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Edited version of your written advice
Authorisation Number: 1013129095771
Date of advice: 9 December 2016
Subject: Superannuation Guarantee
Question 1
Are payments to an employee through revenue sharing arrangements in respect of intellectual property (IP) owned by, created or developed whilst employed with the entity 'salary and wages' as defined in subsection 11(1) the Superannuation Guarantee Administration Act 1992 (SGAA)?
Answer
No
Question 2
Do the payments fall within the meaning of 'ordinary time earnings' as defined in subsection 6(1) of the SGAA?
Answer
No
Question 3
Does an individual who is not ordinarily an employee of the entity who is paid the payments become an employee within the meaning of that term in section 12 of the SGAA?
Advice
No.
This ruling applies for the following periods
1 June 2016 to 30 June 2021
Relevant facts
The entity offers financial incentives to successful discoverers and/or inventors who may be or not be employees in respect of intellectual property (IP) which is vested in the entity and developed whilst employed with the entity.
The IP in question is the subject of possible future commercialisation and potential payments to the employees and other individuals.
Relevant legislative provisions
Superannuation Guarantee Administration Act 1992 subsection 6(1)
Superannuation Guarantee Administration Act 1992 subsection 11(1)
Income Tax Assessment Act 1997 section 995-1
Patents Act 1990 section 15
Advice
Reasons for Decisions
An employee's 'earnings', for the purpose of the definition of OTE in subsection 6(1) of the SGAA, is the remuneration paid to the employee as a reward for the employee's services. The practical effect for superannuation guarantee purposes is that the expression 'earnings' means 'salary or wages'.
OTE is described in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages', as the Payments for the 'ordinary hours of work'.
The term 'ordinary hours of work' is defined as:
● the hours specified as the employee's ordinary hours under an award or agreement; or
● if the ordinary hours are not specified, the hours regularly worked by the employee; or
● if the ordinary hours are not specified and the regular hours are impossible or impractical to determine, the actual hours worked.
In summary, under SGR 2009/2, all earnings for the ordinary hours of work are included as OTE. Payments for hours performed outside of the ordinary hours of work are not classed as OTE.
Subsection 11(1) of the SGAA defines 'salary and wages' as including:
(a) commission; and
(b) payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate; and
(ba) payments under a contract referred to in subsection 12(3) that are made in respect of the labour of the person working under the contract; and
(c) remuneration of a member of the Parliament of the Commonwealth or a State or the Legislative Assembly of a Territory; and
(d) payments to a person for work referred to in subsection 12(8); and
(e) remuneration of a person referred to in subsection 12(9) or (10).
Proceeds from commercialisation of IP on the other hand are a different aspect. Commercialisation in this case is the process by which the benefits available from an innovation are made accessible to a market(s) in exchange for fair consideration.
Any potential breakthrough could be regarded as a 'result', with the proceeds from commercialisation paid only after achieving a result and it then proceeding on a commercial basis. The proceeds only become payable after a result has been produced together with the ensuing sale of the intellectual property. Correspondingly, if there was not a result there would not be commercialisation proceeds to distribute. The proceeds are not based on specified duties or performance targets, and are not paid to the employees in an employment context.
Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines intellectual property as: an item of intellectual property consists of the rights (including equitable rights) that an entity has under a Commonwealth law as:
(a) the patentee, or a licensee, of a patent; or
(b) the owner, or a licensee, of a registered design; or
(c) the owner, or a licensee, of a copyright;
or of equivalent rights under a foreign law.
Distributions paid under this framework do not form part of an employee's superannuable salary paid by the entity. Commercial returns received from intellectual property will be distributed to the successful discoverer(s)/inventor(s) or their estate for the life of the patent and extensions thereof for as long as there is net commercial revenue from the respective IP.
Section 15 of the Patents Act 1990 indicates situations exist where an employer would be entitled to have the right to hold a patent granted to it by an employee. The most obvious scenario is where an employee produces an invention in the course of his/her employment. It is an implied term of all employment contracts that the employer is entitled to the benefit of any invention by an employee either made in the course of employment or resulting from work the employee is paid to do. This will be the case unless there is a specific express or implied agreement between the parties that states otherwise.
Subsection 6(1) of the SGAA defines OTE in relation to an employee as earnings in respect of the total ordinary hours of work, other than some excluded lump sum payments in regard to termination of employment.
Payments are for IP developed whilst working for the entity and will only be distributed if there are proceeds from the commercialisation of the IP in the future. As such the payments cannot be reasonably expected to be exclusively associated with ordinary hours worked at the entity.
The Payments made as a consequence of the work of individuals resulting in proceeds from the commercialisation of the IP, are also not salary and wages for the individual, and a Payment made to a non-employee does not change their status to one of an employee as the Payments are not made in consequence of employment but as a result of being a successful discoverer/inventor.
Conclusion
The IP revenue payments paid to the employees of the entity are not paid as a consequence of the employee's employment. The Payments are paid to them as discoverers/inventors of IP and not directly or indirectly in their capacity as employees. The IP revenue payments are also not considered salary or wages therefore there is no obligation on the entity to pay SG on these amounts.
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