Edited version of your written advice

Authorisation Number: 1013139468815

Date of advice: 14 December 2016

Ruling

Subject: Commercialisation Revenue Payments

Question 1

Is the entity required to withhold PAYG withholding amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from distributions of net commercialisation revenue (Commercialisation Revenue Payments) it makes to discoverers/inventors?

Answer

No

Question 2

Is the entity required to withhold PAYG withholding amounts under section 12-190 of Schedule 1 to the TAA from Commercialisation Revenue Payments it makes to discoverers/inventors?

Answer

No

Question 3

Where:

(I) The entity receives a payment under a licensing agreement governing the commercialisation of the IP produced by a discovery or invention which is a royalty;

(II) Commercialisation Revenue Payments are made by the entity in accordance with the terms of their framework to the successful discoverer/inventor; and

(III) The successful discoverer/inventor is a foreign resident at the time the Commercialisation Revenue Payments are made,

is the entity required to withhold PAYG withholding amounts under section 12-285 of Schedule 1 to the TAA from the royalty payments the entity receives under licensing agreements governing the commercialisation of the IP produced by the discovery or invention?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The entity is a body corporate established under a State research Act.

The function of the entity is to control and manage a research institute (Institute).

The Institute is also established under the State research Act and is a fully integrated research and development centre.

The Institute has an active program for patenting and commercialising intellectual property (IP). To promote innovation and inventiveness, the Institute offers financial incentives to successful discoverers and/or inventors. These financial incentives are paid pursuant to and in accordance with legislation and a remuneration framework.

The legislation indicates that it is the status of an individual as a successful discoverer or inventor which provides the basis for the authority of the entity to pay a bonus.

It also indicates that individuals who are paid such bonuses may, or may not be, employees of the entity.

The remuneration framework is separate to, and distinct from, any existing or previous relationship between an individual discoverer/inventor (whether in the nature of employment or not). It establishes the mechanism for successful discoverers/inventors to be rewarded for their innovation pursuant to the legislation.

The remuneration framework provides for payments to successful discoverers/inventors which are distributions of net commercialisation revenue (Commercialisation Revenue Payments).

The total amount to be assigned to the successful discoverer/inventor is one third of the net commercialisation revenue. Net commercial revenue is defined as:

(a) All monies received by the entity under a commercialisation contract including signing fees, milestone payments, royalties upon sales, royalties upon sub-license fees, lump sum amounts, dividends, proceeds of sale of shares in a company, and all other monies and consideration whatsoever, excluding

(i) Monies received for research and expended on research;

(ii) Monies received from a licensee or assignee subject to an obligation to use those monies to subscribe for shares in the licensee or assignee,

(b) Less all out of pocket expenses incurred in the commercialisation of the intellectual property including patent application fees, legal fees, license fees, the fees of other consultants, travel expenses, funding body grant reimbursements, government proceeds of commercialisation return, investments made by the Institute in directly supporting the commercialisation of the invention through proof of concept funds, development grants and other costs associated with the delivery of the commercial agreement.

The distribution of the net commercialisation revenue among relevant individuals must be formalised in a letter.

Commercialisation Revenue Payments can only be made following approval by the remuneration committee of the entity.

The remuneration framework provides that the Commercialisation Revenue Payments will only be made to successful discoverers/inventors who are:

(a) The entities' officers, employees, or students, whose IP has been assigned to the entity, through the operation of the legislation, employment agreement or otherwise; or

(b) Collaborators

A collaborator is an individual who is:

(a) A named successful discoverer/inventor on a patent or named contributor in a 'splits' letter; and

(b) Working under the auspices of the entity.

The list of persons regarded by the entity as working under the auspices of the entity includes but is not limited to:

(a) Visiting scientists;

(b) Honorary, emeritus and affiliate scientists;

(c) Students; and

(d) Collaborators at other organisations working on research led by the entity.

The policies of the entity advise that a visiting scientist or affiliate is not considered to be an employee of the entity. Nor is a student as students are enrolled at a university. Whereas honorary researchers are taken to be employed by the entity whilst actively engaged in the work of the Institute or doing anything incidental to that work.

