Taxation Ruling

TR 2023/4

Income tax: pay as you go withholding - who is an employee?

  • Please note that the PDF version is the authorised version of this ruling.
    There is a Compendium for this document: TR 2023/4EC .

Table of Contents Paragraph
What this Ruling is about
Previous ruling
Ruling
6
Appendix – Explanation
Who is an employee within the ordinary meaning of that expression?
Identifying the 'totality of the relationship' between a worker and engaging entity
Evidence surrounding the formation of the contract
Variation, discharge, or waiver
Sham
Equitable remedies
The test to be applied in determining if a relationship is one of employment
Serving in the engaging entity's business
     Characterising an engaging entity's business
     Whether or not the worker conducts their own business is not determinative
     Presenting as an emanation of the business
Control and the right to control
     Other rights that confer a capacity to control
Other indicia
     The ability to delegate, subcontract or assign work
     'Results' contracts
     Provision of tools and equipment
     Risk
     Generation of goodwill
Other relevant considerations
     Labels given to parties in the contract and other descriptors of their relationship
     Where a business engages with a non-individual entity
     Neither employee nor independent contractor - lease or bailment
Date of effect
83

Relying on this Ruling

This Ruling (excluding appendix) is a public ruling for the purposes of the Taxation Administration Act 1953, except to the extent that the Ruling considers the ordinary meaning of an employee for the purposes of subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992.

Subject to that exception, if this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling.

To the extent that this Ruling aids in understanding the ordinary meaning of an 'employee' for the purposes of subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992, it is not binding on the Commissioner. However, if the Commissioner later takes the view that the subsection 12(1) applies less favourably to you than this Ruling indicates, the fact that you acted in accordance with this Ruling would be a relevant factor in your favour in the Commissioner's exercise of any discretion in regard to the imposition of superannuation guarantee penalties.

What this Ruling is about

1. This Ruling explains when an individual is an 'employee' of an entity for the purposes of section 12-35 of Schedule 1 of to the Taxation Administration Act 1953 (TAA). That section imposes an obligation on a paying entity to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an employee, whether or not the paying entity is the employer.

2. All legislative references in this Ruling are to Schedule 1 to the TAA, unless otherwise indicated.

3. The expressions 'employee' and 'employer' in the Superannuation Guarantee (Administration) Act 1992 have both their ordinary meaning and an extended meaning. This Ruling aids in understanding the ordinary meaning of an 'employee' for the purposes of subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 but it is not able to be binding on the Commissioner on that aspect.

4. This Ruling does not deal with payments for work and services which are subject to withholding under other provisions, such as payments to directors[1] or office holders[2], labour hire payments[3] and alienated personal services income.[4]

Previous Ruling

5. TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees previously provided guidance on this issue and was withdrawn with effect from 15 December 2022 when the draft of this Ruling was issued for comment. This Ruling takes into account developments in case law[5] since TR 2005/16 was last updated.

Ruling

6. The term 'employee' is not defined in the TAA. For the purposes of section 12-35, the term 'employee' has its ordinary meaning.

7. Whether a person (that is, a worker) is an employee of an entity (referred to in this Ruling as the 'engaging entity') under the term's ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.[6]

8. To ascertain the relevant legal rights and obligations between the worker and the engaging entity, the contract of employment must be construed in accordance with the established principles of contractual interpretation.[7] The task is to construe and characterise the contract at the time of entry into it.[8] For the purposes of that exercise of construction, recourse may be had to events, circumstances and things external to the contract which are objective, known to the parties at the time of contracting and assist in identifying the purpose or object of the contract.[9]

9. Where the worker and the engaging entity have comprehensively committed the terms of their relationship to a written contract and the validity of that contract has not been challenged as a sham, nor have the terms of the contract otherwise been varied, waived, discharged or the subject of an estoppel or any equitable, legal or statutory right or remedy, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of an engaging entity.[10] Evidence of how the contract was performed, including subsequent conduct and work practices, cannot be considered for the purpose of determining the nature of the legal relationship between the parties.[11]

10. However, evidence of how a contract was actually performed may be considered to establish the contractual terms or to challenge the validity of a written contract consistent with general contract law principles, including to:

establish formation of the contract
identify the contractual terms that were agreed to - for example, where the contract is wholly or partially oral
demonstrate that a subsequent agreement has been made varying, waiving, or discharging one or more of the terms of the original contract
show the contract was a sham, or
establish evidence of an estoppel, rectification or other legal, equitable or statutory rights or remedies.[12]

11. A useful approach for establishing whether or not a worker is an employee of an engaging entity when analysing and weighing up each of the indicia of employment identified in the case law is to consider whether the worker is working in the business of the engaging entity, based on the construction of the terms of the contract.[13] This evaluative exercise should not be approached on the basis that there is a checklist against which ticks and crosses may be placed to produce the answer.[14] Rather, the terms of the contract between the parties must be considered holistically to determine whether, on balance, the worker is an employee or independent contractor. It requires an approach which involves standing back and viewing the contract from a distance such that an informed, considered, qualitative appreciation of the whole can be undertaken.[15] Further '[n]ot all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another.'.[16]

