Navigating the latest developments 4 min read
The Federal Government has taken a major step towards the implementation of Australia's first patent box regime, introducing the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 to parliament. We discuss the latest developments below.
- As we previously reported, on 11 May 2021 the Federal Government announced its intention to introduce Australia's first patent box. Following industry consultation the government has since introduced a Bill to parliament to give effect to the patent box regime.
- In line with the government's initial announcement, the proposed patent box regime is intended to incentivise investment and innovation in Australian medical and biotechnology industries. The incentive is an effective tax rate of 17% for corporate taxpayers in respect of income derived from the exploitation of qualifying medical or biotechnology patents. One key change to the regime since it was first announced is that the relevant patent must be linked to a therapeutic good included on the Australian Register of Therapeutic Goods (ARTG).
- The income derived from the exploitation of such patents may include, without limitation, revenue derived from selling the therapeutic good to which the patent relates, royalties for granting rights to exploit the patent, gains on the sale or assignment of the patent, and damages or compensation payable in respect of the patent.
- The portion of income that is attributable to such patents must be determined so as best to achieve consistency with the OECD Transfer Pricing Guidelines. This portion is further reduced to the extent the R&D activities connected with the patents are performed overseas, as well as for the cost of any acquired intellectual property.
In-house counsel; biotech and pharma executives; accountants.
Under the proposed regime:
- a patent qualifies for the patent box regime if it's an Australian standard patent or, in a further concession to what was initially proposed, a United States Utility Patent or a European Patent;
- the patent box applies to patents granted or issued after 11 May 2021 in respect of income years starting on or after 1 July 2022, and so may apply to patents filed prior to the Budget night announcement. This is in contrast to the regime proposed in the government's Discussion Paper, under which only patents having a priority date after 11 May 2021 were to be eligible;
- an exclusive licensee will not be eligible for the tax concessions as they hold rights to the patent under licence, rather than holding the patent itself; and
- in order to be eligible, a patent must also be linked to a therapeutic good included on the Australian Register of Therapeutic Goods, which includes medicines, medical devices and other goods used for therapeutic purposes, such as some disinfectants and blood products. However, as noted in the Explanatory Memorandum, the patented invention or substance does not need to account for the entire therapeutic good in order to be eligible. It is sufficient that the invention or substance is a 'singular component' of the therapeutic good.
Accessing the patent box
- Corporates wishing to take advantage of the concessional tax rate must elect for the regime to apply at the latest when lodging its income tax return for the relevant fiscal year.
- The election is on a prospective basis and is irrevocable. That is, if the election is not made in time the taxpayer will not be able to access the patent box for that income year.
- In instances where income is derived from an eligible patent in an income year prior to the remaining conditions of the patent box scheme being met, the income tax return can be amended in order to claim the tax concession in respect of that income, provided the taxpayer has elected to access the patent box.
The nexus requirement
To ensure the Australian patent box complies with the OECD's BEPS Action 5 Report on Harmful Tax Practices, there must be a sufficient nexus between the R&D activities undertaken in Australia and the concession. The portion of income eligible to be included in the patent box will, therefore, be reduced to the extent the taxpayer does not perform the R&D itself, but either outsources it to a related party overseas or acquires intellectual property developed by another party. The eligible portion is connected with existing concepts contained in Division 355 of the Income Tax Assessment Act 1997 (Cth), namely deductions for which the taxpayer is already entitled to a tax offset under:
- Section 355-205 (R&D expenditure);
- Section 355-305 (decline in value of R&D assets);
- Section 355-480 (earlier year associate R&D expenditure); or
- Section 355-520 (decline in value of R&D partnership assets).
Once the eligible portion is determined, a portion of this income would be treated as non-assessable non-exempt (NANE) income to the extent required to achieve an effective tax rate (ETR) of 17%.
The patent box regime therefore applies in the following manner:
- Identify all patents that underlie the patent box income stream;
- Determine a reasonable apportionment of this patent box income stream that is attributable to those patents;
- Multiply this amount by the R&D fraction, ie, the extent to which this is attributable to eligible R&D activity performed in Australia multiplied by 1.3 (capped at 1); and
- Multiply this amount by the patent box NANE fraction, ie, the amount required to achieve the 17% ETR.
In Australia, the timelines for securing a granted patent and/or listing a therapeutic good listed on the ARTG can be extensive and corporates may therefore not be in a position to receive the concessional tax rates as soon as they become available.
Corporate taxpayers should also carefully consider the potentially substantial compliance costs associated with accessing the patent box regime. This includes, for example, the cost to taxpayers of ensuring that any claim for the patent box concession is defensible and that, in accessing the regime, they do not contravene Australia's general anti-avoidance provisions.
- Stay tuned for updates on the progress of the Bill and carefully consider whether your business may be eligible for concessional tax treatment. You must elect for the regime to apply or risk losing your ability to apply.
- Businesses looking to access the patent box in the future should also consider the potential compliance burden as part of their overall strategy.
- For further information about the Patent Box seek advice from our experts.