This week, the Australian government handed down its annual budget. At the risk of sounding overly cynical, I am always sceptical about how many of the policy measures announced in the budget will actually come to fruition, given that their funding is often dependent on hazy forecasts of future economic performance, and their implementation may span many years during which future budgets – and potentially new governments – may come and go, bringing their own priorities and revised forecasts. But even I cannot help sitting up and taking notice when patents get a mention, with all of the ensuing media coverage that brings during the budget frenzy!
So the ‘big news’ is that the government is going to introduce a ‘patent box’ tax incentive scheme in Australia… sort of. If you are not already familiar with the concept, 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. Other income continues to be taxed at the standard corporate rate.
The Australian patent box scheme is actually going to be somewhat limited, initially applying only to medical and biotech patents, with the possibility that it might also be made available to the clean energy sector. The incentive will only be available on income generated from patents applied for after the budget announcement (i.e. pre-existing patents and application will not be eligible). And it will not come into effect until 1 July 2022. The tax rate on eligible income will be 17%, compared with the normal corporate tax rate of 30% for large companies, or 25% for small and medium enterprises (SMEs). This discounted rate is higher than other countries that operate a patent box system, e.g. France 15%, Spain 12%, UK 10%, Belgium 6.8%, Luxembourg 5.84%, and Netherlands 5%. Even taking into account that a number of these countries have a lower corporate tax rate than Australia, equal or larger discounts are also available elsewhere, e.g., in France (where the corporate tax rate is 32.02%), Spain (25%), Belgium (25%), and Luxembourg (24.94%).
So – true to form – the Australian patent box will be a very ‘middle-of-the-road’ affair, with limited eligibility, and relatively modest tax discounts, especially for SMEs that are already subject to a lower tax rate than larger corporates. As it so often does, the government has decided to limit its exposure by picking winners – this time, medical and biotechnology industries – leaving other sectors (such as IT, where Australian companies such as Atlassian, Canva, Afterpay, Judo Bank, Zip Co, and AirWallex have been punching well above their weight) to fend for themselves. Or, more likely, to move their R&D activities overseas, into more favourable jurisdictions.
On the other hand, the announcement is something of a turnaround for this government, considering that criticism among G20 finance ministers in 2014, and a 2015 review commissioned by the Office of the Chief Economist in the Department of Industry delivered negative conclusions that seemed to have killed off any prospect a patent box scheme being introduced in Australia.