12. The fact that a worker may be conducting their own business, including having an Australian business number, is not determinative. A person conducting their own business may separately be an employee in the business of another.[17]

13. The 'label' which parties choose to describe their relationship, whether within a written contract or otherwise, is not determinative of, or even relevant to, that characterisation. It is the legal rights and obligations which constitute their relationship which are relevant, and 'labels' used to describe the relationship which are inconsistent with those rights and duties have no meaning.[18]

14. An arrangement between parties that is structured in a way that does not give rise to a payment for services rendered but rather a payment for something entirely different, such as a lease or a bailment, does not give rise to an employment relationship for the purposes of the TAA.

Appendix – Explanation

15. Section 12-35 provides that '[a]n 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)'.

16. For section 12-35 to apply, there must be a payment of salary, wages, commission, bonuses, or allowances made by an entity (the entity does not need to be the employer) to an employee:

as a consequence of their employment, and
as an individual[19] in their capacity as an employee.

17. The term 'employee' is not defined in the TAA; therefore, it has its ordinary meaning. In most cases, it will be self-evident whether an employer and employee, or principal and independent contractor, relationship exists. However, it is sometimes difficult to discern the true character of the relationship as the contract or contracts between the parties may be unclear or ambiguous, or because the terms are disputed by the parties or are otherwise in apparent conflict. Because of these difficulties, the ordinary meaning of employee has been the subject of a significant amount of judicial consideration.

Who is an employee within the ordinary meaning of that expression?

18. The relationship between a worker and an engaging entity will generally be either:

a relationship of employment, often referred to as a contract of service, or
a principal and independent contractor relationship, referred to as a contract for services.

19. The Courts have considered these relationships in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. The leading decision is Personnel Contracting. In that case, the majority of the High Court confirmed that in determining whether a relationship between a worker and engaging entity is one of employment, an examination of the totality of the relationship must be undertaken by reference solely to the legal rights and obligations which constitute that relationship.[20] This examination of the established contractual relationship is undertaken through the focusing question of whether the worker is working in the business of the engaging entity.[21]

20. The various indicia of employment that have been identified in case law remain relevant but are to be considered only in respect of the legal rights and obligations between the parties.[22] The indicia point to whether the worker is working in the business of the engaging entity or not.[23]

21. While no factor will be determinative, the more control the engaging entity can exercise over how, when and where the worker personally performs their work under the contract, the more likely the worker is to be an employee of the engaging entity. This is because the ability to exercise control demonstrates the subservient and dependent nature of the work of the worker to the business of the engaging entity.[24] With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it.[25]

Identifying the 'totality of the relationship' between a worker and engaging entity

22. The totality of the relationship between a worker and an engaging entity comprises the legal rights and obligations they have in respect of each other - that is, the contractual relationship between the parties.[26] To determine the nature of the contractual relationship between a worker and an engaging entity, it is the terms of the contract alone, whether express or implied, which are to be taken into account.[27]

23. As such, the first step in determining whether an employment relationship exists is to identify the contract between the parties. Employment contracts may be:

wholly in writing
wholly oral, or
comprised of any combination of written terms, oral terms and terms implied from conduct.

24. The second step is to identify the terms of the contract, that is the legal rights and obligations agreed between the parties, whether written, verbal or a combination of the two.[28]

25. Where a contract is purported to be wholly in writing, it will also be necessary to determine if the contract is a comprehensive account of all the terms agreed to between the parties, or whether there are in fact oral and implied terms which also comprise the contract.

26. This will require an examination of the factual arrangement to ensure an appropriate understanding of the contractual terms (written, oral, or a combination of the two) that exist under the contractual arrangement.

27. This was demonstrated in Hollis, where the High Court found that the contractual relationship between Vabu and its bicycle couriers was partly oral, despite the existence of a written contract.[29] The High Court came to this conclusion on the basis that:

some important aspects such as the rate of remuneration for deliveries were not recorded in the written agreement, and
other aspects, such as annual and sick leave, were provided for but were not available to couriers.[30]

28. Where a contract is not comprehensively committed to writing, evidence of how the contract was performed, including subsequent conduct and work practices, will be considered to the extent that such evidence identifies the contractual terms agreed between the parties.

