Australia: Proposal for “patent box” regime

Only some types of patents would be eligible and patents granted or issued after 11 May 2021.

Some types of patents would be eligible and patents granted or issued after 11 May 2021

The Federal Government on 10 February 2022 introduced the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 (Bill) into the House of Representatives.

The bill’s objective is to stimulate business innovation in the field of therapeutic substances and devices by allowing profits attributable to eligible patents to be subject to a reduced corporate income tax rate of 17% from 1 July 2022.

KPMG observation

With very little parliamentary “sitting time” remaining before an expected May 2022 federal election, businesses in the medical innovation sector would hope the Senate passes the bill at the end of March 2022, or that the bill is a priority for re-introduction post-election.

What types of patent would be eligible?

Only some types of patents would be eligible, and the bill would only apply to patents granted or issued after 11 May 2021 and income derived from 1 July 2022. Thus, businesses with eligible patents would need to have processes in place to track pre- and post-patent revenue from July 2022 onwards.

To be eligible, the patent must relate to a pharmaceutical substance, or to an invention that must constitute, form part of, or be incorporated into a therapeutic good included in the Australian Register of Therapeutic Goods (ARTG). However, this does not mean that only income from Australian registered patents could be included in the patent box.  Income derived from a U.S. utility patent or from a patent granted under the European patent convention could also be included in the patent box, provided the patent relates to a substance or invention that is included in a good listed in the ARTG.

What types of income from the patent can a business include?

The following income types could be included:

  • Income from the sale of a therapeutic good linked to the patent
  • Royalties or licence fees from the grant of a right to exploit an invention covered by the patent
  • A balancing adjustment event in relation to the patent
  • Compensation or damages relating to the patent (for example, when another party pays compensation for infringing the patent)

For the first two categories, income arising prior to the sale or to the grant of the right could also be included.  This would allow, for example, milestone payments in relation to the development of a subsequently patented product to be included.

How would the eligible income be calculated?

To comply with the terms of the Organisation for Economic Cooperation and Development (OECD) 2017 Agreement on Modified Nexus Approach for IP Regimes, the bill needs to scale back the eligible portion of patent-related income in certain circumstances so that Australia only grants favourable tax treatment to income from patents that arise in large part from Australian R&D activities. Under the bill, this would be done by calculating the “R&D fraction” which then determines how much of the income linked to the patent is eligible for the lower tax rate.

Broadly, a patent holder would calculate the R&D fraction as follows:

  • Numerator:         1.3 x A
    • A = [Total revenue account expenditure incurred and notionally deductible under the R&D provisions in the current or a prior year in relation to the patent, plus the cost of capital assets applied to R&D activities relating to the patent]
  • Denominator:     A + B + C
    • B = Expenditure relating to the patent incurred in respect of R&D carried out by an associate outside Australia
    • C = The cost of depreciating assets that relate to the patent (for example, when the business has acquired a patent from a third party)

The effect of the R&D fraction is that a business could fit all of its income from an eligible patent into the patent box, provided that items B and C represent less than 23% of the total expenditure.

How would the 17% tax rate take effect?

To apply the 17% tax rate, the bill treats a portion of the patent-related income as non-assessable, non-exempt (NANE) income.

So, for a company with a 30% standard income tax rate, 43.3% of the eligible patent income (after applying the R&D fraction) would be NANE, and the remainder would be taxed at 30%, to give an overall effective rate of 17%.

KPMG observation

The measures in the bill are viewed as a welcome addition to the business taxation landscape and it is hoped that a successful implementation in the medical sector would lead to an expansion to additional sectors (not just cleantech).  Post enactment, more work would be needed to clarify certain administrative details—such as how much of the revenue from a product is attributable to the patented component(s).


For more information, contact a KPMG tax professional in Australia:

Kelly Chong | +61 2 9335 8404 | kellychong@kpmg.com.au

Georgia King-Siem | +61 2 9335 8567 | gkingsiem@kpmg.com.au

 

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