22 February 2022

Australian Medical/Biotech ‘Patent Box’ Tax Legislation Revealed

Some kind of box On 10 February 2022, the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 was introduced to the Australian parliament, and received its first and second readings in the House of Representatives.  The Bill represents the fulfilment of an undertaking in the Federal Government’s 2021 budget to introduce a ‘patent box’ scheme to encourage innovation and commercialisation in the Australian medical and biotechnology sectors.  A ‘patent box’ (the name refers either to an actual box on a form, or to a notional box into which a company allocates a proportion of its income) is a tax incentive scheme under which income that can be directly attributed to the commercialisation of patented technology (as distinct from other attributes, such as branding, know-how, or manufacturing capability) is taxed at a reduced rate. 

Under the scheme established by the legislation, the minimum concessional tax rate is 17%, compared with the normal corporate tax rate of 30% for large companies, or 25% for small and medium enterprises (SMEs).  However, the full benefit of the scheme is only available to the extent that R&D leading to development of a patented invention is conducted in Australia.

As the government had indicated in its original budget announcement, only medical and biotechnology inventions will be eligible for the patent box tax concession.  In particular, a patent will be eligible if it is ‘linked’ to a therapeutic good included on the Australian Register of Therapeutic Goods (ARTG).  This means that a product, which is covered wholly or in part by the claims of the patent, must be a therapeutic good (e.g. a pharmaceutical substance or medical device) that requires, and has received, marketing approval in Australia.

Interestingly, however, the patent relied upon as the basis for eligibility under the patent box scheme need not be an Australian patent.  A patent will qualify under the scheme if it is an Australian standard patent (i.e. innovation patents are not eligible), a US utility patent, or a European patent granted under the European Patent Convention (EPC). 

It was initially proposed that only patents having a priority date after the announcement would qualify.  However, in further positive news, according to the Bill patents granted or issued after the date of the budget announcement (11 May 2021) will be eligible.

It is intended that the patent box concession will commence in the coming financial year, i.e. from 1 July 2022.  However, for this to happen the legislation will need to be passed in both houses of parliament before federal election is called.  It is widely anticipated that this will occur in early to mid April, shortly after the government hands down its budget on 29 March 2022.  With no further sitting days scheduled prior to budget week, it could become a race against time to get the legislation through.

Requirement for R&D Undertaken in Australia

The patent box concession is available only to companies, i.e. individual taxpayers are not eligible.  The corporate taxpayer must be either:

  1. an Australian resident, or
  2. a resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’, and that carries on business in Australia through such a permanent establishment.

The legislation includes a concept known as the ‘R&D fraction’ to account for the level of R&D conducted in Australia.  Without getting into details, a taxpayer who undertook all of the relevant R&D themselves in Australia would have a R&D fraction of 100%, and would be able to claim the concessional tax rate of 17% on income attributable to the patented invention.  However, a taxpayer who acquired the patent, or outsourced R&D to a related party, where the R&D was undertaken overseas, would have a ratio of less than 100%, and would only be able to claim the concessional rate on the corresponding fraction of the relevant income.

Income Attributable to Patented Technology

It appears that it will be up to the patent holder to work out a ‘reasonable apportionment’ of the ‘patent box income stream’ (i.e. income generated by goods incorporating a patented invention) that is attributable to the underlying patent(s).  The amount determined must be consistent with OECD Transfer Pricing Guidelines and (if relevant) the OECD Model Tax Convention on Income and Capital, while also being directly derived from the value of the embedded patent itself to the extent that it contributes to the overall value of the therapeutic good.  In practice this seems like a potential minefield, and I expect that this will mean that R&D tax advisors will be looking to develop and offer expertise in this area!

Patent box income streams are not limited to income derived from sale of goods incorporating the patented technology.  Income generated from licensing of patents is also eligible for the concessional tax rate, as is income generated from what the legislation calls a ‘balancing adjustment event’, which would primarily apply if a patent is sold.  Additionally, income in the form of damages or compensation paid in relation to a patent – e.g. as a result of a successful infringement action, or settlement – is counted as a patent box income stream.