29. Once the terms of the contract between the worker and the engaging entity have been established, it is these terms alone that are relevant to a determination of the nature of the relationship between the parties.[31] As such, the process of characterising the nature of the relationship between the parties remains the same regardless of the form the contract takes. Even where there is only an oral contract, the task is to establish the terms of the contract from the evidence and from those terms determine the nature of the relationship. The former 'multifactorial test' is no longer necessary nor appropriate for this process.[32]

30. In addition to identifying the terms of the contract between the parties, evidence surrounding a contract's formation, or how a contract was actually performed, may be taken into account, consistent with general contract law principles, to:

assist with the identification of the object or purpose of a contract
demonstrate that a subsequent agreement has been made varying, waiving or discharging one or more of the terms of the original contract (noting this may also become apparent when considering and determining the terms of the relevant contract as discussed in paragraphs 24 to 28 of this Ruling)
show the contract was a sham, or
establish evidence of an estoppel, rectification or other legal, equitable or statutory rights or remedies.[33]

Evidence surrounding the formation of the contract

31. Regardless of the form a contract takes, it is to be construed and characterised at the time it was entered into.[34] To assist in identifying the purpose or object of a contract and to determine whether a contract was in fact formed and when it was formed, recourse may be had to events, circumstances, and things external to the contract which:

are objective, and
are known to the parties at the time of contracting.

32. In ZG Operations, Kiefel CJ, Keane and Edelman JJ found that the contract could not be one of employment, having regard to circumstances surrounding the making of the relevant contract (referred to as the '1986 contract'), specifically the nature of the contracting parties at the time the contract was entered into[35]:

... The 1986 contract between the partnerships and the company came to be made because of the company's insistence that the only ongoing relationship between the respondents and the company would be that established by the 1986 contract and that the partnerships would own and operate the trucks which would transport the company's deliveries. Given that the genesis of the contract was the company's refusal to continue to employ the respondents as drivers, and the respondents' evident acceptance of that refusal, it is difficult to see how there could be any doubt that the respondents were thereafter no longer employees of the company.

Variation, discharge, or waiver

33. The parties to a contract may expressly agree, whether in writing or orally, to vary, discharge or waive the terms of their contract after it has been formed.[36] A variation of the terms of a contract may also occur by implication, for example as a result of the conduct of the parties.[37]

34. Where a worker and engaging entity have conducted themselves in a manner that is inconsistent with the terms of the contract, such conduct may be considered to have in fact varied the rights and obligations that form their relationship.

Sham

35. A contract will be a sham if it is not a legitimate record of the intended legal relationship between 2 parties, but instead is 'a mere piece of machinery' serving some other purpose (often to act as a façade and deliberately obscure the true legal relationship for third parties).[38]

36. This requires all parties to an agreement to have no intention to create the purported legal relationship. It will only apply in situations where an engaging entity and worker both intended their relationship to differ from their written contract. It will not apply where one party alone sought to obscure their actual relationship.

37. If the contractual arrangements constitute a sham, the characterisation of the relationship will be determined by reference not to the purported contract but by reference to the actual legal rights and obligations which the parties created.

Equitable remedies

38. The majority of the High Court in Personnel Contracting confirmed that the parties' conduct could reveal probative evidence of facts relevant to rectification, estoppel or any other legal, equitable or statutory rights or remedies.[39] Where one of the contracting entities is entitled to equitable relief from a Tribunal or the Courts in respect of the contract, this is likely to impact on the characterisation of the employment relationship.

The test to be applied in determining if a relationship is one of employment

Serving in the engaging entity's business

39. At its core, the distinction between an employee and an independent contractor is that:

an employee serves in the business of an employer, performing their work as a part of that business
an independent contractor provides services to a principal's business, but the contractor does so in furthering their own business enterprise; they carry out the work as principal of their own business, not part of another.[40]

40. In reference to the terms of the contract between an engaging entity and worker, the focusing question through which any determination of the existence of an employment relationship will always be 'is the worker an employee of the engaging entity?'[41] A useful approach for assessing this is to ask whether the worker is working in the business or enterprise of the engaging entity, based on the terms of the contract, having regard to the various employment indicia (outlined in paragraphs 45 to 75 of this Ruling) identified in case law.[42]

Characterising an engaging entity's business

41. The correct characterisation of the business being carried on by the engaging entity is an essential part of determining whether the worker is working in the business of the engaging entity.[43]

42. In Personnel Contracting, the High Court examined the nature of the engaging entity's (Construct's) business in characterising its relationship with the worker (Mr McCourt). Kiefel CJ, Keane and Edelman JJ considered that the core of Construct's business was their promise to supply compliant labour to their customer (Hanssen)[44]:

The right to control the provision of Mr McCourt's labour was an essential asset of that business. Mr McCourt's performance of work for, and at the direction of, Hanssen was a direct result of the deployment by Construct of this asset in the course of its ongoing relationship with its customer.

