Private ruling: PAYG withholding
Date of advice: 10 November 2016
Published: March 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022
Date scheme commenced: 1 July 2016

Ruling: Q1: Is there a PAYG Withholding obligation on payments from the employer to employees who receive a share of net revenues from the commercialisation of intellectual property? | A1: No.

Relevant facts and circumstances: The entity has a revenue sharing arrangement with employees in respect of intellectual property (IP) owned by, created or developed whilst employed with the entity. The IP in question is being commercialised in name of the entity.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-35 of Schedule 1

Reasons for decision: Summary: Part 2-5 of Schedule 1 (Sch 1) of the Taxation Administration Act 1953 (TAA) covers Pay As You Go (PAYG) withholding obligations. Subdivision 12-B of Sch 1 of the TAA outlines payments for work and services, more specifically under section 12-35 payments to employees are covered. Section 12-35 of Sch 1 of the TAA states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). Paragraph 14 of Taxation Ruling TR 2005/16 states for the provision (Section 12-35 of Sch 1) 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. It is accepted that recipients of the payments in relation to the intellectual property (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 item is either directly or indirectly related to an employment or to services rendered is a question which has caused difficulty in a number of cases. 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 CJ 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 and Company up to the date of his enlistment. But nothing that he had done in his employment by Macdonald Hamilton and 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.'' If payment is made to an individual but not in the capacity of an employee, withholding is not required under s12-35 of Sch 1 of the TAA. | Detailed Reasoning - Conclusion: The IP revenue payments paid to employees are not paid as a consequence of the employee's employment. The payments are paid to them as creators of IP and not directly or indirectly in their capacity as employees. The IP revenue payments are also not considered salary or wages therefore there is no obligation on the entity to withhold from payments made to employees in relation to IP revenue payments under section 12-35 of Sch 1 of the TAA.