Qualifying Patents Need not be Australian

Australia is a relatively small market for most therapeutic goods, and innovative companies therefore need to look to overseas markets to achieve significant success and growth.  Regardless of where it is earned, all income that is taxable in Australia will potentially qualify for the patent box concession.  There is no requirement, however, that a company claiming under the patent box scheme actually own a patent in every country in which it generates an income stream.  If I understand the legislation correctly, it is sufficient that a company own at least one patent, in at least one of Australia, the US, and Europe (granted under the EPC).

The point of this appears not to be capturing enhanced income that is generated as a result of a price premium charged due to a patent ‘monopoly’, but rather to provide a tax incentive for developing and commercialising technology that meets a minimum ‘innovation standard’, as defined by the test of inventive step under national patent laws.  So having a granted patent acts more as ‘proof’ of innovation, for the purposes of the patent box concession, than it does as a source of increased income in its own right.  Having said that, however, the patent must be kept in force if the owner is to continue benefiting from the patent box scheme.

According to the Explanatory Memorandum accompanying the Bill, the reason for including US and European patents under the patent box scheme (but not patents granted in other jurisdictions) is twofold:

  1. the patentability standards and examination practices associated with US and European Patents are considered to be broadly similar to patent standards and examination practices in Australia; and
  2. currently, around 75% of medical and biotech patents filed by Australian entities are filed in Australia, whereas the figure rises to 97% if the US and Europe are also included, so these three jurisdictions capture the overwhelming majority of potential users of the scheme.

Technologies Covered by the Patent Box Scheme

As I have already noted, only patents that are ‘linked’ to a therapeutic good included on the ARTG will be eligible under the Australian patent box scheme.  While the government initially indicated that it would consult on whether the ‘clean energy’ sector should also be covered, I am unaware of any further policy announcements in this area.  However, restricting the scheme (at least initially) to registered therapeutic goods significantly simplifies the eligibility criteria.

On the other hand, it does have the potential to create anomalies.  For example, an Australian entity could conduct R&D in Australia, and own patents covering goods that would potentially be registrable on the ARTG, while its business could be based on manufacturing and sales in other countries where it has either has, or does not require, regulatory authorisation.  (This could happen, for example, where an Australian company develops a treatment or diagnostic test for a disease or condition that is substantially unknown in Australia.)  In these circumstances, the entity would need to apply for and obtain registration on the ARTG in order to qualify for the patent box concession, despite having no intention of marketing its goods in Australia.  But perhaps this is a contrived scenario that would hardly ever arise in practice.

Relevant Date for Eligibility of Patents

As mentioned previously, from the original announcement it appeared that the government’s intention was that only patents having a priority date after 11 May 2021 would be eligible under the proposed patent box scheme.  However, a number of industry stakeholders made submissions during a consultation process arguing that the long product development lifecycles in the medical and biotechnology sectors would mean that it could be a number of years before any Australian company would see any benefit from the proposed patent box scheme.  And, fortunately, the government has heeded that feedback, with all patents granted after 11 May 2021 being eligible under the legislation.  This means that, if the Bill is passed in the coming weeks, some companies with recently granted patents will potentially be able to start claiming the patent box tax concession almost immediately, in the 2022-23 fiscal year.


I have my fingers crossed that the patent box legislation makes it through both houses of parliament and is passed before an election is called.  The federal opposition expressed some scepticism about the scheme when it was announced (as tends to be the wont of oppositions), so there is no guarantee that the legislation would be resurrected in the next parliament if there were to be a change in government.

The legislation will create a very limited scheme compared to most other countries that have some form of patent box arrangement (and some, such as the Netherlands, that have a broader ‘innovation box’ scheme that also recognises various forms of non-patent IP).  However, it is a start.  It will make Australia more competitive with other jurisdictions, in terms of attracting R&D activity.  It will provide an additional incentive for the medical and biotechnology sectors, in which Australia has considerable R&D capabilities.  And, if it proves to be successful, it may provide a starting point that could be expanded to cover other sectors in the future.


Post a Comment

Copyright © 2014
Creative Commons License
The Patentology Blog by Dr Mark A Summerfield is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Australia License.