The terms of the remuneration framework indicate that:

(a) It is the status of an individual as a successful discoverer/inventor which provides the basis for both the authority of the entity to pay, and the opportunity for an individual to receive, a Commercialisation Revenue Payment.

(b) Individuals with various relationships with the entity(including but not limited to employment) may receive Commercialisation Revenue Payments under the terms of the framework.

(c) Those persons who are paid Commercialisation Revenue Payments under the remuneration framework may, or may not be, employees of the entity.

While in some cases a relationship of employment may exist between the entity and the individual who is the recipient of a Commercialisation Revenue Payment that relationship is not necessary, and if it exists, it does not provide the reason for the making of the Commercialisation Revenue Payments. The remuneration framework is separate to, and distinct from, any pre-existing relationship between the entity and the individual discoverer /inventor (whether in the nature of employment or not). It does not indicate that the Commercialisation Revenue Payments are made to an individual as an employee or in consequence of their employment.

The remuneration framework confirms that:

(a) In the case of the recipient who is an employee, the Commercialisation Revenue Payments do not form part of that employee's “superannuable salary” paid by the entity, and

(b) The commercial returns from the IP will be distributed to the successful discoverers and inventors or their estate for the life of any relevant patent and extensions of the patent for as long as there is net commercial revenue from the respective IP. Accordingly, at the time the Commercialisation Revenue Payments are made, the initial relationship between the entity and the successful discoverer or inventor (whether that be a relationship of employment, under the auspices of the entity or other) may no longer exist.

Consistent with their legislation, the IP Policy provides that, as an employer, the entity is the owner of the IP created by its staff members in the course of their employment.

The IP Policy also indicates that where a student participates in a research team which includes staff members, the IP arising from the research team will be owned jointly by the student (who is not an employee) and the entity (as the staff member's employer). Further, the entity requires that students participating in these projects assign any IP they generate in the course of the project to the entity.

In relation to visiting researchers, the policy provides that '…. generally it will be understood that entity will seek either ownership of any IP that is generated at the entity by the visiting researcher or a share in proceeds of commercialisation of such IP.'

Across the various relationships, including staff members, students and visiting researchers, the appointment/project is undertaken on the basis that the entity either has or will seek ownership of IP generated.

The key steps involved in the commercialisation process of a discovery and/or invention can be summarised as follows:

(a) Invention

When a discovery and/or invention is disclosed, the entities' Business Development team (BD team) will assess its commercial potential against a number of key criteria.

(b) Patent protection

If the BD team determines that the discovery and/or invention has commercial potential, the BD team and relevant discoverer/inventor will work on a development plan to support and/or strengthen the patent application for that particular discovery and/or invention.

(c) Commercialisation strategy

The BD team will identify a commercialisation strategy for the discovery and/or invention which may include partnering with an existing company or forming a start-up company.

(d) Out licensing of the technology

When a suitable partner has been identified/engaged, the BD team will negotiate and execute a licence agreement for the technology. The licence agreement will include details about:

a. The IP and commercialisation rights that are granted to the licensee company in return for certain financials; and

b. The obligations of the parties.

The relevant discoverer and/or inventor will often stay involved to this point to provide research expertise in the development of the technology and to receive research funding into their research laboratory. Any such funding will not form part of the Commercialisation Revenue Payment.

(e) Contract Management

At the time of licensing, the discovery and/or invention will usually require further development by the licensee company before going to market. The BD team will track the development of the technology and ensure that all revenues owed to the entity are collected and distributed according to the policy.

The commercialisation of the IP and the arrangements between the entity and an individual discoverer/inventor in that regard are matters which are separate and distinct from any previous relationship between the entity and the discoverer/inventor whether or not that previous relationship is in the nature of an employment relationship or not.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Taxation Administration Act 1953 Section 12-190 of Schedule 1

Taxation Administration Act 1953 Section 12-285 of Schedule 1

A New Tax System (Goods and Services Tax) Act 1999 section 9-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(2)

Reasons for decision

Question 1

Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

Paragraph 14 of Taxation Ruling TR 2005/16 states for the provision (Section 12-35 of Sch 1) to apply, there must be an employee, a payment of salary, wages etc. to an employee as a consequence of his/her employment and finally the payment must be made by an entity.

