In a bid to incentivise Australian innovation in the medical and biotech industries, the Federal Treasurer has announced in this year’s Budget that Australia will adopt a ‘patent box’ system, in line with many other jurisdictions.
The announced incentive will be a reduced corporate tax rate of 17% for income generated from Australian medical and biotech patents. This is a reduction from the general corporate tax rate of 30% and the rate of 25% for base rate entities. Presumably, this lower rate will apply to royalties and other income generated from the use of patents, as well as profits realised on their ultimate sale.
Eligibility will be limited to income from granted patents, which were applied for after the Budget announcement on 11 May 2021.
Austrade states the patent box’s aim is to encourage businesses to undertake their R&D in Australia, keep patents here and manufacture patented technologies onshore.
However, observations from some other jurisdictions suggest the system may simply incentivise foreign companies to register their overseas developed medical and biotech patents in Australia, without actually undertaking the research and development and manufacturing work in Australia. Time will tell.
While we will need to see the legislation to know what the proposed incentive means for participants, here are some initial thoughts and observations:
- The incentive will be limited to corporate tax entities; so most trusts and partnerships will be excluded. However, given profits made on the sale of patents are taxed as income, rather than concessionally taxed capital gains, this is unlikely to be an impediment.
- Will the lower tax rate apply where the patent box entity is a member of a tax consolidated group and, if so, how will this work mechanically with differing tax rates being applied to the income of the head company of the consolidated group?
- Will losses generated by a patent box entity in a consolidated group be quarantined so as to be effectively capped at the 17% rate or will they be deducted by the head company at the 30% rate?
- While the lower corporate tax rate provides an immediate incentive to the patent box entity, it will presumably result in lower franking credits being available to pay franked dividends to members.