As we recover from the pandemic and find our new normal, Australia’s strength as a leader in research and development, innovation and technology will become more important than ever before. The 2021-22 Federal Budget puts forward investment of almost $1.2 billion in Australia’s digital future through a comprehensive Digital Economic Strategy. This includes investment in growing digital skills and digital safety and security, to enable businesses and consumers to actively engage in the digital economy with confidence, but also to empower businesses to grow investment in digital technologies. In addition, a “patent box tax regime” will be introduced to encourage investment in Australian medical and biotech technologies.
Further measures supporting innovation, such as reforms to employee share schemes, can also be found under Attracting global business and talent.
Introduction of Patent Box regime for medical and biotech innovations
The Government is introducing a “patent box tax regime” to encourage innovation in Australia by taxing corporate income derived from certain patents at a concessional effective corporate tax rate of 17 per cent (compared to the current headline corporate tax rate of 30 per cent for large businesses and 25 per cent for small to medium companies from 1 July 2021).
The patent box concession is proposed to apply from income years starting on or after 1 July 2022, but only in respect of granted patents which were applied for after 11 May 2021 (the date of the Budget announcement).
The patent box will, at least initially, apply to income derived from Australian medical and biotechnology patents only. The Government will consult on whether a patent box would be an effective way of supporting innovation in the clean energy sector.
By providing a competitive tax rate for certain profits generated from Australian owned and developed patents, a carefully designed patent box regime has the potential to deliver long-term transformational outcomes for the Australian economy by boosting continuing investment in innovation opportunities within Australia. It should also ensure ownership of the outcomes of successful medical innovation remain in Australia by reducing the incentive to transfer valuable intellectual property out of Australia.
Many comparable jurisdictions such as the United Kingdom, France, Spain and the Netherlands currently have a broad “patent box” or “innovation box” regime that is designed to encourage the development and ownership of certain intellectual property in their home jurisdiction. Enacting a similar ‘patent box’ regime should help Australia to remain competitive and support a local growth agenda in the specific industries targeted.
The Government will follow the OECD’s guidelines on patent boxes to ensure the patent box meets internationally accepted standards. The Government will consult with industry in respect of the detailed design of the patent box regime. Although a decision has been made to pursue a narrow and targeted regime, we would query whether consultation may lead to a regime over time with broader application (for example, similar to the Dutch innovation box which includes copyright in software).
The Government has also asked the Board of Taxation to review the administration of the Research & Development (R&D) Tax Incentive before the end of 2021.
Potentially faster tax write-offs for intangible depreciating assets
In the lead up to the Budget, the Government announced that the tax law will be amended to allow taxpayers the choice to claim tax depreciation for certain intangible assets by either self-assessing the effective life of the asset or over its statutory effective life. The Government has indicated this will apply to eligible assets acquired from 1 July 2023. This is also the new scheduled end date for the “temporary full expensing” concession, which was announced in last year’s budget and has now been extended by a further year in this Federal Budget.
Under the current enacted law, intangible depreciating assets must be written off for tax purposes over the legislated statutory effective life as prescribed for the particular type of intangible (for example, in-house software can only be written off over five years). The amendment will apply to patents, registered designs, copyrights and in-house software.
The proposed change to provide a mechanism for taxpayers to self-assess the effective life of intangible depreciating assets is welcomed and levels the playing field with tangible assets.
However, it can be acknowledged that the intangible asset depreciation rules in other jurisdictions are more extensive and as such remain a point of distinction for an Australian businesses seeking an ‘innovation advantage’ when it comes to the depreciation of intangible assets. Additionally, the proposed measure may be of little value to start-ups who are loss making in their early years.
This is the Government's second attempt to change the way in which intangible assets are depreciated. The Turnbull Government announced this same measure in its National Science and Innovation Agenda in 2015. The measure was later abandoned as it was not supported by the Opposition and failed to pass in the Senate. It is hoped that the current Government has more success passing this legislation the second time round.
Digital Games Tax Offset
The Government will introduce a 30 per cent refundable tax offset for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure. The maximum Digital Games Tax Offset (DGTO) an eligible business will be able to claim each year will be capped at $20 million.
Consultation with industry is expected in mid-2021 to inform the criteria and definition of qualifying expenditure to support the development of digital games, with the DGTO to be available from 1 July 2022. The offset will be available to Australian resident companies or foreign resident companies with a permanent establishment in Australia. It will not be available for development of games with gambling elements or that cannot obtain a classification rating.
This announcement, which was made in the lead up to the Budget, is expected to provide a significant boost to the gaming industry and has been very well received by the industry. The intention of the offset is to not only develop the fast growing digital gaming industry in Australia, but also to attract and retain key digital talent that is transferable to other sectors. This should help position Australia as a leader in digital technologies in the future.
Funding for adoption of e-invoicing
The Government will provide $15.3 million in funding to increase awareness of the value of electronic invoicing (e-invoicing) for all businesses. This follows the announcement in last year’s Federal Budget that e-invoicing will be mandatory for all Commonwealth agencies from 1 July 2022.
This funding will support the Treasury and the Australian Peppol E-Invoicing Authority (ATO) to improve business e-Invoicing awareness and adoption through:
- working with payment providers (for example, EFTPOS, Visa, Mastercard and New Payments Platform Australia) to integrate e-invoicing into the main payment methods used by business to help businesses get paid faster
- educational activities to raise business awareness
- supply chain pilots with large businesses to gain insights and drive adoption across supply chains
- continuing to work with states and territories to extend public sector e-invoicing adoption, and
- further consultation on potential regulatory and non-regulatory ways to accelerate e‑invoicing adoption.
These actions aim to assist in the acceleration of adoption of Peppol e-Invoicing in the private and public sectors and lay further foundations for an expected national e-invoicing mandate following further stakeholder consultation. Of particular interest, there will be opportunities for large and small businesses and systems providers to work together to drive network adoption via targeted supply chain pilots. This aims to address industry concerns around inter-operability between small and large business systems and processes to allow for supplier and customer enablement to occur at speed and at scale, a key differentiated feature of a universal e-invoice system like Peppol.
Mass adoption will be key for the economy to fully realise the estimated $28 billion efficiency dividend over the next ten years and drive reduced payment times from large to small businesses, in conjunction with other measures such as the Payment Times Reporting requirements. There may also be future benefits for streamlining tax compliance obligations and reducing red tape arising from adopting the Peppol e-invoicing framework across the economy, as has been the case in other OECD territories.
Review of venture capital concessions
The Government has committed to undertake a review of the existing venture capital tax concessions to ensure current arrangements are fit-for-purpose and support genuine early stage Australian start-ups.
The tax incentives currently available - the venture capital limited partnership (VCLP) and early stage venture capital limited partnership (ESVCLP) rules - are designed to attract foreign investment and encourage venture capitalists to invest in early-stage Australian business at start-up and growth stages. The existing concessions include flow-through tax treatment to investors, a tax exemption for eligible foreign venture capital limited partners on their share of incomes and gains from eligible investments or incomes and gains arising from the disposal of such investments, and more recently, a non-refundable carry-forward tax offset of up to ten per cent of the value of eligible contributions made to an ESVCLP.
A review of the parameters and requirements for eligibility for these concessions is long overdue having regard to whether they are currently fulfilling the need for entrepreneurial capital available for investment in new ventures in Australia.
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Brady Dever
Partner, Tax & Legal Alliances Market Leader, PwC Australia
Tel: +61 431 759 399