reduced by an amount representing twice the amount recouped. Any remaining R&D expenditure after that amount has been subtracted remains deductible at the rate of 125 per cent.

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Extra 50 per cent deduction available

Where a company has been eligible for the Tax Concession for at least three years and increases its R&D expenditure above its average amount for the preceding three years, that company may be entitled to an additional 50 per cent deduction. A company will be eligible for the Incremental Tax Concession (175 per cent premium) where: it is entitled to deduct an amount of 'incremental expenditure' (R&D expenditure excluding plant related expenditure) in the income year; it has collectively deducted an amount of incremental expenditure or has received a Government R&D Start Grant for each of the three previous years; and the incremental expenditure for the relevant year exceeds the average of the preceding three years.

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Cash payments

Certain eligible small companies are able to claim R&D -related expenditure as a rebate (tax offset) instead of as deductions. The tax offset is equivalent to 30 per cent of the deduction the company would otherwise have been entitled to under the Tax Concession or Incremental Tax Concession. The offset is particularly beneficial to companies with a tax loss, as the rebate may be offset against other tax liabilities. A company may claim the offset where: it is registered with the IR&D Board; its total R&D expenditure in the income year is between $20,000 and $1 million (subject to grouping rules); its turnover does not exceed $5 million (subject to grouping rules); and ownership of the company by exempt entities does not exceed 25 per cent. An exempt entity is one whose income is exempt from income tax and generally includes charitable, religious, scientific and public educational institutions. This requirement can be problematic for university spin-offs and similar companies.

Further information on the Tax Concession is available through the ATO and AusIndustry websites.

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Company news

In brief: Regular news from the biotech industry.

Ambrilia Biopharma and Merck sign licensing agreement

12 October – Ambrilia Biopharma Inc. and Merck & Co Inc. announced that Ambrilia has entered into an exclusive licensing agreement granting Merck the worldwide rights to Ambrilia's HIV/AIDS protease inhibitor (PI) program. This agreement includes exclusive worldwide rights to the lead compound PPL-100. Ambrilia has received an upfront licensing fee of US$17 million and is eligible for up to US$215 million upon successful development and commercialisation. Ambrilia also stands to receive significant additional milestone -based payments on the future development and commercialisations of each back-up compound or related compounds that fall within the scope of the Ambrilia PI program.

[Source: Company News]

Circadian receives grant for conotoxin development

11 October – The Australian Research Council (ARC) announced the award of a Linkage Grant to Circadian's wholly owned subsidiary, Polychip Pharmaceuticals Pty Ltd, based at Monash University. The research team is working to develop new stable peptides based on conotoxins for the treatment of pain. Peptides are increasingly being developed as therapeutic agents as they are easier and cheaper to manufacture than compounds such as antibodies and potentially retain good specificity for the target.

[Source: Company News]

FDA approves Zolinza for Lymphoma

7 October – Merck & Co Inc. announced today that the United States Food and Drug Administration (FDA) have approved ZolinzaTM once daily for cutaneous T-cell lymphoma. ZolinzaTM is a histone deacetylase (HDAC) inhibitor, allowing for the activation of genes that may help to slow or stop the growth of cancer cells. The approval was based on two open-label clinical studies – however the exact anticancer effect of ZolinzaTM has not been fully characterized.

[Source: Company News]

FluLavalTM a new option for treating flu

5 October – GlaxoSmithKline (GSK) announced that the United States Food and Drug Administration has approved FluLavalTM for the active immunisation of adults 18 years and older against influenza disease, caused by influenza virus types A and B. GSK added FluLavalTM to its portfolio of flu products when it acquired the Canadian vaccine manufacturer ID Biomedical Corporation in December 2005. FluLavalTM was approved after the FDA reviewed data that studied the drug in 1000 healthy adults in the US aged 18 to 64 and in 658 adults aged 50 years and older in Canada. The results of these trials showed FluLavalTM to be safe and to stimulate an immune response.

[Source: Company News]

GSK to acquire CNS

9 October – GlaxoSmithKline (GSK) and CNS Inc. announced the execution of a definitive agreement for GSK to acquire CNS for approximately US$566 million. CNS is a manufacturer of Breathe Right® nasal strips and FibreChoice® dietary fibre supplements. Breathe Right® strips and FibreChoice supplements are protected by patents in the United States and key markets worldwide.

[Source: Company News]

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Lucentis shows significant vision benefits

4 October – Two Phase III trials published in the New England Journal of Medicine demonstrate that Novartis' Lucentis® treatment maintains or improves vision in patients with wet age-related macular degeneration (AMD), the leading cause of blindness in people over 60. Lucentis® has been approved for treatment of wet AMD in Switzerland and the US, while submission for European Union approval was completed in March 2006. Results from the studies show that 90 per cent or more Lucentis-treated wet AMD patients maintained vision and up to 40 per cent of patients experienced improvement in vision as measured by visual acuity. Visual acuity refers to the ability of people to detect fine detail or small distances with the eye. AMD is a degenerative eye disease that affects the central part of the retina at the back of the eye that is responsible for vision necessary for everyday activities like reading, driving, telling time or identifying faces.

