Australia is a leading destination for biotech innovation thanks to Australia’s strong government commitment, support and investment into the life sciences sector providing biotech and pharma companies with world class researchers, clinicians and knowledge.
Benefits of conducting R&D and clinical trials in Australia
A key benefit of coming to Australia to conduct research and clinical trials is the generous R&D Tax Incentive (R&DTI) administered by the Australian Government, which can provide a refundable tax incentive up to 43.5% (and in rarer cases 48.5%) of eligible R&D expenditure for companies with an aggregated turnover below $20 million. The incentive can then be put back into funding further clinical trials and research in Australia, resulting in a cycle which can significantly increase the scope of the trials in a way not otherwise possible in many other jurisdictions. In addition, the Australian Government recently announced in the 2021-2022 Federal Budget that it plans to introduce a new Patent Box scheme to encourage commercialisation of Australian IP which some larger biotech and pharma companies may take advantage of.
Conducting R&D and clinical trials within Australia also provides businesses with the following benefits:
- Access to diverse and skilled human capital, including some of the world’s best researchers, health professionals and top graduates from high quality universities.
- Access to world class research companies and facilities.
- Strong clinical trial capability as Australia has world class clinical trial sites and CROs recognised by Good Laboratory Practice (GLP) guidelines.
- Diverse participant recruitment pool (population of nearly 25 million).
- An efficient ethics and regulatory framework including a Clinical Trial Notification (CTN) scheme that enables rapid entry (5-7 weeks) to first-in-human and other clinical studies.
- Nationally regulated standards that are internationally recognised by both the Food and Drug Administration (FDA) and European Medicines Agency (EMA). Therefore clinical trials conducted in Australia will not require separate US FDA Investigational New Drug (IND) application approval.
- Cost efficiencies, as it is generally more cost effective to undertake R&D in Australia than US/Europe because of the incentives available, favourable exchange rates and cost of labour.
- The ability for trials that are dependent on seasonal factors to continue in Australia as it is located in the Southern Hemisphere.
- Ease of doing business in a politically stable, English speaking nation.
- Access to reduced income tax rates (17%) from 1 July 2022 for commercialisation of Australian held IP (see ‘Commercialisation of Australian IP (Patent Box)’ below)
Setting up and operating a business in Australia to access these benefits naturally comes with having to navigate various regulatory requirements. This article provides a high-level summary of some of the accounting and tax considerations inbound companies should be aware of before committing to setting up an Australian presence.
Subsidiary company vs branch
Whilst it is possible to do business in Australia as a non-Australian entity, a subsidiary company incorporated in Australia is the most popular legal structure used by companies wishing to operate in Australia.
The Australian subsidiary company must have at least one Australian resident director and an Australian resident “public officer” for dealings with the Australian Taxation Office. These two roles can be held by the same person.
Registrations and taxes
Businesses will generally require an Australian Business Number and Tax File Number to operate in Australia.
The Goods & Services Tax is Australia’s sales-based tax (i.e. VAT) and is generally levied at 10% on most goods and services. Registration is compulsory where turnover is expected to exceed AUD $75,000 in a 12-month period.
Depending on the “aggregated turnover” (i.e. turnover of the subsidiary and certain related group entities) the Australian company’s tax rate will be between 25% – 30%.
The standard year-end in Australia is 30 June, however businesses can apply to have an alternative year-end to match group reporting dates, such as 31 December or 31 March.
Structuring of IP
There are various tax and commercial considerations in deciding which entity should hold the IP to be generated from the Australian activities and there is no one-size-fits-all approach. As IP is essentially mobile, companies should at the foremost take into consideration commercial goals when making decisions on the location of their IP.
Any IP generated from the Australian R&D or clinical trials can be owned either by the Australian subsidiary company (Australian owned R&D) or the foreign parent company (foreign owned R&D).
Australian companies that have rights to exploit the IP they develop, even if that IP is held by its parent, may be able to claim the R&DTI if it is undertaking the R&D activities on behalf of itself and not for any other entity.
Australian companies that do not hold the IP or that do not have rights to exploit the IP from the Australian R&D may still be eligible for the Australian R&DTI, but additional measures are required which may considerably impact the benefits available.
Research & Development Tax Incentive (“R&DTI”)
The R&DTI is a key incentive from the Australian Government and is available to companies conducting eligible experimental research and development activities that may benefit the wider Australian economy.
Generally, toxicology studies, analytical studies, preclinical and clinical trials, drug/medical device development and manufacture (for use in trials) undertaken in Australia may be qualifying ‘Core’ or ‘Supporting’ activities for the R&DTI.
Up to 30 June 2021, companies with an ‘aggregated turnover’ of less than AUD $20 million may receive a 43.5% refundable tax offset (i.e. the offset is applied to any tax liability and any excess is refunded to the company in cash).
Key considerations for structuring to access the R&D Tax Incentive include:
- The commercial goals of the company and whether claiming under the ‘foreign owned’ or ‘Australian owned’ R&D rules is appropriate (IP ownership).
- How the Australian entity will be funded (effect of debt vs equity funding).
