An eligible corporate taxpayer must be a patentee who holds rights over an eligible medical or biotechnology patent linked to a therapeutic good included on the Australian Register of Therapeutic Goods.
Qualifying patents consist only of “Australian standard patents granted by the Commissioner of Patents”, “a United States Utility Patent issued by the USPTO”, or a “European patent granted under the Convention on the Grant of European Patents of 5 October 1973, as in force from time to time”.
The corporate taxpayer must undertake the Research & Development (which has been the subject of R&D Incentive claims) in respect of that patent, in Australia. There will be a reduction in the income subject to the concessional treatment where R&D has been undertaken overseas.
The corporate taxpayer must make an irrevocable prospective choice to apply these rules to all that taxpayer’s eligible patents.
The rules require the taxpayer to reasonably apportion income that is attributable to the eligible patent.
A portion of the income that qualifies for the concessional treatment will be treated as “Non Assessable Non Exempt” income, which will have consequences to the taxpayer in respect of reducing the ability to deduct associated expenses.
The rules are designed to comply with the BEPS Action 5 Report so as not to be seen as a “harmful tax practice” for international tax purposes.
Given the current Australian company tax rate is 25% (for base rate entities with turnover up to $50m) and 30% for companies more generally, companies that undertake medical or biotechnology R&D and exploit the resulting patents for income clearly have an incentive to apply these rules.
The Government estimates that the tax benefits from these rules will start flowing from the 2024 income year ($50m in that year).
The patent box regime sees the intersection of a number tax consideration and concepts – Income tax, R&D and transfer pricing – and therefore when enacted, requires eligible companies to carefully consider the implications in relation to record keeping, governance and the overall cost benefits of choosing to apply the regime compared to not doing so.
There has been discussion of patent box in Australia for many years as one of the levers to support innovation in Australia, and it is therefore pleasing that this Bill has been introduced. While it is currently limited to medical and biotechnology patents, to promote innovation across a wider number of fields, this regime should be expanded to all patents in the near future.