The Bill implementing Australia's highly anticipated patent box has been introduced into the Australian Parliament (the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022), following the Australian Government's announcement in the 2021-22 Budget (see our prior alert here). This comes on the heels of the beneficial changes to the R&D tax incentive and other recent announcements intended to make Australia a more attractive location for medical research and clinical trials.
Following extensive public consultation, the bill sets out the proposed design of the patent box which implements a concessional effective income tax rate of 17% for eligible income derived from medical and biotechnology patents with effect for income years starting on or after 1 July 2022. Australia's current corporate income tax rate is 30% or 25% for certain small business entities.
In welcome news, the Australian Government has adopted two of the key improvements raised by Baker McKenzie in our submission on the proposed regime and by a range of stakeholders:
Although other suggestions made in consultation have not been implemented, the patent box is a welcome development in improving Australia's tax competitiveness for medical and biotechnology commercialisation decisions.
The key prerequisites companies must meet to take advantage of the patent box are summarised at a high level below:
Incur expenditure on eligible R&D activities in Australia for the purposes of the R&D tax incentive.
Patentee of an Australia, US or European patent.
Make an irrevocable election to access the patent box by the time the income tax return is due for the first income year in which they wish to access the patent box.
Patent linked to a therapeutic good that is on the Australian Register of Therapeutic Goods maintained by the Therapeutic Goods Administration.
Derive income from the exploitation of the qualifying patent(s).
As the patent box relies on a combination of existing transfer pricing rules and the R&D tax incentive, it will be critical that taxpayers prepare robust transfer pricing documentation to support how eligible income has been calculated. Taxpayers should carefully consider the compliance work required and other tax impacts before opting in due to the irrevocable nature of the election. We provide a high level overview of the patent box design below.
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