The entity makes payments to inventors who are either current employees of the entity, visiting scientists or students. In relation to current employees it is accepted that recipients of the payments in relation to the intellectual property (IP) are “employees” and the payments are made by an entity, therefore it has to be determined whether the payments are made as a consequence of the recipient's employment and whether the payments are considered salary, wages etc.

The question whether an item is either directly or indirectly related to employment or to services rendered is a question which has caused difficulty in a number of cases.

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

The leading case in connection with the question is FC of T v Dixon (1952) 86 CLR 540; 10 ATD 82. In that case it was held that weekly instalments to make up the difference between the rate of civil pay of an employee on enlistment and the rate of his defence force pay was in the nature of income, and therefore assessable. This decision overruled the decision of the Board of Review in 15 CTBR Case 8 that such payments were not assessable. All the members of the High Court agreed with the Board's view, however, that the payments were not allowed, given or granted to the employee in respect of, or for, or in relation directly or indirectly to any employment of or services rendered by him within the meaning of sec 26(e)(now section 15-2 of the ITAA 1997). In a joint judgment Dixon C.J. and Williams J. said (86 CLR at p 553; 10 ATD at pp 83-84):

``There can, of course, be no doubt that the sum of £104 represented an allowance, gratuity or benefit allowed or given to the taxpayer by Macdonald Hamilton and Company. Our difficulty is in agreeing with the view that it was allowed or given to him in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him. It is hardly necessary to say that the words `directly or indirectly' extend the operation of the words `in relation to'. In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause. It may be conceded also that the proviso has an effect upon the construction of para (e) of sec 26, but the effect is only to show that the allowance may be in consequence of a retirement from or termination of the office, not to show that a mere historical connection, as it may be called, is sufficient. We are not prepared to give sec 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination.''

Fullagar J said (86 CLR at pp 563-564; 10 ATD at pp 89-90):

``The moneys would not, of course, have been paid if the respondent had not been employed by Macdonald Hamilton and Company up to the date of his enlistment. But nothing that he had done in his employment by Macdonald Hamilton and Company, or might thereafter do if he re-entered their employment, provided the occasions of the payments. The payments were made irrespective of any services given by an employee as employee. The same bounty was available to one who had served for one month or for ten years.... The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterises the payment. The payment does not partake in any degree of the character of a reward for services rendered or to be rendered.''

In this case, the Commercialisation Revenue Payments are paid to persons who may or may not be employees of the entity. Individuals with varying relationships with the entity fall within the terms of the remuneration framework and have an opportunity to share in net commercialisation revenue on the same basis.

The Commercialisation Revenue Payments are made pursuant to a separate arrangement between the entity and the discoverer/inventor which is governed by the remuneration framework. The payments are linked to the commercial success of a research discovery that becomes a commercial product, rather than through an existing relationship with the entity and an individual. The success of the commercial product is not dependent on any work performed by the individual, its success is dependent on the ability to commercialise that discovery.

The Commercialisation Revenue Payments are not a reward for services which have been provided, as they are the product of the commercial success which is gained from exploiting the discovery. Not all discoveries from the entity will give rise to a Commercialisation Revenue Payment. Accordingly, the payment is not a reward for services as an employee.

The legislation and the remuneration framework identifies that being an employee of the entity is not a necessary qualifying criteria for a receipt of a Commercialisation Revenue Payment. It is the status of an individual as a successful discoverer/inventor which provides the basis for the authority of the entity to pay a Commercialisation Revenue Payment.

The required nexus between the Commercialisation Revenue Payments and employment is not present as the payments will not be made as a reward for services, they will not be paid to the relevant individuals as a consequence of their employment, and they will not be paid to an individual as a result of their employment with the entity.

In conclusion, the Commercialisation Revenue Payments paid to employees are not paid as a consequence of the employee's employment. They are paid to them as creators of Intellectual Property and not directly or indirectly in their capacity as employees. The Commercialisation Revenue Payments are not considered salary, wages, bonuses, commissions or allowances paid to an individual as an employee and therefore there is no obligation to withhold from the Commercialisation Revenue Payments made to under section 12-35 of Schedule 1 of the TAA.