Whether or not the worker conducts their own business is not determinative

43. While an independent contractor typically performs work representing their own business and not that of the principal, focusing solely on whether the worker works in their own business may detract from considering the totality of the relationship between the worker and engaging entity.[45] This is because a worker may realistically have a business of their own and also perform work in an engaging entity's business (and not through their own business). Also, a worker's services may appear to benefit both their own business and the engaging entity's business, making the finding that they have their own business unhelpful.[46]

44. While the 'own business/employer's business dichotomy'[47] may not be universally applicable, it can help focus attention upon those aspects of the contractual relationship which bear more directly upon whether the worker's work was so subordinate to the employer's business that it can be seen to have been performed as an employee of that business rather than as part of an independent enterprise.[48]

Presenting as an emanation of the business

45. Whether a worker is required under a contract to present to the public as part of the engaging entity's business is a key consideration in determining whose business they are serving in. In Hollis, bicycle couriers were presented as emanations of the employer's business to the public and to those using the employer's couriers by wearing uniforms bearing the employer's logo as contractually required. This was an important factor in supporting the majority's decision that the bicycle couriers were employees.[49]

46. However, it is important to distinguish between a worker being contractually obliged to present as part of the engaging entity's business and them merely choosing to do so to abide by a business' expectations. In ZG Operations, the delivery drivers ordinarily wore company-branded clothing and installed tarpaulins bearing the company's logo on the trucks, but they were not contractually required to do so. As a result, the High Court held that this did not change the contractual rights which comprised the relationship between the parties.[50]

Control and the right to control

47. An employer generally has a right to control how, where and when its employee performs their work.[51] The importance of control in this context lies not in its actual exercise, but rather in the contractual right of the employer to exercise such control.[52]

48. The importance of a right to control was emphasised by Kiefel CJ, Keane and Edelman JJ in Personnel Contracting where they stated[53]:

... the existence of a right of control by the putative employer over the activities of the putative employee serves to sensitise one to the subservient and dependent nature of the work of the employee, so as to assist in an assessment of whether a relationship is properly to be regarded as a contract of service rather than a contract for services.

49. Where the main operating activity of the business is the supply of labour or a service of some kind, often a critical element of the business is the need to retain control over that labour or the workers providing the service. This control will be strongly indicative of an employment relationship. In Personnel Contracting, the High Court found Construct retained a right of control over Mr McCourt that was a core part of its business as a labour hire agency. This right to control the work of Mr McCourt was seen as a key asset of Construct's business. The High Court found that Mr McCourt had no right to exercise any control over what work he was to do and how that work was to be carried out.[54]

50. An employer may not always retain a right to control all aspects of how, when and where work is performed; different kinds of control may be contractually available depending on the nature of the arrangement. For example, in a casual employment arrangement, in the ordinary sense, the employee retains control over when or for how long they work because they may refuse a particular offer of work from their employer.[55]

51. A term in a contract that purports to confer a right to control must be interpreted in the context of the broader contract and the services being provided. In ZG Operations, the High Court found that a clause requiring carriage of goods 'as reasonably directed' did not confer the necessary control when viewed in context. The context indicated that ZG Operations, the engaging entity, had a power to give directions to make deliveries, but it did not have the power to direct how they should be done.[56]

Other rights that confer a capacity to control

52. In some cases, a broad, unfettered right to terminate a worker's contract may confer a capacity to control that worker, as the engaging entity can use the prospect of termination as a tool to control performance.[57]

53. Similarly, a requirement that a worker indemnify an engaging entity for damages from failing to adhere to the engaging entity's instructions or directions may give the engaging entity control.[58]

Other indicia

The ability to delegate, subcontract or assign work

54. A critical feature of an employment relationship is the personal service of the employee; the worker themselves should be serving in the engaging entity's business. As such, the existence of a right which allows a worker to delegate, subcontract or assign their work to another, qualified[59] or otherwise, is generally to be viewed as inherently inconsistent with an employee relationship.[60]

55. Where a worker has an entirely unfettered right to delegate, subcontract or assign their work to others, in the absence of countervailing considerations, the existence of this right will be a very strong indicator against the worker being an employee.[61] Where the right is fettered, the degree of inconsistency between it and the other terms of the contractual relationship between the parties will reveal the degree to which the fettered right to delegate, subcontract or assign tends against a finding of employment.[62]

56. As such a right to delegate, subcontract or assign work which is[63]:

not limited in scope (that is, the worker can delegate, subcontract, or assign the entirety of their work to another, as opposed to only discrete tasks)
not a sham[64], and
legally capable of exercise[65]

will indicate a worker is not an employee of the engaging entity. Whether the worker is, however, an independent contractor will depend upon an examination of the totality of the legal rights and obligations between the parties.

57. The concept of delegating, subcontracting and assigning work in this context should not be confused with other arrangements in which a different person might perform work in the worker's place. An employee may frequently delegate tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this delegation exercised is fundamentally different to true delegation exercised by a contractor outlined in this Ruling.

58. Similarly, a worker may have the right (or even the obligation) to find a 'substitute' to perform work in their place - for example, when they are unwell and unable to work.[66] When a worker asks a colleague to take an additional shift or responsibility, and the worker is not responsible for paying that replacement worker, the worker has merely organised a substitution or shared the workload. This is not delegation, subcontracting or assignment of work being exercised by the worker.

'Results' contracts

59. Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for services.[67] The reference to a 'result' in this context is the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third-party labour, plant, and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

60. The way in which a worker is remunerated for their services, and the process through which the parties determine this remuneration, can help to identify whether a worker is being engaged to serve in an engaging entity's business or has merely contracted with that business to produce a specified result.

