Australia Set For New Patent Box Tax Incentive Scheme

A new ‘patent box’ scheme is set to roll out in Australia from 1 July 2022. Initially this tax incentive for patent owners will be limited to the medical and biotechnology industries, with potential scope for the clean energy sector in the future.

It is hoped that by encouraging companies to commercialise and manufacture patented technology locally, the scheme will stimulate innovation in these sectors, and increase the retention of leading-edge R&D activities in Australia. Another benefit seen in European countries that have existing patent box systems in place, is its ability to not only attract companies to invest in Australia, but also to retain that investment in the long term.

Currently in Australia, taxpayers fund a multibillion-dollar R&D tax incentive scheme that permits companies to claim an offset on some R&D expenditure that exceeds the corporate tax rate. The issue with this existing scheme is that it doesn’t require that the eligible R&D result in a commercial outcome. Patent box addresses this issue by delivering the financial benefit only if and when profits are earned from the commercialisation of the patent.

Under the scheme, income derived from eligible Australian developed medical and biotech patents will be taxed at 17%, a rate that is around half that which is currently applicable to large companies in Australia. For SMEs this means a reduction of 8% on their standard corporate tax rate, and for large businesses the decrease will be 13%.

Eligibility

Patent box will apply only to Australian medical and biotechnology patents applied for after the 11 May 2021 budget announcement. Any applications made prior to this date will be ineligible. Only inventions claimed in standard patents will be eligible for patent box, while those claimed in innovations patents will not. Under recent changes, innovation patents are no longer accepted by IP Australia, the final day for filing being 25 August 2021. However, three avenues still remain for filing innovation patents after this date – as a ‘qualifying application’ (a divisional of a standard patent application with a filing date on or before 25 August 2021), as a conversion from a qualifying application, or as a divisional from an innovation patent

Further, to be eligible, income must be derived directly from the patent. While at present the boundaries have not been precisely defined, broadly it means that income must be directly attributable to the commercialisation of the patented technology. This means that income resulting from other activities such as manufacturing, branding or know-how are likely to be ineligible, and will not attract the concessional rate.

Another requirement is that a share of the R&D associated with the product must have occurred in Australia. The concessional rate will then apply to eligible company profits in proportion with the percentage of associated R&D undertaken by the company that occurred onshore.

Criticisms

While patent box has a lot of support from the innovation sector, there have been some criticisms that the scheme does not go far enough.

First, Australia’s patent box is strictly industry limited. The medical and biotechnology industries are the only winners at this stage, while other key sectors have, for now, been passed over. This could impact other important sectors, particularly IT, an industry that has in recent years produced several innovative start-ups that are achieving success despite extremely challenging terrain. While at face value the government saves by limiting the scheme, the flow on effect could be damage to the Australian economy at large, if key players in the Australian IT and other sectors decide to relocate R&D activities offshore. Another criticism is that failing to extend application of the scheme more broadly is a missed opportunity to stimulate Australia’s start-up ecosystem, which in turn has the capacity to negatively impact innovation and the economy more generally.

Another criticism is that at 17%, the tax rate on eligible income is still comparatively high. The tax rate in European countries is lower across the board, ranging from 5% in the Netherlands to 15% in France. However, given Australia’s relatively high corporate tax rate, the discount is nevertheless significant despite the discount rate being higher than other countries.

Key questions

Although the scheme is limited in some aspects, and at this stage applies only to the medical and biotech industries, it has met with praise from business leaders throughout the innovation sector. However, while the Treasurer has outlined the broad application and operation of patent box, exact details are yet to be announced, so important questions still remain for many potentially eligible companies.

It is clear that the scheme applies to Australian companies operating onshore. However, the way in which patent box applies, if at all, is uncertain in relation to otherwise eligible Australian patents held by companies located in other jurisdictions.

It is also not known whether or not the scheme will apply to income earned by Australian based companies, that is derived from international patents that are related to eligible Australian patents.

If you are keen to find out more about patent box, wish to discuss your eligibility, or if you would like to take part in the government consultation process once the scheme is open, contact our IP experts today.

Daniel Abraham – Principal, Trade Marks & Designs – email now

Michelle Don-Paul – Principal, Patents – email now

Article by Daniel Abraham | Registered Attorney & Principal at Platform®IP

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