The Research and Development Tax Incentive (RDTI) scheme is the Australian Government’s flagship support package for businesses undertaking research and developmental activities in Australia. However, it’s no secret that once a product passes the R&D phase and is ready to be commercialised, Australian innovators often move their business overseas rather than maintaining their base of operations here.
To combat this, the Australian Government recently introduced a Bill before Parliament containing the provisions for its own version of the ‘patent box’. The key objective of the patent box regime is to encourage medical and biotechnology companies to innovate and commercialise their patented inventions here in Australia by providing those companies with an effective tax rate of 17% on eligible patent income.
Should the Bill be passed in its current form, the 17% concessional tax rate is proposed to apply from 1 July 2022.
To qualify for the lower tax rate, businesses must satisfy several key criteria:
- They are a medical or biotechnology company.
- They have claimed the RDTI in respect of one or more of their novel products.
- They hold the rights to one of the following types of qualifying patents in respect of that novel product:
- Australian standard patent granted by the Commissioner of Patents
- United States Utility Patent issued by the United States Patent and Trademark Office
- European patent granted under the European Patents Convention
- The patent is linked to a good registered in the Australian Register of Therapeutic Goods
- The patent was granted or issued after 11 May 2021
Patent box income
Where these conditions have been satisfied, the next step is to identify the ‘patent box income’ attributable to the exploitation of the patent. This can include:
- Sales of the therapeutic good
- Royalties or licence fees from granting rights to use the patent
- Proceeds from sale or assignment of the patent
- Damages or compensation arising under the patent
Importantly, not all income will attract the 17% concessional tax rate – only income arising specifically from the exploitation of the patent will be eligible. For example, sales of therapeutic goods attributable to the company’s marketing or manufacturing processes will not be eligible, so a reasonable apportionment will be required.
Further, the medical or biotech company must also have incurred R&D expenditure in Australia. Even though the RDTI allows expenditure from certain types of overseas R&D activities to be eligible for the incentive, for the purposes of the patent box regime, that expenditure will not be eligible. Accordingly, businesses that are conducting their R&D activities outside of Australia will not benefit from the concessional tax rate.
Did we get it right?
As with many other Government support packages for technology businesses and startups, Australia is lagging behind other developed nations. Ireland was the first country to introduce the patent box back in 1973, almost fifty years ago. The UK introduced its patent box ten years ago in 2012 and today over 20 countries have their own version of the patent box, 18 of which are OECD member states.
Australia also remains one of the most heavily taxed countries in the world. Our corporate tax rate (which was only recently reduced from 30% to 25% for most companies), remains higher than the OECD average of 22%, while the 17% proposed patent box tax rate is still considerably higher than the 8% OECD average.
Besides lowering the effective tax rate further, what we want to see from the Government in relation to the patent box regime in the future is:
- Expand the patent box to industries other than medical or biotechnology, such as the low emissions or renewables sectors.
- Include the sale of goods from manufacturing processes as eligible patent income – manufacturing processes are often kept confidential and so a patent is not filed.
- Broaden the types of IP that can qualify for the patent box, not just patents e.g., copyrighted software or trade secrets.
- Include patents filed in other foreign jurisdictions outside of Europe and the US, such as Japan, South Korea and China.
- Expand the definition of eligible patent income to include income from overseas R&D expenditure that is subject to a positive Advance/Overseas Finding.
Although there is still a long way to go, the patent box is a step in the right direction and we welcome further Government measures that support Australian businesses to maintain their international competitiveness. Reach out if you would like to know more about the patent box or to discuss how we can help you maximise the amount of your R&D tax offset.