Private ruling: Pay as you go (PAYG) withholding and commercialisation revenue payments
Date of advice: 15 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | Year ended 30 June 2023
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the University required to withhold PAYG amounts under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from distributions of net commercialisation revenue payments made to creators? | A1: No | Q2: Is the University required to withhold PAYG amounts under section 12-190 of schedule 1 to the TAA from distributions of net commercialisation revenue payments made to creators? | A2: No | Q3: Where: i. the University receives a payment under a licensing agreement governing the commercialisation of the intellectual property (IP) produced by a discovery or invention which is royalty; ii. commercialisation revenue payments are made by the University in accordance with the terms of their framework to the successful creator, and iii. the successful creator is a foreign resident at the time the commercialisation revenue payments are made, Is the University required to withhold PAYG amounts under section 12-285 of schedule 1 to the TAA from the royalty payments made to creators that the University receives under licensing agreements governing the commercialisation of the IP produced by the creators? | A3: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The applicant is a university (the University) which has an intellectual property (IP) policy (the Policy). The Policy states that where staff and students of the University create IP, this property can be commercialised by the University. The Policy also sets out the method of sharing of commercialisation proceeds received by the University with creators. The Policy indicates that the net revenue received will be distributed X% to the creator, X% to the research and innovation department, and X% to the University as a whole. In some cases, there may be a relationship of employment but that relationship does not provide the reason for making the payment. The distributions are not paid as a reward for services which have been provided. Under the Policy creators can elect to receive their share of commercialisation revenue payments or direct the payment to an internal research area of the University. Monies paid by the University to employees are to be paid as income and payment of any amounts to any creator is conditional upon the creator acknowledging, amongst other things, his or her responsibilities for any taxation obligations which may flow from the receipt of the funds.

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 subsection 9-10(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(2) | 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) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(2)(c)

Reasons for decision: Summary: PAYG deductions are not required to be made from distributions of net commercialisation revenue payments made to creators under section 12-35 of Schedule 1 to the TAA. | Detailed Reasoning - Detailed reasoning: 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 Schedule 1 to the TAA) 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 University makes payments to intellectual property (IP) creators who are current employees, visiting scientists or students. In relation to current employees it is accepted that recipients of the payments in relation to the 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 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 & Company up to the date of his enlistment. But nothing that he had done in his employment by Macdonald Hamilton & 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 University, individuals with varying relationships with the University fall within the terms of the Policy have an opportunity to share in net commercialisation revenue on the same basis. 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 University 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 University will give rise to a commercialisation revenue payment. Accordingly, the payment is not a reward for services as an employee. It is the status of an individual as a successful creator (a discoverer or inventor) which provides the basis for the University to pay a commercialisation revenue payment. 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. The payments are not considered salary or wages therefore there is no obligation to withhold from payments under section 12-35 of Schedule 1 to the TAA. | Summary: PAYG deductions are not required to be made from distributions of net commercialisation revenue payments made to creators under section 12-190 of Schedule 1 to the TAA. | Detailed Reasoning - Detailed reasoning: 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. | Detailed Reasoning - 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 University will constitute a supply. | Detailed Reasoning - Enterprise: Subsection 9-20(1) of the GST Act states in part: 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, creators 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 University policies - 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 an enterprise pursuant to paragraph 9-20(2)(c) of the GST Act. Accordingly, there is no obligation to withhold PAYG from payments made to these contractors under section 12-190 of schedule 1 to the TAA. | Summary: The University is not required to withhold PAYG withholding amounts under section 12-285 of Schedule 1 to the TAA from any royalty payments the University receives under licensing agreements governing the commercialisation of the IP. | Detailed Reasoning - Detailed reasoning: 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 University will enter into a licensing agreement to commercialise the IP produced by that discovery/invention. The University 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 University will be the owner of the IP produced by the successful discovery or invention which is subject of a licensing agreement. The University 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. As the University exclusively owns the IP, it is under no obligation to transfer or assign any royalties it receives under the relevant licensing agreement. The successful creator will have no entitlement to receive any royalties received by the University under the relevant licensing agreement. The only amounts the successful creators may receive are the commercialisation revenue payments. As the successful creators are not entitled to receive all, or any part of, the amount of royalties received by the University, the University is not required to withhold PAYG withholding amounts under section 12-285 of Schedule 1 to the TAA from any royalty payments the University receives under licensing agreements governing the commercialisation of the IP when it distributes these amounts.