What the proposed Patent Box regime could do for Australian manufacturing businesses

Tax Insights

In the 2021 Federal Budget, the Australian Government announced plans to introduce our nation’s first Patent Box regime.

The regime, which already exists in more than 20 other countries, aims to encourage patent development and its associated research and development (R&D) in Australia.

It does this by giving companies a reduced tax rate on revenue derived from the patented intellectual property.The regime, which already exists in more than 20 other countries, aims to encourage patent development and its associated research and development (R&D) in Australia.

Set to start on 1 July 2022, the announcement has since resulted in a Treasury-led consultation which closed in mid-August of this year.


How the regime is set to work

While key details about the workings are still to be released, Australia’s first Patent Box regime is set to offer companies a reduced corporate tax rate (17%) on income derived from certain biotech and medical technology patents.

Key details include:

  • The concessional tax rate would apply to all patent applications lodged  after 11 May 2021 when approved and for income years from 1 July 2022
  • The patents must be owned by an Australian company
  • R&D associated with the patent must have been carried out in AustraliaCurrently, Australia’s R&D tax incentive is our most valuable form of Federal Government support in driving local innovation.

The Federal Government has indicated that the regime may be extended to include patents in the clean energy sector.

Plans to limit this tax concession to certain industries are in contrast to other countries where it applies to all patents. At this time, there’s no clarification as to exactly what constitutes “biotechnology” in terms of patent classification.  

However, the announcement is definitely a step in the right direction and would likely evolve over time to include additional industries.

Currently, Australia’s R&D tax incentive is our most valuable form of Federal Government support in driving local innovation. When set up and managed correctly, the administrative process is relatively simple and the benefits can be quite substantial and critical for supporting business innovation in Australia.


Potential issues with the proposed regime

The concept of patent boxes dates back to 1970s Ireland, when the government introduced a reduced tax rate to incentivise local innovation.

Its name is linked to the simple idea that a taxpayer “ticks a box” in their annual tax return to make their claim. However, in reality the workings are often very complex and thereby more attractive to larger corporations than SMEs.

For example, the latest figures from the UK show that only 5% of SMEs make use of the country’s Patent Box incentive – likely because of the time and cost involved in administering it.

In Australia, this is further complicated by the fact that our incentivised tax rate is still relatively high. At 17%, it sits well above the UK’s incentivised tax rate and Sweden’s standard corporate tax rate of 10%. This may mean that corporations which have traditionally opted to conduct their patent and associated R&D activities overseas in more attractive jurisdictions will continue to do so.

It’s also unclear at this stage how a company will calculate how much revenue is derived from the patented technology.  


For example, if a car manufacturer patents a clean energy part in a vehicle, it must only claim the portion of revenue that’s generated from that part. The fact that manufacturing income is set to be excluded in Australia’s first Patent Box regime (unlike the UK) will significantly limit what biotech and medical businesses can claim.


While we believe this is a great initiative and well overdue to encourage more innovation and manufacturing in Australia, we’re excited to learn more about the details as they come to light.

With the regime set to officially launch at the start of the next financial year, the draft legislation will no doubt provide a clearer roadmap on who is set to benefit and how they can make a claim.

Watch this space for further information as it’s released.


Want to learn more?

If you require further information on the proposed Patent Box regime, please reach out to your local RSM adviser

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Authors

Jessica Olivier
Partner, R&D Tax and Government Incentives, National Leader - Manufacturing Services
Ross Dixon
Senior Manager - Albury