61. Consideration for a specified result is often a fixed sum paid on completion of the particular job[68] as opposed to an amount paid by reference to hours worked, activities performed or a commission.

62. In contracts to produce a result, payment is often a negotiated price for the specified outcome. For example, in Stevens, payment was determined by reference to the volume of timber delivered[69] and in Queensland Stations Pty Ltd v Federal Commissioner of Taxation[70], it was a fixed sum per head of cattle delivered. A payment is more likely to be for a result if it bears little to no reference to the time spent working to produce the outcome.[71]

63. However, 'piece-rate' or 'output-based' payment models are often consistent with an employment relationship if they are simply a natural means to remunerate the particular kind of task the worker is performing.[72] Often in these cases, the employee is paid per discrete task because of one or more of the following factors:

the sole duty of the employee is to complete the task
it is easier to calculate remuneration based on task completion
the amount per task is calculated by reference to the period worked or by reference to time variables (for example, effort, speed and waiting times), or
paying per task is used as a means to increase productivity.[73]

64. Key examples of non-hourly remuneration models that have been found to be consistent with employment include:

land salesmen, who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only[74]
bicycle couriers paid a flag fall rate per delivery, rather than per time period engaged[75]
fruit pickers paid daily per bin of fruit picked[76]
interviewers who were only paid a fixed rate on the completion of each assignment that was determined by reference to the time expected to complete the assignment.[77]

65. The Full Federal Court in JMC observed that the manner in which a lecturer was remunerated for his teaching services, being paid an amount per hour for giving a lecture and a different amount per hour for marking, was 'not inherently incompatible with either an employment relationship, or an independent contract relationship'[78] although they were inclined to it favouring an independent contractor relationship.[79] We note that this observation of the Full Federal Court was made in the context of the facts of JMC, where a number of the terms of the relevant written contract were considered to favour against a finding of an employment relationship.

Provision of tools and equipment

66. The provision of assets, equipment and tools by a worker, and the incurring of expenses and other overheads, may be an indicator that the worker is an independent contractor.[80] However, a worker bringing their own tools is not automatically inconsistent with an employment relationship. The nature, scale and cost of the tools and equipment must be considered.

67. As highlighted in Hollis, the provision and maintenance of tools and equipment and payment of business expenses should be significant for the worker to be considered an independent contractor. The majority of the High Court stated[81]:

In classifying the bicycle contractors as independent contractors, the Court of Appeal fell into error in making too much of the circumstances that the bicycle couriers owned their own bicycles, bore the expenses of running them and supplied many of their own accessories. ... A different conclusion might, for example, be appropriate where the investment in capital was more significant, and greater skill and training were required to operate it.

68. In ZG Operations, Gageler and Gleeson JJ considered the question of scale with respect to the cost of tools and equipment to be important, finding[82]:

Where work contracted for, actually performed by an individual, and paid for, involves use of a substantial item of mechanical equipment for which the provider of the work is wholly responsible, the personal is overshadowed by the mechanical. That was recognised by this Court in Humberstone v Northern Timber Mills and again in Wright v Attorney-General for the State of Tasmania. Those cases were cited as authorities for that proposition in Neale v Atlas Products (Vic) Pty Ltd; they support what has become the 'conventional view' that 'owners of expensive equipment, such as [a truck], are independent contractors'.

69. Equipment that is not specialised or inherently used only for the completion of the worker's contracted services is also less likely to be considered significant.[83] This may include personal electronic devices such as a mobile phone or laptop, or modes of transport that are also used for personal or recreational purposes (for example, bicycles).

70. There are situations where, having regard to the custom and practice of the work, or the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the worker is engaged as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work. All the other legal rights and responsibilities must be considered to determine the nature of the contractual relationship.

71. Further, an employee, may be reimbursed (or receive an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car. In contrast it may be more common for an independent contractor to factor these anticipated expenses into a negotiated price for services.

Risk

72. Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee.[84] On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work.

73. A clause in a contract that requires a worker to take out public liability or indemnity insurance in the Commissioner's view will likely be a neutral factor in determining the nature of the relationship between the worker and the engaging entity, unless an examination of the totality of the legal rights and obligations between the parties supports a conclusion that the worker is an independent contractor. In such a case, while not determinative, the worker's obligation to take out public liability or indemnity insurance will incline towards the finding of an independent contractor relationship.[85]

Generation of goodwill

74. If an independent contractor performs services in the course of their own business, it would be common for the contractor to be able to generate goodwill for that business. Where a contract between a worker and engaging entity prevents any goodwill from accruing for a worker's possible business, this may indicate that the worker is instead serving in the engaging entity's business.

75. However, not all businesses will necessarily generate goodwill. In ZG Operations Kiefel CJ, Keane and Edelman JJ found[86]:

... many businesses - such as manufacturers of products for a single customer - do not generate goodwill. That is a feature of the niche in the market occupied by those businesses; it is not a circumstance which denies the independence of such businesses from their customers.

