- From 1 July 2022, the Australian Government is to introduce a patent box regime that will tax income derived by a company from eligible Australian patents at a concessional tax rate of 17% rather than at the standard corporate rate of 30%, or 25% for small to medium companies
- The regime will apply to revenue generated from granted Australian patents applied for after 7:30pm on 11 May 2021 (Budget night) and covering medical and biotech technologies
- The Government has indicated that the regime may be extended to clean energy technology patents
To comply with the recent OECD international tax norms, the regime will be built around a domestic development or 'nexus' requirement. This will mean that the concessional tax rate will only apply to the portion of a company's income derived from the patent R&D expenditure that it incurred and which took place in Australia. This nexus requirement is a key plank in the OECD developed guidelines for acceptable - non-harmful - IP regimes, and emerged from the now almost decade's long OECD base erosion and profit shifting project.
While we are as yet to see the legislation for the regime, and as noted below consultation is only now taking place, the likely start point for determining covered income is the relevant expenditure incurred by the company in developing a patented item. Relevantly, how much of the expenditure was incurred by the company in Australia or will otherwise be taken to qualify as eligible expenditure? The ratio of that qualifying expenditure to the total expenditure incurred should set the overall percentage that should be applied to the income earned from an eligible patent. The likely next step is to determine the income earned, how much relates to the patent and how much to ancillary processes such as marketing and manufacturing. Income earned in relation to such processes will not eligible for the 17% rate.
Lastly the 17% rate should apply to the net income earned and not the gross income. In the scenario of a covered item with multiple contributory patents, a further step will likely need be undertaken to first ascertain the economic contribution of each component patent before then going through the preceding steps outlined to arrive at the overall qualifying net income which may be taxed at the 17% rate.
In broad outline, the Government’s goal with this regime is to drive research in medical and biotech technologies and also support skilled work by encouraging companies to base their R&D activities in Australia. Essentially, it is a regime designed to encourage companies to undertake their R&D locally and keep relevant patents and jobs in Australia. Arguably, the limited ambition of the regime was a factor in settling on the chosen 17% rate, which is well above the rates of comparable foreign regimes.
Importantly, the Government has indicated that it will consult closely with industry on the design of the patent box regime. To this end, Treasury has released a discussion paper in which it seeks input from industry and professionals, including seeking input as to whether the regime should be expanded to clean energy technologies. Submissions are due no later than 16 August 2021. Interested parties considering making a submission to Treasury should act now.