Equity-minded researchers punished by tax laws

By Pete Young
Thursday, 07 March, 2002

Harsh tax treatment of research institute scientists trying to commercialise their inventions is harming Australia's national interests, bio-industry leaders warn.

They claim it can leave university researchers who convert their intellectual property into equity in spin-off companies facing tax bills of 10 times their annual salary.

The result is a disincentive to biotechnologists tempted to turn entrepreneur, says Prof Peter Andrews, co-director of Queensland's Institute for Molecular Bioscience, which has been involved with half a dozen spin-offs.

Most Australian universities own the IP generated by inventions of staff members but commonly agree to share any commercial fruits of the technology with all contributors.

The problem starts when a university scientist turns entrepreneurial and wants to convert his IP into an equity stake in a spin-off created to capitalise on the invention.

The taxman can treat the transfer as a "hugely valuable gift" in which case it draws a hefty fringe benefits tax, Andrews said.

Or it can be viewed as the equivalent of salary and taxed at the marginal rate of about 50 cents on the dollar.

For an equity slice carrying a million-dollar valuation,, that adds up to a tax bill of nearly $500,000 - a worrying burden for researchers earning $50,000 a year. Especially since the valuation is only theoretical and dependent on future success.

The inventor of a technology and the driving force behind a biotech company using the technology are often one and the same person, Andrews said.

It's a demanding job and most people "need a decent slice of equity as encouragement."

Tax regulations that make it "almost impossible" to transfer equity to individual researchers are not helping the country to create wealth, he argued.

Greg Baynton, head of venture capital company Orbit Capital, agreed: "The tax position for inventor equity is a significant problem. It is not an ideal situation."

Some methods for minimising the problem exist but they are often inconsistent with university positions on inventor equity, Baynton said.

The University of Melbourne adopts a different stance on IP than other tertiary institutions by making university employees immediate owners of any IP they create.

The only caveat is that the university retains a non-exclusive, royalty-free worldwide licence to use of the IP for educational purposes, said deputy vice-chancellor of research Prof Frank Larkins.

Since the IP is effectively owned by the researcher from the date of its creation, any tax ramifications don't affect the university.

"That is a case-by-case matter between the inventor and the Australian Tax Office and we don't become involved in that," Larkins said.

The policy was introduced 18 months ago because the university wanted to encourage and empower researchers to protect and develop their IP.

"One of the things the university wanted to do was raise the consciousness of people to try and protect IP for the national benefit," Larkins said.

The response from the research community to the university's initiative has been "overwhelmingly positive," he said.

"This puts them at the centre of the decision-making process which is 180 degrees from the other model where the university is the primary decision-maker."

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