See below for further detail.
Context and consultation objective
On 11 May 2021, the Australian Government announced that it will introduce a patent box for corporate income associated with patented inventions in the medical and biotechnology sectors. The patent box will apply to companies for income years commencing on or after 1 July 2022.
‘Patent box’ is a generic term for regimes that apply a concessional tax treatment to profits derived from eligible intellectual property (IP). Currently, over 20 jurisdictions, including the UK, Singapore and many European countries have patent boxes or other regimes that offer concessional tax treatments to IP derived profits.
The aim of the Government’s policy is twofold:
- To encourage companies to base their medical and biotechnology research and development (R&D) operations, and commercialise innovation, in Australia. R&D investment is mobile and a range of factors influence companies’ decisions. While it usually takes a number of years for innovations to become profitable in the medical and biotechnology sectors, a concessional tax rate on those profits will create an additional incentive to locate R&D in Australia.
- To retain the ownership of eligible patented inventions in Australia.
The objective of this discussion paper is to inform the Government’s consideration of the detailed design of the patent box announced in the 2021-22 Budget.
This paper sets out the key design features of the patent box for which Treasury is seeking further information. Consultation questions are included as a guide only and submissions do not need to be confined to those questions.
Following consideration of responses to this discussion paper, the Government will issue and consult further on exposure draft legislation prior to introducing legislation into Parliament.
Through this discussion paper, the Government is also consulting on the potential expansion of the patent box approach to low emissions technologies and whether it is an effective way to support the development of those technologies.
Patent box design considerations
In Australia, profits on corporate IP are taxed at the relevant corporate income tax rate, which is currently either 30 per cent or 25 per cent from 1 July 2021 (depending on an entity’s annual aggregate turnover).
The ownership of patented inventions and any associated profits can be relocated offshore, making patent profits sensitive to preferential tax treatments. More than 20 countries have implemented patent boxes. The design features of these regimes vary significantly.
The following broad design features will form the basis of Australia’s medical and biotechnology patent box:
- an effective concessional tax rate of 17 per cent for companies on eligible profits from eligible patented inventions;
- only inventions claimed in standard patents granted by IP Australia which were applied for after the Budget announcement (that is, have a priority date after 11 May 2021), will be eligible; and
- the patent box will be designed to be consistent with the OECD/G20 Forum on Harmful Tax Practice (FHTP) framework governing IP regimes, including the OECD’s Base Erosion and Profit Sharing (BEPS) Action 5 minimum standard. Pages 23‑36 of this OECD report may assist you with understanding the framework.
- This includes that the concessional tax treatment will only apply to company profits from patented inventions in proportion to the amount of associated R&D that was conducted in Australia by the company.
The Australian Government will draw on approaches in comparable international jurisdictions with patent boxes to maximise effectiveness and minimise compliance burdens.