Other relevant considerations

Labels given to parties in the contract and other descriptors of their relationship

76. Often contracts include clauses that purport to characterise or label the relationship, for instance as being one of an independent contractor. The 'labels' which the parties may have chosen to describe their relationship are not determinative or even likely relevant to the characterisation of their relationship.[87] In Personnel Contracting, Kiefel CJ and Keane and Edelman JJ[88] stated[89]:

As a matter of principle, however, it is difficult to see how the expression by the parties of their opinion as to the character of their relationship can assist the court, whose task it is to characterise their relationship by reference to their rights and duties. Generally speaking, the opinion of the parties on a matter of law is irrelevant. Even if it be accepted that there may be cases where descriptive language chosen by the parties can shed light on the objective understanding of the operative provisions of their contract, the cases where the parties' description of their status or relationship will be helpful to the court in ascertaining their rights and duties will be rare.

77. Further, clauses of a contract such as the following which require:

a worker to use a registered business name
a worker to work under an Australian business number
a worker to provide invoices as a prerequisite to payment
an engaging entity to provide the worker with one or more of sick pay, holiday pay and superannuation

are more than mere labels reflecting the parties' opinion of the nature of their relationship, and rather are operative terms of the contract between the parties, unless they have been varied, are unenforceable or considered to be a sham.[90]

78. While the first 3 obligations listed in paragraph 77 of this Ruling may be consistent with an independent contractor relationship[91] and the last obligation consistent with an employment relationship, the Commissioner does not consider that these factors in themselves are determinative.[92] It is necessary to examine the totality of the legal rights and obligations between the parties to determine whether the worker is an independent contractor or employee.

Where a business engages with a non-individual entity

79. Where a worker does not contract directly with a business, but instead engages to perform work for the business as a partner of a partnership or through an entity such as a company or trust, this may indicate an employment relationship has not been created.[93] This is because there may be no contractual rights and obligations existing between the business and the worker (in their individual capacity).

80. However, a different conclusion may be reached if a worker uses an interposed entity but is also directly a party to the contract with the engaging entity. For example, an engaging entity may enter into a contract with both the interposed entity and the worker.[94]

Neither employee nor independent contractor - lease or bailment

81. There are circumstances in which the relationship between a person who engages another to perform work and the person engaged does not give rise to a payment for services rendered or provision of labour but rather a payment for something entirely different, such as a lease or 'bailment'. In these circumstances, a person enters into a lease or bailment for the use of property owned by another person and the payments are made from the lessee or bailee to the lessor or bailor. Consequently, the lessee or bailee, rather than being a provider of services to the owner of the asset, acquires a right to exploit that asset for their own benefit in return for a 'rental' payment to the owner.

82. A common form of bailment relationship is that of owner and taxi driver. In the taxi industry, some taxi drivers who operate under a bailment arrangement make a payment to the owner allowing them to use the taxi to drive. These payments may take the form of lease payments or a percentage of shift takings. In Commissioner of Taxation of the Commonwealth of Australia v De Luxe Red & Yellow Cabs Co-operative (Trading) Society Ltd & Ors[95], the Full Federal Court held that a taxi licence owner and taxi drivers were not in a relationship of employer and employee. The relationship was rather one of bailment, even though the licence owner had a degree of control over the drivers' work.

Date of effect

83. This Ruling applies both before and after its date of issue. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10 Public Rulings).

Commissioner of Taxation
6 December 2023

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Footnotes

Section 12-40.

Section 12-45.

Section 12-60.

Division 13.

Specifically, Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (ZG Operations).

Personnel Contracting at [61] and [172-173].

Personnel Contracting at [60], [124] and [173].

Personnel Contracting at [174].

Personnel Contracting at [175].

Personnel Contracting at [43], [59] and [173]; WorkPac Pty Ltd v Rossato [2021] HCA 23 at [56-57] and [63].

Personnel Contracting at [55], [59], [173] and [185-189].

Personnel Contracting at [42] and [177].

Personnel Contracting at [36-39], [61-62], [121], [173] and [183]. The relationship may be affected by statutory provisions and by awards made under statutes (Personnel Contracting at [41]).

Personnel Contracting at [34].

Hall (Inspector of Taxes) v Lorimer [1992] 1 WLR 939 at page 944 (Lorimer).

Lorimer at page 944. See also Construction, Forestry, Maritime, Mining and Energy Union v. Personnel Contracting Pty Ltd [2020] FCAFC 122 at [20] in which Allsop CJ observed the value of how Mummery J expressed the task in Lorimer:
because it illuminates, in language of metaphor, the relevance of intuitive appreciation and assessment of the whole, rather than a process of mechanically disaggregating and deconstructing different parts of the relationship by tests drawn from other cases.

The High Court in Personnel did not suggest this approach was incorrect at [34].

Personnel Contracting at [181].

Personnel Contracting at [63] and [66].

Section 12-35 does not apply to payments made to other entities provided that the arrangement is not a sham or a mere redirection of an employee's salary or wages.

Personnel Contracting at [44], [61] and [172].

Personnel Contracting at [36-39], [61-62], [121] and [183].

