On 5 July 2021, the Government released its Discussion Paper setting out the Government’s proposal and seeking views from key stakeholders. The paper will be open for submissions until 16 August 2021.   Now is the opportunity for stakeholders to put forward their suggestions as to what a patent box in Australia should entail.

Patent boxes typically refer to a concessional tax regime on intellectual property (IP) profits. The Government is hoping to incentivise companies to base their medical and biotechnology research and development in Australia by offering a concessional tax rate of 17% on income earned from granted patents.

What does the Discussion Paper reveal / leave open?

Medical and Biotechnology Inventions:

  • The patent box will only apply to medical and biotechnology inventions that were claimed in standard patents granted by IP Australia after the Budget announcement (that is, patents that have a priority date after 11 May 2021).
  • In terms of medical/biotechnology inventions, the international patent classification system (used by IP Australia) will likely be authoritative. Eligibility thus depends on the use or classification of the individual patent, as opposed to the classification or industry sector of the company which owns the patent.
  • There are two proposed frameworks for the medical/biotechnology requirement, which are still open for discussion:
    • A ‘patent-level test’, where the patent box applies to inventions defined in the patent claim that are primarily used or classified as medical/biotechnology.
    • An ‘income streaming test’, where all patented inventions qualify for the regime, but only eligible profits attributable to activity in the medical and biotechnology sectors would receive the concessional rate.
  • Ultimately, the definition of medical technology and biotechnology sectors for determining eligibility is left open.

Low Emissions Technologies:

  • Suggestions are open as to whether the patent box should accommodate innovation in low emissions technologies and how the clean technology sector could be defined accordingly.

R&D, Revenue and Expenditure:

  • Concessional treatment will only apply to net IP income where the company owner undertook substantial associated R&D of their patent in Australia.
  • Businesses will be required to show an eligible level of Australian R&D expenditure as a proportion of their overall R&D expenditure on their IP asset.
  • The scope of how substantial this domestic R&D activity needs to be is still open for discussion. Suggestions are also open on how R&D expenses should be recorded and reported to the ATO, and how eligible R&D expenditure should be defined.
  • It is undetermined what types of patent-related revenue, and to what extent ‘downstream’ profits, will be eligible. This could include:
    • Royalties/licence fees derived from an eligible patented invention;
    • Revenue embedded in the sale of patented goods or services or the use of patented processes in production;
    • Revenue from damages or an account of profits for infringement of an eligible patented invention; and
    • Revenue by sale or assignment of an eligible patented invention.
  • An apportionment mechanism to separate eligible revenue and non-eligible revenue and expenses may be needed.
  • It is open as to whether companies that make significant losses in the development of their IP can still benefit from a concessional tax rate. The Discussion Paper calls for suggestions on what arrangements could be put in place regarding profit and loss without posing integrity risks.

Making submissions

Consultation for the patent box is aligned with the Government’s Modern Manufacturing Strategy, which aims to create new businesses and support employment opportunities, including in IP intensive areas.

To have your say in the design and scope of the patent box, stakeholders can submit responses to the Discussion Paper to PatentBoxConsultation@treasury.gov.au by 16 August 2021. Electronic lodgement is preferred, but postal submissions may also be made. Full instructions for responding are available on the treasury website.

The Discussion Paper calls for any input as to how the above criteria should be defined, as well as how the regime should be administered and regulated for corporate compliance.

At a later date, the Government will also consult on an exposure draft of legislation before introducing the patent box into Parliament. This is an opportunity for companies to provide input for Government consideration.

We would like to acknowledge the contributions of Amy O’Bryan and Rex Lee in drafting this blog.