As part of Federal budget measures to foster innovation, commercialisation, and manufacturing in Australia, the Federal Government has announced yesterday the introduction of a patent box tax regime for medical and biotechnology patents.

A ‘patent box’ is a policy tool which applies a lower rate of corporate tax to any profits derived from patents. Patent box regimes can incentivise domestic investment in research and development (R&D) and disincentivise companies from locating income offshore. This kind of policy tool can also assist in bridging the gap between R&D and commercialisation.

Under the newly announced regime, corporate income directly derived from patents (which can be placed in the ‘patent box’) will be taxed at a rate of 17% – compared to the current rate of 30% for large businesses and 25% for SME’s. Income from manufacturing, branding and other attributes will continue to be taxed at 30%. The concession will apply starting 1 July 2022.

The Government will also consider whether a patent box would be effective for supporting the clean energy sector.

Details of the scheme are yet to be determined and will be developed in consultation with industry. However, we understand that only granted patents, applied for after the Budget announcement, will be eligible.

The scheme is expected to cost approximately $206.4 million over the forward estimates period.

Budget papers state that the requirement for domestic development will encourage additional investment and hiring in research and development activity and encourage companies to develop and apply their innovations in Australia.1

This is a welcome change from the Government’s previous position on this issue. In 2015, the Office of the Chief Economist reported on patent box tax schemes,2 concluding that implementation of a patent box scheme would merely increase the number of ‘opportunistic’ patent applications, which would not be tied to real economic activity, and that the fall in tax revenues collected from innovative companies would likely to exceed revenues from IP income.

However, it appears that promising remarks made by Treasurer Josh Frydenberg in 20193 that the Federal Government was considering a patent box scheme have ultimately come to fruition.

We are optimistic that the implementation of a patent box regime will be successful and that this policy will help make Australia a more attractive location for innovation and manufacturing in the medical and biotechnology sectors, which will provide a real benefit to the Australian economy.

Patent filing numbers are generally understood as a fundamentally good indicator of innovation and economic activity. With provisional patent application numbers in Australia falling by an average of 1% per annum over the last ten years, and the reduced use of our patent system by Australian applicants,4 we are pleased to see the Government taking positive and proactive steps to reverse these trends.