Private ruling: Ordinary Times Earnings
Date of advice: 13 May 2016
Published: June 2016
Ruling period: 1 July 2015 - 30 June 2016

Ruling: Q1: 1. Are proceeds from the commercialisation of Intellectual Property, payable by you to an inventor from various license arrangements, considered ordinary time earnings as per subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)? 2. Will you incur any superannuation guarantee charge under the SGAA if it does not contribute superannuation in relation to any amount payable under the Agreement? Advice 1. No. 2. No. As the payment would not be considered ordinary times earnings (OTE). Your contentions have been taken into consideration. Please see 'Reasons for decision'.

Relevant facts and circumstances: 1. You are an affiliated health organisation of your state Health under the Health Services Act 1997 and are subject to the following policies: • Intellectual Property Arising from Health Research - Policy -Department of Health PD2005_370 (DoH IP Policy) • Your Organisation Intellectual Property Policy (O IP Policy) 2. The O IP Policy applies to all intellectual property rights, including rights in confidential information, patent applications and patents, copyright and registered and unregistered trade mark rights. It also covers all your employees, including Visiting Medical Officers, Honorary Medical Officers and any other person using your resources. 3. DoH IP Policy states at clause 5.4.1 that: 'Where intellectual property developed by an employee is commercialised by, or on behalf of, a public organisation, and such commercialisation gives rise to income and other benefits to the public health organisation, the benefits to the public health organisation shall be dealt with as outlined in section 5.5' 4. Clause 5.5.3 of the DoH IP policy states that following deduction by the public health organisation of establishment costs and protection costs any net commercialisation proceeds will be distributed as follows: a. One third to the creator b. One third to the department; and c. One third to the public health organisation 5. The definition of creator includes employees, visitors and students. 6. Under the DoH IP Policy any monies paid 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. 7. You are the owner of certain intellectual property rights in a research Project carried out by your employees and other research team members. You have derived commercialisation proceeds from the Project following entry into various licence agreements. 8. O IP Policy states that payment to the inventor will continue after their employment with the Entity ceases, and will also continue to their estates after their deaths. 9. You distribute commercialisation proceeds in accordance with the O IP Policy to your Inventor/creator. 10. The Inventor was engaged on the Project on an ongoing basis. 11. The Inventor has been a paid employee of you for various periods. The Inventor has held a formal appointment with you that was honorary in nature. 12. The Inventor was physically located at your organisation when carrying out their research. 13. Your Medical Research Program Head (and co-inventor) confirms in a Statutory Declaration that their patented discoveries were subsequently licensed to third parties for commercial application.

Relevant legislative provisions: Superannuation Guarantee Administration Act 1992 subsection 6(1) | Income Tax Assessment Act 1997 section 995-1 | Patents Act 1990 section 15 We followed these ATO view documents | Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' ,

Reasons for decision: Summary: Proceeds from the commercialisation of Intellectual Property, payable by you to the Inventor from various license arrangements, are not considered ordinary time earnings as per subsection 6(1) of the SGAA. | Detailed Reasoning - Detailed reasoning: An employee's 'earnings', for the purpose of the definition of OTE, 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: meaning of the terms 'ordinary time earnings' and 'salary or wages' , as the payment 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. 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 Inventor in an employment context. The O IP Policy applies to all intellectual property rights, including rights in confidential information, patent applications and patents, copyright and registered and unregistered trade mark rights. One of the intended outcomes of the O IP Policy is that all Staff has a clear understanding of protection and ownership of intellectual property rights created by Staff, and notify the IP Committee of all potential intellectual property rights in health research. In accordance with the O IP Policy, the entity (you) that employs a staff member owns all the intellectual property rights created or developed by the employee in the course of their employment. It also states that the entity will also own all the intellectual property rights created or developed by a non-employed Staff member who uses any of the entity's resources in the course of health research. Section 995-1 of the Income Tax Assessment Act 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. The O IP Policy states an entity may gain ownership of intellectual property rights that are created or developed by Staff in the course of their employment or as a result of their use of an Entity's resources, including funding. New inventions can be covered by patents, which give the holder exclusive rights over use of the invention and the right to authorise other parties to use it (usually for 20 years). The actual inventor is usually the patent holder but sometimes the patent will be granted to the inventor's employer instead. Section 15 of the Patents Act 1990 indicates situations exist where an employer would be entitled to have the right to hold a patent granted to it by an employee. The most obvious scenario is where an employee produces an invention in the course of his/her employment. It is an implied term of all employment contracts that the employer is entitled to the benefit of any invention by an employee either made in the course of employment or resulting from work the employee is paid to do. This will be the case unless there is a specific express or implied agreement between the parties that states otherwise. Section 11 of the DoH IP Policy states, the ownership of IP which arises from such ventures will depend upon the contractual arrangements between the parties. It goes on to explain that where public health organisations enter into collaborative research activities or joint ventures with third parties, a written agreement must be in place which sets out how the benefits will flow back to each of the parties in respect of any proceeds of commercialisation. Section 12 outlines that arrangements of this kind will vary in their terms and conditions, and may or may not involve such aspects as: • Assignment of the intellectual property to the commercialising entity; • Provisions for profit sharing with creators Under DoH IP Policy any monies paid 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. In the Inventor's case, due to the type of work and random nature of it, the payment resulting from the commercialisation would be regarded as a share of the profits rather than a payment of OTE from an employer. As the money paid to the Inventor from you has come from an outside source for his share of the work carried out in research of the patent, it is not therefore a payment originated by you for work exclusively carried out in his employment with them. In a letter of offer from you to the Inventor, it was outlined in the list of functions and responsibilities for his Honorary Medical Officer role that the duties/responsibilities did not include research work as one of the responsibilities of the Honorary Medical Practitioner. Your Medical Research Program Head (and co-inventor) confirms in a Statutory Declaration that their patented discoveries were subsequently licensed to third parties for commercial application. 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 proceeds from the commercialisation of the patent were also not associated with duties associated with the ordinary work responsibilities. As the payments were for the results of research work done whilst working for both you and another entity and were proceeds from a third party, it cannot be reasonably expected to be exclusively associated with ordinary hours worked at you organisation. | Detailed Reasoning - Relevant legislative provisions: Superannuation Guarantee Administration Act 1992 subsection 6(1) Income Tax Assessment Act 1997 section 995-1 Patents Act 1990 section 15 | Detailed Reasoning - We followed these ATO view documents: Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' ,