Under the federal budget handed down on Tuesday night, the government will launch a patent box scheme targeted at the medical and biotechnology sector. The scheme, to be launched from 1 July 2022, should further encourage the commercialisation of medical and biotech innovations in Australia.

Under the patent box, income derived from eligible patents will be taxed at a concessional rate of 17%, a reduction of 8% for SMEs and 13% for large businesses. At this stage, the scheme will apply to income derived from Australian-owned and developed medical and biotechnology patents applied for after Tuesday’s budget announcement. The Treasurer, Mr Frydenberg stated:

Under the patent box, income earned from new patents that have been developed in Australia will be taxed at a concessional 17 per cent rate — almost half the rate that applies to large companies.

The aim of the patent box is to encourage businesses to retain or locate the development, manufacture and exploitation of patents locally. The Federal Government budget papers stating that the requirement for Australian development will “encourage additional investment and hiring in research and development activity and encourage companies to develop and apply their innovations in Australia.”

Precise details are yet to be announced, but it is understood that the reduced tax rate is only applicable to that income derived directly from eligible patents, possibly excluding income derived from manufacturing or branding. The proportion of income included will also be affected by how much of the research and development is undertaken in Australia.

While the scheme clearly applies to companies located in Australia holding an eligible patent, it is unclear how the scheme will apply to patents held by companies located elsewhere, but where an Australian based company has an exclusive licence to exploit the patent or has real and substantial rights to the patentable technology in the territory. It is also unclear at this stage whether the scheme will include income to the Australian based company derived from related overseas patents where an eligible patent is held in Australia.

The government has indicated that it will follow the OECD’s guidelines on patent boxes to ensure the patent box meets internationally accepted standards and that it will engage in consultation with industry before the July 2022 launch in relation to the detailed design. The government will also consider whether a patent box would be an effective way of supporting the clean energy sector.

Patent Box schemes are already in place in many European countries and the innovation sector has advocated for a similar scheme in Australia for many years on the basis that it is vital to attract companies to invest and maintain that investment in Australia.

The 2021-22 budget announcement looks to be a strong recognition by the government on the importance of science and technology innovation to drive Australia’s economic recovery, post-COVID and beyond.

In other positive developments for the Australian innovation community, the Budget also includes a $124.1 million investment in Artificial Intelligence (AI) over the next six years. This investment includes a National Artificial Intelligence Centre led by Phillips Ormonde Fitzpatrick client CSIRO’s Data 61 and $35.7 million for emerging aviation technologies, including drones.