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February 11, 2022
Australia introduces bill on 17% patent box for medical and biotech technologies
The Australian Government has introduced a Bill into Parliament proposing to introduce an optional 17% patent box regime (patent box) targeting medical and biotechnology patents, as announced in the 2021-22 Federal Budget (Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 - Bill here) to apply for income years commencing on or after 1 July 2022.
This Bill follows a July 2021 Discussion Paper, with no further public consultation on any exposure draft Bill and only limited confidential consultation on an early draft of the law. It appears that many improvements called for in submissions have not been incorporated in the Bill. In particular, the proposals remain limited to eligible income from a medical or biotechnology patent only and calls to expand the patent box to Fintech, life sciences outside the medical space and low emissions technologies were not incorporated.
The patent box applies to patents granted or issued after 11 May 2021. This is a positive development, as Treasury’s Discussion Paper previously proposed that the patent box would only apply to patents applied for after 11 May 2021.
A high level overview of key elements of the complex proposals in the Bill is set out below.
Design and eligible patent box income
The patent box offers a concessional effective tax rate of 17% on net eligible patent income by allowing a portion of the taxpayer’s ordinary and statutory income derived that would otherwise be included in its assessable income to be made non-assessable, non-exempt income (NANE).
Taxpayers will need to:
A portion of that amount is then made NANE income to achieve an effective tax rate of 17%
Where income is derived from a patent box income stream, only the proportion of that income that is attributable to the taxpayer’s development of that patent is subject to the concessional tax treatment. Income streams include sales or rental income, royalties or license fees, balancing adjustments derived from proceeds of sale that are received, or damages and compensation derived for an infringement of the taxpayer’s patent.
The R&D fraction formula (which is cumulative, including all R&D expenditure from previous years) ensures a link between the benefits of the patent box and the extent of underlying R&D which generated the intellectual property (IP) that was undertaken by the taxpayer; the higher the fraction, the more patent box income that may be taxed concessionally. The R&D fraction (capped at 1) is:
The numerator “A” in the R&D fraction captures only the R&D expenditure incurred by the taxpayer for R&D activities undertaken in Australia.
For “C” an integrity rule can apply to deem the cost of an asset held by the R&D entity to be its market value if at the asset acquisition time, the R&D entity was not dealing at arm’s length and the asset’s cost was less than its market value.
The amount of each patent box income stream remaining after applying the R&D fraction is multiplied by the patent box NANE fraction (1 - 17%/R&D entity’s corporate tax rate).
The effect of making a portion of the patent box NANE is that the taxpayer will no longer be entitled to claim deductions to the extent that their loss or outgoings are incurred in gaining or producing that NANE income, so the 17% is applied on “net income. This approach introduces further complexity and will require careful analysis of expenses and the establishment of an acceptable apportionment approach. Follow on consequences from deduction denials must also be considered for example where there is a mix of profitable and not yet profitable products. Taxpayers may consider opting into patent box only once losses have been utilized and their patent has been commercialized.
To access the patent box concessional tax treatment, the taxpayer must meet the eligibility criteria:
The regime is optional for corporate taxpayers, and taxpayers must elect for the patent box to apply using an approved form by the time their income tax return is filed for the year of entry. This election is irrevocable and applies to all of a taxpayer’s medical and biotechnology patents on a prospective basis. Careful consideration of the benefits of the regime and other impacts will therefore be required before opting in.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Sydney
Ernst & Young LLP (United States), Australian Tax Desk, New York
Ernst & Young LLP (United Kingdom), Australian Tax Desk, London