Edited version of private advice

Authorisation Number: 1052062549562

Date of advice: 25 November 2022

Ruling

Subject: PAYG withholding - distributions of commercialisation revenue payments

Question

Is Company Arequired to withhold pay as you go (PAYG) withholding amounts from distributions of net commercialisation proceeds (the 'Commercialisation Revenue Payments') it makes to employees in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

3 September 20XX

Relevant facts and circumstances

Company Aemploys a number of individuals. These individuals are classified as employees pursuant to their respective employment agreements. Some of the employees of Company A, in the course of their employment, develop Intellectual Property (IP).

Under their respective employment agreements:

•         the IP developed by the employees in the course of their employment is wholly owned by Company A, and

•         Company A is permitted to commercially develop the IP created by their employees.

Pursuant to Company A's IP policy (the Policy), which sets out the method Company A uses to share the net commercialisation proceeds received by Company A with creators and contributors (including Company A employees), the employees of Company A are entitled to one-third of the income from the commercialisation of the respective IP they have created. Such distributions of net commercialisation proceeds (the 'Commercialisation Revenue Payments') made to employees are distinct and separate to their respective employment agreements.

The Policy defines the following terms:

•         'Net commercialisation revenue': commercialisation revenue less commercialisation expenses in relation to a particular item or related items of intellectual property.

•         'Commercialisation revenue': the gross cash revenue received by Company A from the commercialisation of Company A IP and does not include payments pursuant to a research or consulting agreement or payments used to subscribe for equity in a company.

•         'Commercialisation expense': the expenses incurred by Company A in the production, development, protection, marketing and commercialisation of Company A IP.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1

Reasons for Decision

Question

Is Company Arequired to withhold pay as you go (PAYG) withholding amounts from distributions of net commercialisation proceeds (the 'Commercialisation Revenue Payments') it makes to employees in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Summary

No, Company A is not required under section 12-35 of Schedule 1 to the TAA to withhold PAYG withholding amounts from the Commercialisation Revenue Payments it makes to employees.

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 of Schedule 1 to the TAA.

Paragraph 14 of TR 2005/16 states that there must be:

1.    an employee

2.    a payment of salary, wages etc to an employee

3.    a payment made as a consequence of his/her employment, and

4.    a payment made by an 'entity'.

Each of these conditions are examined below.

Condition 1 - Employee

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.

The Commercialisation Revenue Payments from Company A are made to individuals who are employees under the respective employment agreements (contracts of service) with each employee. Company A and each employee satisfies a typical employer/employee relationship. This condition is therefore satisfied.

Condition 2 - Payment of salary, wages etc to an employee

As per the Facts, the Commercialisation Revenue Payments that are distributed to recipients (Company A employees) are not a remuneration for employment services as they are distinct and separate to their respective employment agreements. According to Company A's Intellectual Property (IP) Policy (the Policy), the relationship between the employee 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 Commercialisation Revenue Payments are not a reward for services as an employee and thus are not considered to constitute 'salary, wages, commissions, bonuses or allowances' paid to an individual as an employee.

As such, this condition is not satisfied.

Condition 3 - Payment made as a consequence of employment

The required nexus between the commercialisation income and employment is not present as the Commercialisation Revenue Payments will not be made for the services rendered by the employee in the ordinary course of employment to develop or create the IP, but rather the payments are exclusively in respect of the profits made on commercialisation of IP. The profits from the commercialisation of the IP are not received as part of the ordinary course of employment with Company A.

As such, this condition is not satisfied.

Condition 4 - Payment made by an entity

The Commissioner considers this condition is satisfied.

Therefore, as all of the above conditions are not satisfied, there is no obligation under section 12-35 of Schedule 1 to the TAA for Company A to withhold from the Commercialisation Revenue Payments it makes to employees.