[Source: Company News]

Pfizer to buy PowderMed

9 October – Pfizer Inc announced that it has entered into an agreement to acquire PowderMed Ltd, a United Kingdom company specialising in the emerging science of DNA-based vaccines. PowderMed has developed a unique and proprietary technology to deliver DNA directly to the cells of the body's immune system and is advancing the pipeline of proprietary vaccine candidates for influenza and chronic viral diseases. PowderMed's proprietary needle free delivery system, Particle Mediated Epidermal Delivery (PMED), delivers DNA coated microscopic gold particles into the skin using pressurised helium gas. Vaccines delivered through the PMED technology has been shown to elicit both antibody and cell mediated immune responses, which could lead to improved efficacy compared to traditional vaccines. Financial terms of the deal were not disclosed.

[Source: Company News]

Sanofi-Aventis strengthens commitment to fight neglected tropical diseases

10 October – Sanofi-Aventis has strengthened its commitment with the World Health Organisation (WHO) to fight certain neglected tropical diseases by donating US$25 million over five years. This agreement is an extension of the first convention on sleeping sickness, whose objective is to expand the scope of action to fight other neglected tropical diseases such as leishmaniasis, Buruli ulcer and Chagas disease. Previous donations made it possible to distribute free of charge medicines used to fight sleeping sickness and facilitated screening of at-risk populations.

[Source: Company News]

UK approval for Phase 3 cystic fibrosis trial

6 October – ASX-listed Pharmaxis Ltd has received approval from the United Kingdom Medicines Healthcare Products Regulatory Agency (MHRA) to begin Phase 3 clinical trials to evaluate Bronchitol for the treatment of cystic fibrosis in the UK. Trials will be conducted across Europe and Australia and will be assessed for improvements in lung function, exacerbations and quality of life. Bronchitol is a patented, inhalable dry power formulation. The United States Food and Drug Agency and the European Medicines Agency have granted orphan drug status for Bronchitol for the treatment of cystic fibrosis. Pharmaxis is hopeful that the Phase 3 trial will provide sufficient data for the European marketing application to be lodged.

[Source: Company News]

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BioTip: Novelty and Grace Periods

A general tenet of patent law is that for an invention to be patentable it must, among other things, be novel in light of the prior art. Different thresholds of novelty operate in different jurisdictions. In many jurisdictions, the prior art base against which an invention is assessed for novelty includes any publication or use of the invention anywhere in the world before the filing date of the patent application. The patent laws of some jurisdictions provide a 'grace period' which preserves the novelty of an invention in that jurisdiction in spite of certain disclosures made by the inventors within a prescribed period prior to the filing of a patent application. The grace period in Australia, the United States, Canada and Brazil is 12 months, and in Japan it is six months. European patent law does not provide a grace period. To ensure broadest patent coverage, inventors should avoid disclosing their invention before filing a patent application, and professional advice should be sought before any reliance is placed on the operation of a grace period.

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Announcement

RNAi Discovery Awarded Nobel Prize

2 October 2006 – The Nobel Prize in Physiology or Medicine for 2006 was jointly awarded to Andrew Z Fire and Craig C Mello for their discovery of 'RNA interference – gene silencing by double-stranded RNA'. This discovery relates to a fundamental mechanism for controlling the flow of genetic information. In 1998, the American scientists published their discovery of a mechanism that can degrade mRNA from a specific gene and their respective employees The Carnegie Institution of Washington and the University of Massachusetts sought patent protection for this invention. This mechanism, RNA interference (RNAi), is activated when RNA molecules occur as double-stranded pairs in the cell. Double-stranded RNA activates biochemical machinery which degrades those mRNA molecules that carry a genetic sequence identical to that of the double-stranded RNA. When such mRNA molecules disappear, the corresponding gene is silenced and no protein of the gene is made. RNA interference occurs in plants, animals, and humans. It is of great importance for the regulation of gene expression, participates in defence against viral infections, and keeps jumping genes under control. RNA interference is already being widely used in basic science as a method to study the function of genes and it may lead to novel therapies in the future.

Allens Arthur Robinson Patent & Trade Marks Attorneys assisted in the protection of this pioneering invention in Australia and successfully defended opposition proceedings by Benitec Australia Pty Ltd against the grant of the patent.

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Upcoming Allens event

Your invitation to Allens drinks during AusBiotech 2006

Are you attending AusBiotech 2006 in Sydney during November?

If so, why not take time out from the conference to come and meet Allens Biotech team on Monday 20th November at 6.00 pm.

We invite you to join us for drinks at Allens Sydney offices while enjoying spectacular views of Sydney Harbour.

For your invitation, all the details about our function and the RSVP date, see www.aar.com.au/pubs/bt/11oct06/invite.pdf (214KB PDF)

We hope to see you in Sydney!

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Events

Information on the latest conferences

See conferences in: October | November

October

Australasian Clinical Research: Collaborating to do it Right
Monday 23 – Wednesday 25 October
Mercure Hotel
Brisbane, Australia

November

BioBusiness Summit 2006
Thursday 9 – Friday 10 November
New Delhi, India
http://ficci.com

NanoBiotech World Congress
Thursday 16 – Friday 17 November
Boston, United States

NEW – AusBiotech 2006: Bridging Innovation and Investment
Sunday 19 – Wednesday 22 November
Sydney Convention & Exhibition Centre, NSW

NEW – Bioinformatics Australia 2006 'Connecting Australian Bioinformatics'
Tuesday 21 – Wednesday 22 November
Sydney Convention & Exhibition Centre, NSW

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For further information, please contact:

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