Edited version of your written advice

Authorisation Number: 1013013308454

Date of advice: 12 May 2016

Ruling

Subject: Pay as you Go (PAYG) Withholding and Superannuation Guarantee

Question 1

Does the employer have an obligation to withhold Pay as you go (PAYG) from any amount payable to an inventor in respect of the payment by the employer of proceeds from the commercialisation of Intellectual Property (IP) ensuing from various licencing arrangements the employer has entered into with third party licensees (Agreements), under the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on

1 July 2000

Relevant facts and circumstances

The employer is an organisation subject to the following policies:

i. Intellectual Property- Policy - (The Department Policy);

ii. The employer Intellectual Property Policy, (the employer IP Policy).

The employer IP Policy was developed giving consideration to all applicable laws and the Department Policy and it applies to all the employer employees, including any person using the employer's resources. The employer IP Policy contains similar provisions in respect to the distribution of commercial proceeds (inventor's payment) as set out in the Department Policy.

The Department Policy directives denote that where IP commercialised by a person using the employer's resources gives rise to income it shall be distributed in the following manner:

i. One third to the creators of the intellectual property;

ii. One third to the department or section of the organisation which originated the intellectual property; and

iii. One third to the organisation.

The definition of creator is very broad and includes not just employees but also visitors and students.

Section 11 of the Department Policy states:

The ownership of IP which arises from such ventures will depend upon the contractual arrangements between the parties.

Section 12 outlines that arrangements of this kind will vary in their terms and conditions, and may or may not involve such aspects as:

• Assignment of the intellectual property to the commercialising entity;

• Provisions for profit sharing with creators

Under the Department Policy any monies paid to employees are to be paid as income and payment of any amounts to any creator is conditional upon the creator acknowledging, amongst other things, his or her responsibilities for any taxation obligations which may flow from the receipt of the funds.

The employer is the owner of certain IP rights in a research project carried out by research team members, has derived commercialisation proceeds from the XX project following entry into various licence agreements.

The employer is distributing commercialisation proceeds in accordance with the employer IP Policy to Person A, an inventor.

Person A was until recently an employee of the employer until they gave their notice of resignation which took effect as of the relevant income year. During the period when the intellectual property was created, according to Person A's assertions and the statement from one of the lead inventors, Person A contributed to the XX project in the capacity of a student.

Person A has indicated that they wish payment to be made on rendering an invoice on the basis that their contributions to the XX project were not made during the course or as a direct result of their employment with the employer but rather that they were derived as a result of the research positions they held at the relevant times.

Contributions to the XX project

The employer has been able to ascertain the following based on the available documentation at the employer and to the extent that these correspond with the statements provided by Person A and the leading inventor:

a. The XX project began more than 25 years ago.

b. Person A was engaged on the XX project from 19XX on an ongoing basis, initially as student and subsequently as researcher.

c. In accordance with this report for the purposes of inventorship determination, the employer determined that from 19XX and still ongoing at the date of the report that Person A has consistently played a role in major aspects of the XX project and was appointed as Key Investigator, with a role contributing to both the development of research themes and leadership of the research effort. These efforts on the XX project led to the patent family which have been commercialised.

d. You have included a report that confirms that Person A was a co-awardee of external funds used in the XX project in various years.

Positions history with the employer

The records that could be obtained from the employer payroll show that Person A was a paid employee by the employer at various times over a number of years, ceasing in the relevant income year.

Appointments/Positions held as a student/researcher

Person A was enrolled as a research student, specifically for the study of the XX Project, which was funded by a scholarship.

The research positions were supervised by the main Inventor and Person A was physically located at the employer when carrying out their research efforts.

You have provided a number of documents regarding Person A's employment history with the employer. Within these documents are the list of functions and responsibilities for Person A's role. Relevantly, the duties/responsibilities did not include research work as one of the functions of the employment role.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Summary

The inventor payment is not subject to PAYG withholding.

Detailed reasoning

Part 2-5 of Schedule 1 of the Taxation Administration Act 1953 (TAA) covers Pay As You Go (PAYG) withholding obligations.

Section 12-35 of Schedule 1 to the TAA 1953 provides that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Paragraph 14 of Taxation Ruling (TR) 2005/16 states for section 12-35 of the TAA to apply, there must be an employee, a payment to an employee as a consequence of his/her employment and finally the payment must be made by an entity.

The term 'employee' is not defined in the TAA 1953 therefore it has its ordinary meaning. In most cases, it will be self-evident whether an employer/employee or principal/independent contractor relationship exists.

The question whether an amount is in respect of or for in relation directly or indirectly to employment or to services rendered and limitations imposed upon the generality of these words have been discussed in a number of cases.

If a payment is made to an individual but not in their capacity as an employee, withholding is not required under section 12-35 of Schedule 1 of the TAA 1953.

Application to your situation

In this case, it is clear that Person A did have an employment relationship with the employer over a period of time. The question is whether the inventor payment received is sufficiently separate from that employment. It has to be determined whether the payments are made as a consequence of Person A's employment and whether the payments are considered to be salary, wages etc.

Under the Department Policy any monies paid to employees are to be paid as income and payment of any amounts to any creator is conditional upon the creator acknowledging, amongst other things, his or her responsibilities for any taxation obligations which may flow from the receipt of the funds.

In the various letters of offer you have provided over the years, the list of functions and responsibilities for Person A's role are outlined. Relevantly, the duties/responsibilities did not include research work as one of the responsibilities of the role.

Conclusion

The inventor payment/s are not paid to Person A as a consequence of their employment. The payment/s are paid as creators of XX and not directly or indirectly in their capacity as employees. The Inventor payment/s are also not considered salary or wages, therefore, there is no obligation on the employer to withhold from payments made to Person A in relation to inventor payments under section 12-35 of Schedule 1 of the TAA 1953.

ATO view documents

Taxation Ruling 2005/16

Taxation Ruling No. IT 2581

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