Edited version of private advice

Authorisation Number: 5010076661099

Date of advice: 11 November 2022

Ruling

Subject: PAYG withholding

Question 1

Is Company A required to withhold pay as you go (PAYG) withholding amounts from distributions it makes to inventors and key staff or students of Commercialisation Revenue Payments it receives from Company B in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

Question 2

Do the Commercialisation Revenue Payments that Company A distribute to inventors and key staff or students constitute 'salary or wages' as defined in subsection 11(1) of the Superannuation Guarantee (Administration) Act 1992 >(SGAA)?

Answer

No.

Question 3

Do the Commercialisation Revenue Payments that Company A distribute to inventors and key staff or students fall within the definition of 'ordinary time earnings' as defined in subsection 6(1) of the SGAA?

Answer

No.

This private ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

XX March 20XX

Relevant facts and circumstances

Company A has an active program for patenting and commercialising intellectual property (IP) created through research conducted at Company A, and periodically receives royalty payments or other commercial revenue payments as a result of the commercial exploitation of that IP.

Company A Intellectual Property (IP) Policy

Company A has a written policy (the Policy), which sets out the method Company A uses to share the net commercialisation proceeds received by Company A with inventors and key staff.

The policy provides that distribution of the net proceeds is at the Board's discretion and that the Board may take into account various recommendations and may be guided by the following apportionments: X% to inventors, X% to key staff and students, X% to the laboratory/division for infrastructure and the remaining X% for other infrastructure within Company A.

Inventors, for the purposes of the Policy, are those considered inventors for the purposes of a patent application. All such inventors are, or were, employees of Company A.

Key staff or students are those people who directly supported the inventor(s). Key staff will always be employees of Company A, but students may or may not be employees.

The Policy and the basis for sharing the net commercialisation proceeds (the 'Commercialisation Revenue Payments') is distinct from and separate to any existing or previous relationship between an individual inventor and Company A. Further, the Policy is also distinct from and separate to the agreement between Company A and each of the employees in relation to remuneration for their employment services.

Due to the time it takes to commercialise IP, the distribution of the Commercialisation Revenue Payments can in some cases occur long after the individual inventor or key staff had participated in the creation of the particular invention. Further, at the time the commercialisation distributions are made, the initial employment relationship between Company A and the successful inventor or key staff may no longer exist.

Third Party Exclusive Licence Agreement

Company A has an exclusive licensing agreement with Company B that grants Company B an exclusive licence to exploit certain specific IP created by Company A.

The exclusive licensing agreement provides for payment of licence fees, royalties and milestone payments to Company A.

It is the payment of royalties to Company A that are then distributed to inventors and key staff or students, to which this ruling request relates.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 6(1)

Superannuation Guarantee Administration Act 1992 subsection 11(1)

Taxation Administration Act 1953 section 12-35 of Schedule 1

Reasons for decision

Question 1

Summary

Company A is not required to withhold pay as you go (PAYG) withholding amounts from distributions it makes to inventors and key staff or students of Commercialisation Revenue Payments it receives from Company B in accordance with section 12-35 of Schedule 1 to the TAA.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA requires an entity to 'withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity)'. The withheld amount is referred to as 'PAYG withholding'.

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) discusses the Commissioner's view on whether an individual is paid as an employee for the purposes of section 12-35 to the TAA.

Paragraph 14 of TR 2005/16 states that 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 term 'employee' is not defined in the TAA and for the purposes of withholding under section 12-35 of Schedule 1 to the TAA, the word 'employee' has its ordinary meaning.

In considering the term 'employee', Company A distributes Commercialisation Revenue Payments received to:

•         Inventors - individuals considered inventors for the purpose of a patent application and are or were employees of Company A

•         Key staff - individuals who directly support inventor(s) and will always be employees of Company A

•         Students - individuals who directly support inventor(s) who may or may not be employees of Company A

As per the Facts, the Commercialisation Revenue Payments that are distributed to recipients - whether employees or not employees of Company A - are not a remuneration for employment services as they are distinct and separate to the employment agreement. According to the Policy, the relationship between the inventor and Company A is distinct and separate to any existing or previous relationship with Company A. The recipients fall within the terms of the Policy and have an opportunity to share in net commercialisation revenue.

The distributions from the Commercialisation Revenue Payments are made in accordance with the Policy where there is a separate arrangement between Company A and the individual recipient. The payments are linked to the commercial success of a research discovery that becomes a commercial product, rather than through an existing relationship with Company A and an individual. The success of the commercial product is not dependant 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. Accordingly, the payment is not a reward for services as an employee.

The required nexus between the commercialisation income 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 Company A.

On this basis, the distributions to employees from Commercialisation Revenue Payments received by Company A are not paid as a consequence of the employee's employment. The distributions are paid to inventors of IP, and to key staff or students supporting the inventors, and are not in respect of, or for, or in relation directly or indirectly to employment or services rendered. The distributions from Commercialisation Revenue Payments are not considered to constitute 'salary, wages, bonuses, commissions, or allowances paid to an individual as an employee'. Therefore, there is no obligation for Company A to withhold from such distributions under section 12-35 of Schedule 1 to the TAA.

Question 2

Summary

The Commercialisation Revenue Payments that Company A distribute to inventors and key staff or students do not constitute 'salary or wages' as defined in subsection 11(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Detailed reasoning

Subsection 11(1) of the SGAA defines 'salary or wages' as including the following:

(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).

In the response to Question 1, it was concluded that distributions paid to inventors of IP, and to key staff or students supporting the inventors, are not in respect of, or for, or in relation directly or indirectly to employment or services rendered. The distributions from Commercialisation Revenue Payments are not considered to constitute 'salary, wages, bonuses, commissions, or allowances paid to an individual as an employee'. Rather, the payments are dependent upon the commercial success of the development of Company A's specific IP.

Therefore, the Commercialisation Revenue Payments that Company A distribute to inventors and key staff or students do not constitute 'salary or wages' as defined in subsection 11(1) of the SGAA.

Question 3

Summary

The Commercialisation Revenue Payments that Company A distribute to inventors and key staff or students do not fall within the definition of 'ordinary time earnings' as defined in subsection 6(1) of the SGAA.

Detailed reasoning

Subsection 6(1) of the SGAA defines 'ordinary time earnings' in relation to an employee as:

(a) the total of:

(i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on the termination of his or her employment:

(A) a payment in lieu of unused sick leave;

(B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and

(C) (Repealed by No 15 of 2007)

(ii) earnings consisting of over-award payments, shift-loading or commission; or

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter - the maximum contribution base.

The SGAA does not define the expression 'earnings in respect of ordinary hours of work'. Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) provides guidance on the meaning of 'earnings' for superannuation guarantee purposes. Paragraph 12 of SGR 2009/2 states that earnings are the 'remuneration paid to the employee as a reward for the employee's services' with the practical effect being that the expression 'earnings' means 'salary or wages'.

In the response to Question 2, it was concluded that the distributions paid to inventors of IP, and to key staff or students supporting the inventors, do not meet the definition of 'salary or wages' in subsection 11(1) of the SGAA. Therefore, such distributions are also not considered to fall within the definition of 'ordinary time earnings' as defined in subsection 6(1) of the SGAA.

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