The COVID-19 pandemic prompted many Australian companies to “pivot” their operations to develop and manufacture urgently-needed medical equipment and supplies. The pandemic also highlighted Australia’s medical and biotech industries, which produce high-calibre research and development but have comparatively low commercialisation and manufacturing capability.
The Government has used the 2021-22 Federal Budget as an opportunity to support businesses to focus on growth and innovation to support Australia’s post-pandemic recovery.
In addition to the $1.2 billion investment in Australia’s Digital Economic Strategy, the Government is introducing a “patent box” tax regime to encourage investment in Australian medical and biotech technologies.
A patent box tax regime allows companies to pay a lower rate of corporate tax for income generated through the commercialisation of patented intellectual property (IP) assets. In contrast with research and development (R&D) tax credits, which target the front end of the innovation lifecycle, a patent box regime targets the last stage of the innovation lifecycle, namely commercialisation. Tax relief can be given either as a reduced tax rate or a tax break for a portion of the patent box income.
The Government hopes the introduction of a “patent box” tax regime will encourage innovation in Australia by taxing corporate income derived from certain patents at a concessional effective corporate tax rate of 17 per cent (compared to the current headline corporate tax rate of 30 per cent for large businesses and 25 per cent for small to medium companies from 1 July 2021).
The patent box concession is proposed to apply from income years starting on or after 1 July 2022, but only in respect of granted patents which were applied for after 11 May 2021 (the date of the Budget announcement).
The patent box will, at least initially, apply to income derived from Australian medical and biotechnology patents only. The Government will consult on whether a patent box would be an effective way of supporting innovation in the clean energy sector.
By providing a lower tax rate for profits generated from Australian owned and developed patents, the patent box regime could support the transformation of the Australian economy by boosting continuing investment in innovation opportunities within Australia.
The “patent box” or “innovation box” is currently used by several countries including the UK, France, Spain and the Netherlands to encourage the development and ownership of certain intellectual property in their home jurisdiction.
The introduction of a “patent box” tax regime was initially considered by the Federal Government in 2015, however was rejected due to the potential reduction in short term tax revenues.
The Government has also asked the Board of taxation to review the administration of the R&D Tax Incentive before the end of 2021. This could mean a few things, such as:
- Potentially forming a single government entity that administers the R&D Tax Incentive program instead of separating the responsibility between AusIndustry and the ATO
- Reviewing how effectively the R&D Tax Incentive is in providing cash refunds to the SMEs
- Increasing the uptake in R&D Tax Incentive claimants, as 70% of companies currently eligible to claim the R&D Tax Incentive do not.
While the details remain to be seen, a well-designed patent box regime can incentivise both domestic and foreign innovators to set up or expand their operations by providing a lower tax rate on income derived from their intellectual property in Australia.
To discuss how your business can improve innovation, contact Alan Baghdasarayan on 1300 656 141 or email firstname.lastname@example.org.