On 10 February 2022, the Federal Government introduced the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 (Bill) to the House of Representatives. The Bill implements the "patent box" reforms announced in the Federal Government's 2021-22 budget, which seek to encourage innovation and commercialisation of patented inventions in the biotechnology and pharmaceutical industries in Australia by providing tax concessions for income derived from those inventions.

1. Who is eligible for the concession?

The concession will be available to "R&D Entities" being corporations:

  • incorporated under an Australian law;
  • incorporated under a foreign law but an Australian resident for income tax purposes; or
  • incorporated under a foreign law and both a resident of a country with which Australia has a double tax agreement that includes a definition of 'permanent establishment' and carry on business in Australia through such a permanent establishment.

An R&D entity must make an election to receive the concession. The election must be made in an approved form (to be determined) and must be given to the Commissioner of Taxation. It is proposed that an election will take effect in relation to income in the election year and all subsequent years thereafter.

2. What patents are covered by the concession?

R&D Entities will be able to apply for concession on income derived from the following types of patent:

  • a standard Australian patent;
  • a US utility patent;
  • a European patent,

provided that the patent covers a pharmaceutical substance or invention that is "linked to" a therapeutic good included on the Australian Register of Therapeutic Goods. A therapeutic good is "linked to" a patent:

  • in the case of a patent covering a pharmaceutical substance, where the therapeutic good contains or consists of that pharmaceutical substance; and
  • in the case of a patent for any other invention, where the therapeutic good incorporates that invention.

The scheme will only apply to patents granted or issued after 11 May 2021. To qualify, the R&D Entity will need to own the patent – being an exclusive licensee of the patent will not suffice.

3. What income streams are taxed concessionally?

The concession will apply to the following income streams derived on or after 1 July 2022 in respect of eligible patents held by the R&D Entity:

  • the sale or dealing with a therapeutic good linked to one or more eligible patents;
  • royalties or licence fees payable to the R&D Entity for the grant of rights to exploit an invention in respect of an eligible patent;
  • a balancing adjustment event for an eligible patent;
  • damages or compensation payable to the R&D entity in respect of an eligible patent

4. What is the concessional tax rate?

Where an R&D entity meets all of the above criteria for the patent box regime, eligible income streams will benefit from being subject to an effective income tax rate of 17%, to the extent that the R&D Entity undertakes R&D in relation to the patent in Australia (a reduction on the full company tax rate of 30% or the 25% tax rate for those that qualify as "base rate entities").

The Federal Government has indicated that the Australian Taxation Office will develop guidance on the application of the patent box before it is expected to come into effect.

With only a few sitting days left in the current Parliamentary session, and a Federal election looming, there is now a race against the clock for the Federal Government to pass the Bill. If passed, the legislation will provide further incentives for growth of Australia's medical and biotechnology sectors. However, it is reasonable to ask what the basis is for singling this industry out for special treatment, when many other industries would benefit from a similar incentive.

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