Business tax measures
Patent box tax regime
Globally, many jurisdictions offer patent boxes, including the UK and many European countries. These provide a concessional rate of tax for companies that derive income from their IP, to encourage them to perform R&D and house their IP in those countries. Currently, Australian businesses that generate IP do not have access to these same incentives, leaving them in an uncompetitive situation, with companies either forced to pay much higher tax rates, or relocate their IP to other jurisdictions.
This Budget proposes a new patent box regime to curtail this drain on Australian jobs and revenue, with a concessional patent tax rate of 17% to apply to income derived from medical and biotechnology patents. In effect, this reduces the applicable tax rate due to income from a patent in Australia from the current 30% rate (for large business), down to 17%. As part of this process, it will be necessary to differentiate between income derived due to the patent, and income due to manufacturing, branding, and other attributes. This will be one of the key design elements of the proposed patent box.
The new patent box tax regime will be limited to patents granted in the biotechnology and medical industries. It is likely the Government will follow the OECD design principles for patent boxes.
There is expected to be a consultation period (including the potential to extend to clean technology industries), with changes due to come into effect from 1 July 2022, and will be applicable to any granted patents that were applied for after the Budget announcement.
Although it is pleasing Australian biotechnology and medical companies will likely benefit from the patent box, it is disappointing that it does not apply to other industries, in particular the Australian technology, fintech and other high-tech sectors that generate and rely on income from patents and R&D.
Temporary full expensing extension until 30 June 2023
Government has responded to submissions by EY and others to extend the existing temporary full expensing rules previously announced in October 2020 to apply to eligible depreciating assets first used or installed ready for use until 30 June 2023. No additional changes to the measures are proposed.
Under the revised measures, taxpayers may claim an immediate deduction for eligible depreciating assets first used or installed ready for use, from 6 October 2020 until 30 June 2023. In addition, second element costs included in the cost of eligible depreciating assets during this period may also be immediately deductible.
Corporate taxpayers with ordinary and statutory income in the 2018-2019 or 2019-2020 income year less than $5 billion may also be eligible for the “<$5billion alternative test”. To be eligible taxpayers must meet a more than $100m asset investment test over the 2017 to 2019 income years. Exposure draft legislation with various technical amendments was separately released which clarifies that the cost of buildings which may be deductible under Division 43 can also be included in the assessment of the $100m asset investment test.
Temporary loss carry-back extension
Companies with aggregated turnover of less than $5 billion can already temporarily carry-back company tax losses incurred in the FY20 to FY22 years to offset taxable income in FY19 or later years, resulting in cash refunds of taxes paid in those earlier years (upon lodgement of FY21 and/ or FY22 tax returns). An extension of this measure will allow eligible companies to also optionally carry back (utilise) tax losses from the 2022-23 income year to offset previously taxed profits as far back as the 2018-19 income year when they lodge their 2022-23 tax return.
Extension to Building Better Regions Fund
The Government will continue to support regional Australia through a further $256.5m over 4 years from 2021-22 to the Building Better Regions Fund. This grant funding will support investment into community infrastructure and employment creation aimed at building regional economies.
Technology Investment Roadmap – emissions reduction incentives
The Government has committed $1.2 billion over 10 years (including $643m over 4 years from 2021-22) to drive lowering of emissions by creating the development of regional hydrogen hubs and supporting clean technologies such as carbon capture, use and storage. Support will also be providing a high integrity carbon offset scheme.
ATO Early Engagement Service (AEES)
In order to avoid the risk of new Australian investments being delayed or hampered by ATO processes, the Government has asked the ATO to establish an ATO Early Engagement Service, or “concierge service” to support businesses wishing to invest in Australia.
The concierge service will:
- Provide “up front” confidence to investors about how Australian tax laws will apply be tailored to the particular needs of each investor.
- Offer support in relation to any or all federal tax obligations.
- Accommodate specific project timeframes, and other time sensitive aspects of a transaction such as foreign investment review board (FIRB) approvals.
- Where binding advice is desired, it will also incorporate access to expedited private binding rulings and advance pricing agreements.
- Integrate with the tax aspects of the FIRB approval process (if applicable) so that investors only need to provide information once.
The ATO will consult with business and other stakeholders to develop the AEES during May and June 2021. The service will be available for eligible investors from 1 July 2021.
How effective this measure will prove to be will depend on the actual responsiveness, clarity and timeliness of decision making exhibited by the ATO.