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Edited version of your written advice
Authorisation Number: 1051391870191
Date of advice: 2 August 2018
Ruling
Subject: Superannuation Guarantee
Question 1
Do any distributions of commercialised revenue from intellectual property (Payments) made by the entity fall within the meaning of 'salary and wages' as defined in subsection 11(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?
Answer
No. The Payments are not salary and wages.
Question 2
Are the Payments within the meaning of 'ordinary time earnings' as defined in subsection 6(1) of the SGAA?
Answer
No. The Payments are not ordinary time earnings (OTE).
This ruling applies for the following period(s)
1 July 20xx to 30 June 20xx
Relevant facts
The entity offers financial incentives to successful creators 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
Reasons for Decision
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 a patent 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.
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.
The Payments are for the results of research work done whilst working for the entity and will be proceeds to the creators only when the distribution of commercialisation revenue can be made.
The Payments can only be made following actual receipt by the entity of commercialisation revenue, payment of all out-of-pocket expenses and official calculation of the net commercial revenue for each financial year.
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 creators resulting in proceeds from the commercialisation of the patent, are also not salary and wages for the creators, 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 creator.