Personnel Contracting at [174].

Personnel Contracting at [34], [61] and [183].

Personnel Contracting at [62], [73] and [193].

Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; 160 CLR 16 (Stevens) at [24], per Mason J and [36], per Wilson and Dawson JJ. In Stevens, the High Court was adjusting the notion of 'control' to modern industrial conditions and, in doing so, continued the developments in Zuijs v Wirth Bros Pty Ltd [1955] HCA 73 (Zuijs) and Humberstone v Northern Timber Mills [1949] HCA 49. The control test as articulated in Stevens was cited and adopted with approval by the majority of the High Court in Hollis v Vabu Pty Ltd [2001] HCA 44 at [43] (Hollis); Personnel Contracting at [74] and [174] and the Full Federal Court in JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76 (JMC) at [83].

Personnel Contracting at [44].

The relationship may also be affected by statutory provisions and by awards made under statutes (Personnel Contracting at [41]).

Secretary, Attorney-General's Department v O'Dwyer [2022] FCA 1183 at [29-33].

Hollis at [24]. Relevantly, in Personnel Contracting, the plurality, comprising Kiefel CJ, Keane and Edelman JJ, provided the written contractual relationship between Vabu and its bicycle couriers as an example of a contract that was not comprehensively committed to writing (see Personnel Contracting at [57])

Hollis at [24].

Personnel Contracting at [55], [59], [173] and [185-189].

Personnel Contracting at [55-59] and [185-189].

Personnel Contracting at [42] and [177].

Personnel Contracting at [174].

ZG Operations at [61].

Personnel Contracting at [42], [177] and [188].

R v Foster; Ex parte Commonwealth Life (Amalgamated) Assurances Ltd [1952] HCA 10; Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37 at [149].

Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21 at [34-35]; Personnel Contracting at [177]. A reference to a 'sham' in this Ruling is not a reference to 'sham arrangements' considered under Division 6 of Part 3-1 of the Fair Work Act 2009.

Personnel Contracting at [177].

Marshall v Whittaker's Building Supply Co [1963] HCA 26 at [5], per Windeyer; Colonial Mutual Life Assurance Society Limited v Producers and Citizens Co-operative Assurance Company of Australia Limited [1931] HCA 53; 46 CLR 41 at [48].

Personnel Contracting at [39] and [121].

Personnel Contracting at [36-39], [61-62], [121], [173] and [183]. The relationship may be affected by statutory provisions and by awards made under statutes - Personnel Contracting at [41].

Personnel Contracting at [69-71], [89] and [200].

Personnel Contracting at [89].

Personnel Contracting at [180-181].

Personnel Contracting at [181-183], Tattsbet Limited v Morrow [2015] FCAFC 62 at [61].

Personnel Contracting at [36], [39] and [73].

Personnel Contracting at [39] (referring to Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 at [515]; Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 at [184-185]).

Hollis at [50-52].

ZG Operations at [32-33] and [52-53].

Zuijs at [571-573]; Stevens at [9] and [15-20], per Mason J.

Stevens at [24]; Hollis at [43]; Personnel Contracting at [74] and [174]; JMC at [83].

Personnel Contracting at [73].

Personnel Contracting at [71-77].

Personnel Contracting at [84] and [109].

ZG Operations at [69] and [105].

Personnel Contracting at [196]; Commissioner of State Revenue v Mortgage Force Australia Pty Ltd [2009] WASCA 24 at [104].

Personnel Contracting at [196].

An example of a qualified right of delegation, subcontracting or assignment of work is such a right which requires the consent of the engaging entity to be exercised (see JMC at [79]).

JMC at [74-76].

JMC at [74-75].

JMC at [74] and [76].

JMC at [76-77].

Sham in this context is a reference to the common law doctrine of sham. This is discussed in further detail in paragraphs 35 to 37 of this Ruling.

Whether a right to delegate, subcontract or assign work is capable of being legally exercised should not be confused with whether such a right is unlikely to be exercised in the future as a matter of fact. A right to delegate, subcontract or assign work which is unlikely to be exercised will still be an indicator against a finding of employment, unless the right is a sham or limited in scope (see JMC at [77]).

On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 at [105] and [253].

World Book (Australia) Pty Ltd v FC of T 92 ATC 4327 at [4334], per Shelley JA.

Neale v Atlas Products (Vic) Pty Ltd [1955] HCA 18; 94 CLR 419 at [424-425].

Stevens at [10].

[1945] HCA 13; 70 CLR 539 at [542].

Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52 (Roy Morgan) at [42].

Hollis at [54].

Hollis at [54]; On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 at [277]; Roy Morgan at [42].

Commissioner of Taxation (Cth) v Barrett [1973] HCA 49.

Hollis at [54].

JA & BM Bowden & Sons Pty Ltd v Chief Commissioner of State Revenue [2001] NSWCA 125at [95].

Roy Morgan at [42].

JMC at [45].

JMC at [104].

Stevens at [12].

Hollis at [47].

ZG Operations at [88].

