Budget 2021: A 'patent box' to sprout innovation and talent attraction measures

Changes to Employee Share Schemes and a 'patent box' to encourage companies to base their R&D laboratories in Australia have been announced as part of the 2021-22 federal Budget.

As part of its digital economy strategy, unveiled ahead of the federal Budget on Thursday, the government promised to deliver tax incentives for businesses to "stimulate investment in digital technologies to enhance their productivity and grow and create jobs".

This included a "digital games tax offset" for qualifying Australian games expenditure to eligible businesses, which will see the introduction of a 30% refundable tax offset for eligible businesses that spend a minimum of AU$500,000 on qualifying Australian games expenditure; the ability for taxpayers to self-assess the effective life of certain depreciating intangible assets; and the government undertaking assessment reviews of the venture capital tax concessions to ensure they are achieving their intended objectives.

"The government will allow taxpayers to self-assess the tax effective lives of eligible intangible depreciating assets, such as patents, registered designs, copyrights, and in-house software," it added on Tuesday night.

This measure will apply to assets acquired from 1 July 2023, after the temporary full expensing regime has concluded.

This measure is expected to cost AU$170 million over the forward estimates.

The government also added a handful of measures to this umbrella on Tuesday, including a promise to reduce red tape and remove cessation of employment as a taxing point where Employee Share Schemes (ESS) are concerned.

"Employers use ESS to attract, retain, and motivate staff by issuing interests such as shares, rights (including options) or other financial products to their employees, usually at a discount," the Budget papers explain.

Currently, under a tax-deferred ESS, where certain criteria are met, employees may defer tax until a later tax year -- the deferred taxing point. This change will result in tax being deferred until the earliest of the remaining taxing points, instead.

"This measure will help Australian companies to engage and retain the talent they need to compete on a global stage, which is consistent with recommendations from the Global Business and Talent Attraction Taskforce," it said.

The measure is expected to decrease receipts by AU$550 million over the forward estimates period.

In a bid to back Australian science and technology, the government has also announced the introduction of the "patent box".

"The government will introduce a patent box tax regime to further encourage innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022," it said.

It hopes the patent box will drive research in medical and biotech technologies, and support skilled jobs by encouraging companies to base their R&D laboratories in Australia.

"The government will consult closely with industry on the design of the patent box and explore whether expanding the incentive would be an effective way of supporting clean energy," it said.

Elsewhere, the government will also remove the concessional 10% effective tax rate that applies to income derived from eligible offshore banking activities, under the banner of "removing the preferential tax treatment for Offshore Banking Units".

It believes the measure will address concerns raised by the Organisation for Economic Cooperation and Development over preferential tax treatment.

The measure is flagged as AU$160 million over forward estimates.

The government said it will also update the list of jurisdictions that have an effective information sharing agreement with Australia.

"The measure will help maintain alignment between the [exchange of information] relationships that have been established and the concessional [Managed Investment Trust] withholding rate, to encourage jurisdictions to establish information sharing agreements with Australia," the Budget documents state.

"These agreements form an important part of Australia's commitment to safeguard against offshore tax avoidance and evasion."

The government will also be providing the Australian Taxation Office (ATO) with AU$1.9 million capital funding in 2022-23 to build an online system to enhance the transparency of income tax exemptions claimed by not-for-profit entities.

Currently, non-charitable NFPs can self-assess their eligibility for income tax exemptions, without an obligation to report to the ATO. From 1 July 2023, the ATO will require income tax exempt NFPs with an active Australian Business Number (ABN) to submit online annual self-review forms with the information they ordinarily use to self-assess their eligibility for the exemption.

Elsewhere, the government will extend the power of the Administrative Appeals Tribunal (AAT) to pause or modify ATO debt recovery action in relation to disputed debts that are being reviewed by the Small Business Taxation Division (SBTD) of the AAT.

This measure will take effect from the date of Royal Assent of the enabling legislation.