Patent Box Legislation: What this means for Medtech R&D in Australia

In case you were wondering about the name, it’s not some allusion to physical or virtual box to store one’s patent secrets, rather it refers to the fact that there is a box to tick on the tax form, where you will opt in to the Patent Box tax rates.

A Patent Box is a policy tool that reduces the rate of corporate tax — either as a reduced tax rate or a tax break for a portion of the Patent Box income — levied on the income generated from certain types of qualifying intellectual property (IP), particularly patents, hence the name. In contrast to R&D tax credits / offsets, which target the front end of the innovation lifecycle, a patent box regime targets the last stage of the innovation lifecycle: commercialisation.

In the case of Australia’s Patent Box legislation, introduced to the House of Representatives on 10 February 2022 through the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022, income earned from new medical and biotechnology patents that have been developed in Australia will now only be taxed at a concessional rate of 17% (compared to standard corporate tax rate of 30% or 25% for SMEs).

Section 357-5 of the Bill specifically states its objective as being “to encourage innovation and commercialisation of patented inventions in the medical and biotechnology industries to be undertaken in Australia by taxing income derived from those patented inventions concessionally.”

Following the consultation stage before introduction of the Bill, the Government made two significant expansions to the Patent Box:

• allowing patents issued by the United States Patent and Trademark Office or granted under the European Patent Convention to access the regime; and
• allowing patents granted after delivery of 2021-22 Budget to be eligible (i.e. patents that were filed before Budget night on 11th May 2021 but granted sometime after that date), rather than only those filed after Budget night.

These two inclusions are significant because about 97% of medical and biotechnology patents filed by Australian entities are filed in at least one of the three jurisdictions (Australia, USA, and Europe) included in the finalised Bill. Including patents filed before the 2021-22 Budget night (but granted after said date) will see a more immediate impact of the Patent Box regime, given that profits derived from granted patented inventions are often not realised for several years.

To obtain the benefits of the new Patent Box Bill, patents must link to a therapeutic good entered in the Australian Register of Therapeutic Goods, which will ensure that the Patent Box concessions are targeted toward relevant medical/biotechnology inventions.

In line with internationally accepted standards and best practice, the legislation has been designed to be compliant with the principles outlined by the Organisation for Economic Co‑operation and Development.

The road to the new Bill for Australia’s first patent Box commenced back in 2015, when The Office of the Chief Economist commissioned a report, entitled Patent Box Policies, which provided an overview of patent box policies in various OECD countries.
After release of the 2015 report, consultation was sought from industry (e.g. AusBiotech and Medical Technology Association of Australia) in an effort to create the best version possible for Australia’s first Patent Box.

The feedback about the report was generally negative, with criticism about its limited scope, which may explain the lengthy 6-year delay until legislation was finally introduced in February 2022 for Australia’s first Patent Box.

Eligible entities for the Patent Box are defined the same way as R&D entities in the R&D Tax Incentive legislation: corporate taxpayers who are either Australian residents or conduct business via a permanent establishment in Australia under a double taxation arrangement. To claim the R&D Tax Incentive, these entities are required to keep records for their R&D expenditure and R&D activities, which will assist when opting in to the Patent Box.

Schemes like Australia’s R&D Tax Incentive target the front end of the innovation lifecycle, assisting companies to develop their product, which is often quite lengthy for medical and biotechnology R&D in particular. The Patent Box regime, on the other hand, targets the last stage of the innovation lifecycle: commercialisation. This is important because this step — of translating R&D into a commercial product here in Australia — has been identified as a significant weakness in the Australian R&D landscape, as we touched upon in the article Quantifying Australia’s Returns from Innovation. As mentioned there, this poor commercialisation record in Australia may be one of the factors explaining why Australia’s R&D expenditure share of GDP lags behind the OECD average. So doing everything possible to incentivise knowledge-intensive (e.g. medical and biotechnology) R&D in Australia — through programs like the R&D Tax Incentive — and then keeping the IP derived from this in Australia (with incentives like a Patent Box) so that it can be commercialised, is a sound plan… to encourage investment and create jobs (among other things)!

Having a Patent Box regime will also create synergies with various other government efforts, such as the creation of innovation hubs (e.g. Queensland Innovation Places Strategy), which provide a unique and often specialised environment (the spaces, places, services, networks, and people) that enables and accelerates efforts and opportunities to research, commercialise, scale, and grow new high-value products and services, businesses and jobs — precisely what the Patent Box regime aims to do!

As a late adopter of a Patent Box regime, Australia can learn from the mistakes of other countries with existing IP regimes. In 2020, around 38 countries had already implemented some form of a Patent Box tax regime; however, some are under review, and the ones that have already been abolished had IP regime tax rates of 0%, which likely resulted in too much tax revenue being lost. Question 27 of Treasury’s Patent Box —Discussion paper on policy design specifically asked “Are there design features of any existing patent boxes that, if adopted in Australia, would minimise the regulatory burden on companies?”. Some of the points mentioned in submissions regarding this question include:

• All income relating to a qualifying patented innovation should be eligible (i.e. patent-level test)
• IP developed through R&D activities conducted both in Australia and overseas should qualify (Australia’s R&D Tax Incentive permits overseas expenditure under certain circumstances)
• Belgium’s Patent Box provides companies the option of obtaining an advance ruling to determine the extent of the patent box in advance, thus providing certainty for a period of five years.

As CPA Australia noted in their response to the aforementioned Discussion Paper, the design of any Patent Box regime must consider both the implications for the creation of intangible assets (i.e. the research phase) and the subsequent exploitation of these intangible assets (i.e. the commercialisation phase). This is because companies will inevitably choose what is in their best financial interests, so they may locate their R&D activities in a jurisdiction which has more favourable rules for tax deductions on costs or more attractive input-based R&D tax credits (e.g. the Australian R&D Tax Incentive), but then locate the ownership of the resulting IP rights in a different jurisdiction with a more attractive output-sided tax incentive (e.g. a Patent Box regime with attractive concessional taxation rates).

The medical and biotechnology sector is the first to benefit from Australia’s new Patent Box regime; however, the questions in Treasury’s Patent Box Discussion Paper indicate that businesses involved in developing low emissions technologies (remember the Government’s commitment to the 2030 targets of the Paris Agreement?) will likely be soon benefitting from their own Patent Box legislation.

So if you’re a business doing medical or biotechnology or low emissions technologies R&D, the Patent Box is going to be a big deal right now or fairly soon in terms of your business strategy moving forward… and also a key contribution to supporting investment and jobs in Australia’s knowledge economy — and that’s a winner for so many on so many different levels.