Question 2

Section 12-190 of Schedule 1 to the TAA provides that an entity (the payer) must withhold an amount from a payment it makes to another entity if the payment is for a supply that the other entity has made, or proposes to make, to the payer in the course or furtherance of an enterprise carried on in Australia by the other entity.

Supply

'Supply' is defined in subsection 9-10(1) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as 'any form of supply whatsoever'.

Without limiting these general meanings, subsection 9-10(2) of the GST Act provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply. The list is as follows:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment, or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply;

(g) an entry into, or release from an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

In this case, the assignment of the IP by the individual to the entity will constitute a supply.

Enterprise

Subsection 9-20(1) of the GST Act states in part:

(1) An enterprise is an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade;

(c) ….

Subsection 9-20(2) of the GST Act states in part:

However, enterprise does not include an activity, or series of activities, done:

(a) by a person as an employee …;

(b) as a private recreational pursuit or hobby; or

(c) by an individual without a reasonable expectation of profit or gain

In relation to the concept of reasonable expectation of profit or gain, paragraph 383 of MT 2006/1 states:

The phrase 'reasonable expectation of profit or gain' is not defined in the ABN Act. However, the phrase 'reasonable expectation' has been considered in a number of cases. In News Corporation Ltd v. National Companies and Securities Commission (1984) 57 ALR 550 at 561; (1984) 5 FCR 88 at 101, Woodward J said 'a reasonable expectation of an event requires more than a possibility, risk or chance of the event occurring'.

In this case, discoverers/inventors who are employees will not be carrying on an enterprise in relation to any supplies made for the Commercialisation Revenue Payments since the IP is created in the course of their employment.

In relation to individuals who are not employees who assign IP in accordance with the terms of the IP Policy or the visiting researchers policy, at the time of the assignment, they will not have any more than a possibility that a profit or gain will accrue from the payment of the Commercialisation Revenue Payments.

As a result, the assignment will not be considered to occur in the course or furtherance of an enterprise as per section 9-2 (c) of the GST Act.

Therefore, the entity is not required to withhold from the Commercialisation Revenue Payments under section 12-190 of Schedule 1 to the TAA.

Question 3

Under section 12-285 (1) of Schedule 1 to the TAA, an entity is required to withhold an amount from a royalty payment it receives if:

(a) The entity is in Australia; and

(b) A foreign resident is or becomes entitled:

(I) to receive the royalty or part of it from the entity, or to receive the amount of the royalty or part of it from the entity; or

(II) to have the entity credit the foreign resident, or otherwise deal with on the foreign resident's behalf or as the foreign resident directs, the royalty or part of it, or the amount of royalty or part of it.

In this case, when there is a successful discovery or invention, the entity will enter into a licensing agreement to commercialise the IP produced by that discovery/invention. The entity will receive various payments, which may include royalties, under the licensing agreements from the party who has acquired the right to the use of that IP. The entity will be the owner of the IP produced by the successful discovery or invention which is subject of a licensing agreement.

The entity is entitled to receive the payments made under the licensing agreement by the party who has acquired the right to the use of the IP, including any royalties. The entity is under no obligation to transfer or assign any royalties it receives under the relevant licensing agreement.

The successful discoverer/inventor will have no entitlement to receive any royalties received by the entity under the relevant licensing agreement. The only amounts the successful discoverers/inventors may receive are the Commercialisation Revenue Payments.

The Commercialisation Revenue Payments are:

(I) at the discretion of the entity in accordance with the terms of the remuneration framework;

(II) pursuant to an arrangement between the entity and the individual, which is distinct and separate to the licensing agreement under which the entity may receive royalties; and

(III) a share of net commercial revenue.

As the successful discoverers/inventors are not entitled to receive all, or any part of, the amount of royalties received by the entity, the entity is not required to withhold PAYG withholding amounts under section 12-285 of Schedule 1 to the TAA from any royalty payments the entity receives under licensing agreements governing the commercialisation of the IP.

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