Federal Budget 2022–23 – ‘patent box’ extensions, 120% training and technologies deductions, ‘cost of living tax offset’ confusion

A Bill to introduce the ‘patent box’ regime announced in the 2021–22 Budget has been introduced into parliament.

The Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 amends ITAA 1997 to provide concessional tax treatment for ordinary and statutory income derived by a corporate taxpayer from exploiting a medical or biotechnology patent. Eligible patent income will be subject to an effective income tax rate of 17% to the extent that the taxpayer undertakes research and development (R&D) underlying that patent in Australia.

Eligibility criteria

The patent box regime will be available to an entity that is an “R&D entity” for the purposes of the R&D tax incentive. An R&D entity, under s 355-35, is a corporate taxpayer that is either:

• an Australian resident, or
• a resident of a country with which Australia has a double tax agreement that includes a definition of “permanent establishment” that carries on business in Australia through a permanent establishment.

A taxpayer is required to hold an eligible patent for the purposes of the capital allowance provisions in Div 40 to qualify for the regime, that is, they must be the legal owner. An exclusive licensee of a patent would not satisfy this definition, as they merely hold rights under a licence arrangement as a licensee. Where a taxpayer acquires an eligible patent, the regime benefit is limited to the extent of improvements made by the taxpayer to the patented invention after acquisition.

The regime will cover eligible medical or biotechnology patents linked to a therapeutic good included on the Australian Register of Therapeutic Goods that are:

• Australian standard patents granted by the Commissioner of Patents
• United States Utility Patents issued by the United States Patent and Trademark Office, or
• European patents granted under the Convention on the Grant of European Patents.

Income rules

Only the proportion of ordinary or statutory income derived from exploiting an eligible patent attributable to a taxpayer’s development of that patent will be subject to concessional tax treatment. For example, a reasonable apportionment approach would apply where ordinary income derived from the sale of therapeutic goods may be attributable in part to its marketing and manufacturing. A reduction to patent income will also apply to limit benefits under the regime to the extent that the taxpayer conducted R&D in Australia.

The remaining income considered attributable to a taxpayer’s development of an eligible patent will be made partially non-assessable non-exempt income to achieve an effective tax rate of 17%.

Electing to apply the regime

Taxpayers will be required to make an irrevocable election to access the patent box regime. The election will apply prospectively to all of a taxpayer’s eligible medical and biotechnology patents, including for subsequent income years.

Taxpayers will be able to amend prior year tax returns to claim the patent box concession in respect of income, such as milestone payments, derived before the remaining conditions of the patent box regime were satisfied. This will only be permitted where a taxpayer had made the patent box election before the due date for lodgment of the earlier tax return. Taxpayers will not have the ability to retrospectively make a patent box election for an earlier income year.

If a taxpayer amends an earlier income tax return to claim the patent box concession, a corresponding reduction in deductions will apply to account for the portion of income made non-assessable non-exempt income. In circumstances where a taxpayer does not amend all earlier assessments, it will be open to the Commissioner to make appropriate amendments for relevant income and deduction adjustments.

Application

The amendments will apply to patents granted or issued after 11 May 2021 in respect of income years starting on or after 1 July 2022.

A discussion paper issued on the measure had consulted on whether the proposed regime should be expanded to the clean energy or low emissions sector. The government indicated it had not made any policy decision regarding inclusion of low emissions and clean energy technologies under the regime in the regulation impact statement accompanying the Bill.

Source: Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022, Parliament of Australia website, 10 February 2022, accessed 10 February 2022.

[iKnow CCH]