Eligibility proposed for Australia’s patent box regime for Australian medical and biotechnology industries is now clear, following the introduction of the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 to amend taxation legislation to Parliament.
As discussed in our earlier articles Federal budget 2021: patent box regime announced for Australian medical and biotechnology patents and Australia’s new patent box: unboxed, the patent box regime was first announced in the 2021-2022 Federal Budget. It was intended to provide a tax break: income derived from eligible patents was proposed to be taxed at a concessional corporate tax rate of 17%, rather than the standard corporate tax rate of 30%, or 25% for small and medium enterprises (SMEs). However, the specific workings of the regime were not settled at that time.
The Explanatory Memorandum to the Bill notes that the Government’s key objectives of the patent box regime are to encourage companies to base their medical and biotechnology research and development (R&D) operations in Australia and to commercialise these patented inventions in Australia.
The proposed legislation is complex, and we do not propose to cover all of the details in this article. The key points are summarized below.
Medical and biotechnology industry
The patent box is only to apply to entities holding patents “linked” to therapeutic goods listed on the Australian Register of Therapeutic Goods (ARTG). Accordingly, this requirement confines the patent box regime to the medical and biotechnology industry.
What about cleantech?
The government had previously indicated that it was consulting on whether the patent box should be expanded to include low emissions technologies (i.e., “cleantech”). However, the Explanatory Memorandum indicates that the Government has not made any policy decision on the inclusion of the cleantech industry at this time.
In a significant change following a consultation period with stakeholders, standard Australian patents, United States utility patents and European patents granted or issued after 11 May 2021 that are “linked” to therapeutic goods listed on the ARTG will be eligible.
The Explanatory Memorandum asserts that 97% of medical and biotech patents filed by Australian entities are filed in at least one of these three jurisdictions. The patent box regime is accordingly slated as capturing almost all Australian medical or biotechnological inventions in line with the policy intent.
Further, by changing eligibility to include patents granted after the date of the 2021-2022 Federal Budget announcement, rather than patents filed after that date, the time frame for receiving benefit has potentially been brought forward by several years.
Patents are no longer eligible once they are revoked or ceased.
Linked to a therapeutic good
For a patent to be considered “linked” to a therapeutic good listed on the ARTG, the good must contain or consist of a pharmaceutical substance or incorporate an invention disclosed and claimed in that patent. The patented invention or pharmaceutical substance does not have to encompass the entire therapeutic good and instead can be a singular component of the good.
Eligible entities are defined in the same manner as R&D entities under the R&D tax incentive provisions, that is, corporate taxpayers who are either Australian residents or who carry on business at or through a permanent establishment in Australia under a double taxation arrangement. These entities are already required to keep records demonstrating their R&D expenditure and R&D activities, which are to be used for the purposes of applying the patent box regime as explained below. Tax consolidated groups and multiple entry consolidated (MEC) groups are to be treated as a single entity.
Holding the patent
The entity must “hold” (i.e. own) rights over an eligible patent, and for the purposes of the Patent Box, the patent owner is the patentee. An exclusive licensee of a patent does not satisfy this definition.
Further, if a taxpayer acquires the patent from an “owner” rather than developing the patent itself, the patent may still be eligible for the patent box, but only to the extent of improvements to the patented invention that the taxpayer made after acquiring the patent.
Accordingly, the patent box will provide the most significant advantage where the technology underlying the patent is developed and commercialised by the original patentee.
Patent box election
The taxpayer must elect for the patent box regime to apply, and it then applies to all of the taxpayer’s eligible patents on a prospective basis in respect of income years starting on or after 1 July 2022.
Patent box income stream
The Explanatory Memorandum comments that the patent box regime has high ongoing compliance costs. The taxpayer is required to identify each patent box income stream, which is the ordinary or statutory income derived from exploiting an eligible patent. This includes the sale of linked therapeutic goods; royalties, licence fees or milestone payments; a balancing adjustment event derived from the sale or assignment of the eligible patents; and damages or compensation payable to the taxpayer in respect of the eligible patents.
Determining apportionment of patent box income stream that relates to the patent
Only the proportion of a patent box income stream that is attributable to eligible patents is subject to the concessional 17% tax rate in accordance with Organisation for Economic Co-operation and Development (OECD) guidelines. For example, income or value relating to marketing, branding or hardware of a device that is not directly attributable to the underlying patent is excluded.
Determining R&D fraction
The taxpayer only benefits under the patent box regime to the extent that the taxpayer conducted the R&D for the technology underlying the patent in Australia using the so-called “nexus” approach. The Explanatory Memorandum indicates that where a taxpayer undertook all of the R&D themselves in Australia to develop the patented technology, the R&D fraction is 100%.
Patent box income rules
The full calculations and explanations associated with determining the proportion of the patent box income stream that is subject to the concessional tax treatment can be found in the Explanatory Memorandum. Briefly, however, the proportion is determined by:
- identifying all eligible patents that underlie a patent box income stream;
- determining a reasonable apportionment of the income that is attributable to those patents; and
- reducing that amount by applying the R&D fraction.
A portion of this remaining amount is then made non-assessable and non-exempt income to achieve an effective tax rate of 17%.
While it is promising that the bill is now before the House of Representatives, it needs to pass through both houses of parliament and may be subject to debate and further amendments. With an upcoming federal election, it may still be some time before the bill comes into law. We will keep you updated on its progress.
In short, the patent box as now proposed will provide a concessional corporate tax rate of 17% to a portion of income received from the exploitation of Australian, United States or European patents granted after 11 May 2021 that are linked to therapeutic goods listed on the ARTG, where the income is attributable to the taxpayer’s development of the technology underlying that patent in Australia.