- The effect of transfer pricing (e.g. mark-ups that could be required for services between the Australian presence and overseas parent) on the expected benefits and whether any specific transfer pricing documentation is required.
- Contracts, agreements, and documentation required between the Australian presence and its parent and between the Australian presence and its service suppliers aligns with the commercial intentions of the company.
Changes to the R&D Tax Incentive were implemented from 1 July 2021, which should not significantly affect smaller biotech and pharma companies but may affect larger companies with aggregated turnovers above $20 million. These changes include:
- For companies with an aggregated turnover below $20 million: the refundable R&D tax offset is now 18.5 percentage points (%) above the claimant’s company tax rate (being either 25% or 30% for the 2022 financial year). The refundable tax offset rate accordingly remains unchanged at 43.5% for most claimants or has increased to 48.5% in rarer circumstances for companies that access the 30% corporate tax rate.
- For companies with an aggregated turnover of $20 million or more: a two-tiered premium has been designed rewarding companies that commit a greater portion of their overall business spend on R&D activities. The premium ties the rates of the non-refundable R&D tax offset to the incremental intensity of the R&D expenditure as a proportion of total expenditure for the year. The rates are equal to the claimant’s company tax rate plus:
- 8.5% for R&D expenditure from 0-2% R&D intensity (either 33.5% or 38.5% depending on the company’s aggregated turnover); and
- 16.5% points for R&D expenditure above 2% R&D intensity (either 41.5% or 46.5% depending on the company’s aggregated turnover).
- Increase of the R&D expenditure threshold from $100 million to $150 million per annum.
- Changes to how the clawback, balancing adjustments and feedstock adjustments are calculated.
- Public disclosure of some aspects of the company’s R&D submission including company name and overall R&D spend.
Expatriates travelling to Australia for more than 3 months for business purposes must obtain proper employment authorisation.
Companies operating in Australia can sponsor individuals on the subclass 457 visa, which allows a stay in Australia for up to 4 years.
Superannuation (i.e. pension) is compulsory for all employees. The applicable rate is 10% of their remuneration from 1 July 2021, increasing incrementally each year to 12% in July 2025. Superannuation is payable by the company.
Payroll tax is payable on a State-by-State basis and, once the Australian payroll exceeds the relevant threshold, is approximately 5% of total employee remuneration.
A Workers Compensation Insurance policy is also required in each State that employees work in.
Commercialisation of Australian IP (Patent Box)
The Federal Government announced that Australia will be offering medical and biotechnology companies a tax concession in the form of a limited ‘patent box’ for income years starting on or after 1 July 2022. This corporate tax regime, commonly used by European countries and China, will incentivise biotech companies that carry out ‘Australian owned’ R&D which leads to Australian patents by taxing profits from these patents at only 17% (as opposed to 30% for large businesses and 25% for most small-to-medium enterprises). The patent box will offer a competitive tax rate for profits generated from Australian-owned and developed patents that have been applied for after the Federal Budget announcement made at 7.30pm on Tuesday, 11 May 2021.
The detailed design of the scheme is yet to be determined, with Government still to consult industry. However, if it is modelled after European examples then entities should expect to self-assess by calculating qualifying profit from eligible patents and deducting routine profit or any profits derived from branding or marketing attributes.
It’s likely to provide the greatest benefit to larger corporations and multinationals (i.e. companies in a tax payable position) because the economies of scale make the tax savings worthwhile given the administrative costs involved. However, the global impact of tax for multinationals will still needed to be managed if they opt to make use of this scheme to ensure they are optimising their tax base.
Subsidiaries of foreign companies will require an audit of their financial statements unless they apply for a specific exemption within a specified timeframe.
Despite the above, an audit of the Australian company’s financial statements will be required (and no exemption available) if the company meets any two of the following three criteria:
- Consolidated gross operating revenue of more than AUD $50 million a year;
- Consolidated gross assets of more than AUD $25 million at year end; and/or
- More than 100 employees at year end.
Australia has extensive transfer pricing and tax anti-avoidance measures, so businesses are encouraged to maintain complying transfer pricing documentation to evidence that dealings with international related parties are on an arms-length basis.
Businesses should consider the mix of debt and equity used to fund Australian operations, as Australia’s “thin capitalisation” provisions can limit the amount of interest expenses claimed as a tax deduction.
Payments of interest, royalties and dividends from untaxed profits from the Australian company will be subject to withholding tax. The rate of withholding tax will be set in accordance with any double tax agreement that Australia may have with the country of the parent company.
Large multinationals (with global annual aggregated turnover of more than AUD $1 billion) face additional reporting obligations and integrity measures including Country by Country reporting, Multinational Anti-Avoidance Law, Diverted Profits Tax and substantial administrative penalties for failing to meet tax obligations on time.
Looking to expand to Australia?
Biotech or pharma companies looking to expand to Australia should obtain timely tax advice to ensure their operations are structured tax-effectively and their extensive local tax obligations are met. Please feel free to contact us if you wish to discuss how William Buck can be the landing pad for your venture.