There has been much discussion in the past week or so about the controversial new patent box regime, given Treasury’s release of a discussion paper to inform development of this initiative. But what does the patent box mean for researchers?

For many, the answer is not much, unless you’re in the medical and biotechnology sectors (and, possibly the clean energy sector).

For those in the lucky sectors, the “patent box” – coined because of the theoretical box to be ticked in a tax return – will provide a tax incentive to eligible companies. Eligible profits will be taxed at at a concessional tax rate of 17 per cent, significantly lower than the current company tax rate in Australia of 30 per cent, or 25 per cent (from July 1 2021) for base rate “small business” entities.

The catch is that only patents applied for after the budget announcement are eligible, and the concessional rate will only effectively apply to income generated by the patent itself, rather than manufacturing, branding and other attributes.

The scheme will follow the OECD Base Erosion and Profit Sharing (BEPS) Action 5 standard, to minimise the risk of harmful practices like tax avoidance. This approach implements a substantial activity requirement – a link between the benefits of the IP regime and the extent that the underlying research and development generating the IP asset was performed in the home jurisdiction. The tax benefit from income derived from IP should be proportional to the IP owner’s own R&D expenditure.

Proponents of the scheme argue that the Australian patent system is crucial to the development of the medical and biotechnology industry to reward and encourage innovation, and that the patent box will promote an increased investment in R&D activities, promote commercialisation, and prevent the erosion of the domestic tax base that can so often occur when mobile sources of income, such as intellectual property, are moved to other jurisdictions.

Others note that the patent box scheme attempts to fill a gap left by the existing Australian R&D tax incentive, which enables companies to claim a tax offset for eligible R&D expenditure that exceeds the corporate tax rate.  This incentive does not actually guarantee that the R&D being undertaken will ever actually result in a commercial outcome, a shortcoming which the patent box scheme attempts to address.

On the surface, it would appear that the scheme will promote the commercialisation of research in Australia, presenting a number of opportunities for university researchers in the selected sectors.

However, the scheme has already attracted criticism. It is worth noting that several other jurisdictions, including many European countries, already administer similar schemes, with mixed success.

A 2015 Department of Industry, Innovation and Science (DIIS) report also concluded that a patent box could increase the number of patent applications – but this would be opportunistic behaviour rather than stimulating genuine inventiveness, and that “patent boxes are not a very appropriate innovation policy tool because they target the back end of the innovation process, where market failures are less likely to occur.”

The general conclusion from existing research is that similar schemes often do not achieve their desired effects of encouraging innovation or local R&D.

For university researchers, perhaps the biggest hurdle to accessing the tax incentive is the cost of administration, and the disincentives this will cause for companies looking to access the regime. That is, the proposal, as it currently stands, may lead to potentially complicated formulas required to determine how to calculate the income that will be derived from just the patent.

In the UK, for example, there is data to suggest that SMEs find the scheme too challenging to comply with, given their limited resources (between 2017 and 2019, large companies accounted for 96.3 per cent of the total relief claimed).[1]

These tax incentives, therefore, are generally more attractive for large companies, which stand to derive the most benefit from the scheme. Small and medium sized businesses who have struggled to survive COVID-19 arguably have little time to come looking for patent-generating collaborations with universities, let alone wade through complex compliance rules to access the concessional tax rate.

For start-ups who generally start in a tax loss position, the regime may be altogether too difficult to access. As such, the ability of the patent box to stimulate increased opportunities for collaboration with the university sector may be limited.

Another drawback of the proposed scheme for university researchers is that it could encourage investment of large companies toward the areas currently covered by the scheme, leaving opportunities for R&D in other areas lagging.

Nevertheless, the development of an effective tax incentive program that avoids the pitfalls encountered in other jurisdictions may well assist a HE sector that has suffered as part of the overall decline in gross spending on R&D.

It will be interesting to see whether input from the consultations (closing 16 August) can assist policymakers to finalise design features clever enough to silence the critics. The pressure is certainly on, given its $206.4 million price tag over the forward estimates, and its promise to stimulate domestic innovation.


Ms Kirsty Abbott  is a Taxation Law Lecturer at CQUniversity School of Business and Law. Her research includes consideration of the automation of decision-making processes by the public sector.

Dr Amanda-Jane George is a Postgraduate Research Coordinator, teaching and researching in Innovation & IP Law at the CQUniversity School of Business and Law.



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