Hollis at [56].

In Hollis, Vabu undertook the provision of insurance for the couriers and deducted the amounts from their payments to the couriers.

JMC at [48-49].

At [58].

Personnel Contracting at [58], [63], [127] and [184].

Gageler and Gleeson JJ in agreement with the majority on this point.

At [66].

JMC at [48-49].

JMC at [104].

JMC at [49].

Personnel Contracting at [174]; ZG Operations at [99].

See, for example, Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118.

[1998] FCA 361.

Previously issued in draft form as TR 2022/D3

Previous Rulings/Determinations:

TR 2005/16

References

ATO references:
NO 1-UYVPMOG

ISSN: 2205-6122

Related Rulings/Determinations:

TR 2006/10

Business Line:  SEO

Legislative References:
TAA 1953 Sch 1 12-35
TAA 1953 Sch 1 12-40
TAA 1953 Sch 1 12-45
TAA 1953 Sch 1 12-60
TAA 1953 Sch 1 Div 13
SGAA 12(1)

Case References:
Colonial Mutual Life Assurance Society Limited v Producers and Citizens Co-operative Assurance Company of Australia Limited
[1931] HCA 53
46 CLR 41
5 ALJR 355
38 ALR 73


Commissioner of State Revenue v Mortgage Force Australia Pty Ltd
[2009] WASCA 24
2009 ATC 20-092

Commissioner of Taxation (Cth) v Barrett
[1973] HCA 49
129 CLR 395
73 ATC 4147
4 ATR 122

Commissioner of Taxation of the Commonwealth of Australia v De Luxe Red & Yellow Cabs Co-operative (Trading) Society Ltd & Ors
[1998] FCA 361
38 ATR 609
82 FCR 507
98 ATC 4466
87 IR 349

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contacting Pty Ltd
[2022] HCA 1
279 FCR 631

Construction, Forestry, Maritime, Mining and Energy Union v. Personnel Contracting Pty Ltd
[2020] FCAFC 122

Dental Corporation Pty Ltd v Moffet
[2020] FCAFC 118
278 FCR 502
297 IR 183

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd and Others
[2015] FCAFC 37
228 FCR 346
321 ALR 404

Hollis v Vabu Pty Ltd
[2001] HCA 44
207 CLR 21
2001 ATC 4508
47 ATR 559

Hall (Inspector of Taxes) v Lorimer
[1992] 1 WLR 939
[1992] STC 599
[1999] ICR 739

Humberstone v. Northern Timber Mills
[1949] HCA 49
79 CLR 389
[1950] VLR 44
23 ALJ 584

JA & BM Bowden & Sons Pty Ltd v Chief Commissioner of State Revenue
[2001] NSWCA 125
2001 ATC 4220
47 ATR 94

JMC Pty Ltd v Commissioner of Taxation
[2023] FCAFC 76
297 FCR 600
2023 ATC 20-861

Market Investigations Ltd v Minister of Social Security
[1969] 2 QB 173
[1969] 2 WLR 1

Marshall v Whittaker's Building Supply Co
[1963] HCA 26
109 CLR 210
[1963] ALR 859

Neale v Atlas Products (Vic) Pty Ltd
[1955] HCA 18
94 CLR 419
10 ATD 460

On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No
3) [2011] FCA 366
214 FCR 82
279 ALR 341
83 ATR 137
2011 ATC 20-258

Queensland Stations Pty Ltd v Federal Commissioner of Taxation
[1945] HCA 13
(1945) 70 CLR 539
[1945] ALR 273

R v Foster; Ex parte Commonwealth Life (Amalgamated) Assurances Ltd
[1952] HCA 10
85 CLR 138

Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation
[2008] HCA 21
238 CLR 516
246 ALR 406
2008 ATC 20-029
68 ATR 170

Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance
[1968] 2 QB 497

Roy Morgan Research Pty Ltd v Commissioner of Taxation
[2010] FCAFC 52
184 FCR 448
268 ALR 232
2010 ATC 20-184
76 ATR 264

Stevens v. Brodribb Sawmilling Co Pty Ltd
[1986] HCA 1
160 CLR 16
63 ALR 513
60 ALJR 194
[1986] ACL 36085

Secretary, Attorney-General's Department v O'Dwyer
[2022] FCA 1183
318 IR 216
177 ALD 113

Tattsbet Limited v Morrow
[2015] FCAFC 62
233 FCR 46
321 ALR 305

WorkPac Pty Ltd v Rossato
[2021] HCA 23
271 CLR 456
392 ALR 39

World Book (Australia) Pty Ltd v FC ot T
27 NSWLR 377
108 ALR 510
92 ATC 4327
23 ATR 412

ZG Operations Australia Pty Ltd v Jamsek
[2022] HCA 2
275 CLR 254
96 ALJR 144
398 ALR 603

Zuijs v. Wirth Bros Pty Ltd
[1955] HCA 73
93 CLR 561
[1956] ALR 123
[1955] WCR (NSW) 77
29 ALJ 698