Five things to know about the new patent box regime for Australian R&D
Here at Synnch, we are passionate about all things R&D and innovation. We welcome any initiatives that are designed to grow the impact of the R&D Tax Incentive on the Australian innovation scene. That’s why we are optimistic about the ability of the new patent box introduced by the federal government to encourage investment in Australia’s biotechnology and medical technology sectors.
First things first though… our mission is to simplify the entire R&D Tax Incentive application process. That’s why we are providing you this list of five things relevant to know about the new patent box regime and assist our clients in understanding the ‘why’ behind the initiative and ‘how’ it may be applicable for their R&D activities and businesses.
1. What is a patent box?
Named after the ‘patent box’ that you tick in your tax return (who says politicians lack creativity), the patent box tax incentive allows companies to pay a lower tax rate on income generated through the commercialisation of patented technology. Announced by the Australian Government in its 2021 – 2022 budget, it will be implemented from 1st July 2022. It will see A$206 million allocated to reducing taxes on innovative research to encourage companies to undertake their R&D within Australia, and just as importantly, keep the patents here. The Australian Government will follow the OECD’s guidelines on patent boxes to ensure the patent box meets internationally accepted standards.
2. What is the incentive designed to achieve?
COVID-19 has shone a light on the importance of Australian medical, biotech, and related sectors. Although the country is known for its world-leading research and development programs, its relatively low manufacturing capabilities and commercialisation output was laid bare during the global lockdowns and highlighted the country’s supply chain vulnerabilities. Right now, the incentive will be limited to profits from the commercialisation of medical and biotech patents. If it is proven to encourage more investment in innovation and production within Australia, it is expected to be offered to other industry sectors – think ‘clean technology’ or even defence aligned innovation.
3. So what type of tax deduction are we talking about?
Although the specific rates are yet to be confirmed, there is an expectation that companies will be looking at a reduced corporate tax rate of 17 per cent. This is compared to the standard Australian corporate income tax rates of 30 per cent and 25 per cent for small to medium businesses. This of course is based on the provision that the commercialised patented technology is Australian developed and owned.
4. Okay, how do I know if my R&D activity is eligible?
Although the finer details are being fleshed out by the federal government and industry, the expectation is that eligibility will be defined by the following elements:
- Income needs to be derived directly from the patent (this means that income derived from let’s say, branding, manufacturing, and other attributes of a patented product or method won’t be covered)
- R&D activity underpinning the patent needs to be done in Australia
- The patent needs to be granted for the reduced tax rate to apply (not just applied for)
- It (the patent) must be owned, and income received, by an Australian company (or permanent establishment)
- And finally, the patent needs to be applied for after the budget announcement
5. Why focus on MedTech and BioTech?
MedTech and BioTech have been identified as two vital sectors by the Australian Government. It has vibrant sectors that if supported, could become world-leading. As the healthcare system is receptive to innovation, well-funded, and has strong government support, it is already seen as an attractive location for investment. Combined with a strong regulatory system that protects intellectual property, world-leading universities, and medical research institutions, the government wants to utilise these strengths to build these sectors.
Although there are still challenges, questions, and uncertainty surrounding the scheme, ultimately this is a step in the right direction as the government seeks to support Australian innovation.
If you have any questions relating to the patent box or want to chat more regarding the R&D Tax Incentive and the eligibility of your activity, please reach out to the team at Synnch to find out more.