Australian budget includes patent box, depreciation changes

By Doug Connolly, MNE Tax

The Australian government’s Budget 2021–22 released May 11 announces plans to encourage research through a new patent box regime and other measures and to provide broader business investment support through extending temporary provisions allowing full expensing and loss carry-back.

Research and innovation incentives

The patent box regime introduced in the budget would reduce tax on income from certain types of research to encourage businesses to undertake research and development in Australia and hold their patents there. The new regime is currently aimed at supporting development of the medical and biotech industries. The budget announces that the government is also looking into the patent box as a way to support clean energy.

Under the patent box regime, income from Australian medical and biotech patents would be taxed at a 17 percent rate, rather than at the general corporate tax rate, i.e., 30 percent or 25 percent for small and medium companies. The measure would apply to patents granted after the budget announcement.

Patents and depreciation

The budget states that the government also plans to allow businesses to self-assess the effective life of patents and certain other intangible assets for depreciation purposes. The effective life of such assets is currently set by statute. In addition to patents, the self-assessment provision would apply to registered designs, copyrights, in-house software, licenses, and telecommunication site access rights.

The ability to self-assess the effective life of such assets is intended to reduce the upfront costs of related investments. The provision would apply after the expiration of temporary full expensing (June 30, 2023).

In addition, to support the growth of Australia’s digital gaming industry, the budget also includes a measure to offer digital game developers a 30 percent refundable tax offset for qualifying expenditures. The maximum benefit a developer can claim would be capped at AUD 20 million per year (approximately USD 15 million).

Extended business tax relief

The Australian government introduced temporary full expensing and temporary loss carry-back as business support measures in last year’s budget. The current budget would extend those measures by an additional year.

Under the temporary full expensing provision, eligible businesses can deduct the full cost of eligible depreciable assets. To be eligible, businesses must have aggregated annual turnover or total income of AUD 5 billion (approximately USD 3.9 billion) or less. With the one-year extension, temporary full expensing would be available until June 30, 2023.

The temporary loss carry-back provision currently in effect enables companies with aggregated annual turnover of up to AUD 5 billion to apply tax losses incurred during the 2019–20, 2020–21, and 2021–22 income years to offset tax paid in 2018-19 or later years. The new budget would extend this, adding the ability to carry back losses incurred in the 2022–23 income year.

The government estimates that the extension of the two measures would deliver an additional AUD 20.7 billion (approximately USD 16 billion) in tax relief to businesses.