Edited version of private ruling

Authorisation Number: 1011469851248

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Ruling

Subject: Deduction for Personal Superannuation Contributions

Question

Is your client eligible to claim a deduction in respect of personal superannuation contributions for the relevant income year under section 82AAT of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2007.

The scheme commences on:

1 July 2006.

Relevant facts and circumstances

Your client, who is aged between 50 and 65 years of age, was engaged by a number of entities during the relevant income year to work in a professional capacity.

Your client was employed by a company. A signed TFN declaration was provided to the company.

A PAYG payment summary - individual non-business issued by the company for the relevant income year shows no reportable fringe benefits and discloses gross payments made and PAYG withholding amounts withheld by the company during the first quarter of this income year.

The company also made contributions to a superannuation fund for your client's benefit in respect of this employment in this income year.

Your client was subsequently engaged by the principal for a number of weeks commencing in early November of the relevant year. Your client began the engagement after professional services were advertised.

The principal operated a professional practice, and engaged your client to provide professional services on a relief basis. There was no signed agreement between your client and the principal for the engagement.

A signed TFN declaration was provided to the principal, in order to have tax withheld from the payments your client received under the engagement. Your client did not have a salary sacrifice arrangement.

Your client provided clients who required professional services with personalised specialist experience. Your client was entrusted by the principal to provide professional services in the practice with good faith.

The principal had quality controls in place for its practice during the engagement. Your client was engaged to follow a calendar of booked appointments, with a standard time allowed to your client for each booking.

Your client maintained a professional dress standard. No signage was used.

Your client did not perform the same sort of work for any other businesses during the time your client worked for the principal.

Your client had the right to refuse a particular job. However your client did not come across a circumstance to exercise that right during the engagement.

The principal expected your client to provide the professional services personally. Your client was not able to engage the help of other people in performing the work, and your client did not pay another person to perform work under the engagement.

Your client did not have set hours where your client is required to work for the principal. Your client's hours were set by appointments made on your client's behalf. Details of how your client's hours per week were varied by the principal were provided.

The work was performed at the principal's premises, and your client used the principal's assets and facilities. Your client did not perform the work elsewhere.

Your client could not perform the work without using the principal's assets, and your client did not use any other equipment to carry out the work.

Your client uses a motor vehicle only as a means of transport to the principal's premises, and your client is not reimbursed for the vehicle's running expenses.

Your client was responsible for rectification of professional services if the services provided were not agreeable to a client. The principal expected your client to be fully responsible for the work your client performed. If there was a problem with a client's treatment, your client was responsible for rectifying the problem.

Your client was paid an hourly rate which was agreed before your client entered into the engagement with the principal. Your client was not paid any allowances. Your client received weekly gross payments under the engagement. Your client received a final payment in late December of the relevant year.

Your client has an Australian Business Number and is registered for the Goods and Services Tax (GST). Your client did not charge GST on the supply of professional services to the principal under this engagement.

Your client was not provided with leave entitlements or worker's compensation cover. Your client was also responsible for insurance, including professional indemnity insurance, under this contract.

Your client did not advertise professional services under this engagement to the public.

Your client carried the risk of a loss or the chance of making a profit because your client was personally responsible for the professional services provided. No improvements to the professional practice occurred while your client was engaged by the principal.

Both the principal's professional practice, and the work your client performed under the engagement, were subject to licensing by the relevant authority.

A PAYG payment summary - individual non-business was issued by the principal for the relevant income year in relation to the engagement. The PAYG payment summary shows no reportable fringe benefits and discloses gross payments made and PAYG withholding amounts withheld by the principal during the engagement.

The principal did not provide superannuation support to your client in respect of the relevant income year. A letter from the principal confirms that during the time of the engagement no employer contributions were paid on your client's behalf.

Your client was also employed by a trust. A signed TFN declaration was provided to the trust. A PAYG payment summary - individual non-business issued by the trust for the relevant income year shows no reportable fringe benefits and discloses gross payments made and PAYG withholding amounts withheld by the trust during the fourth quarter of this income year.

The trust also made contributions to a superannuation fund for your client's benefit in respect of this employment in this income year.

Your client carried on a professional services business during the relevant income year, and earned gross business income during this income year.

In addition to the amounts already noted above, your client's assessable income in the relevant income year included income from interest, franked and unfranked dividends, franking credits, a trust distribution, a net capital gain, foreign sourced income and rent.

Your client made personal superannuation contributions to a complying superannuation fund (the fund) late in the relevant income year, in order to obtain superannuation benefits.

Your client provided a written notice to the trustee of the fund (the fund trustee), claiming a deduction for this income year. The notice also specified that the remaining amount of the contribution was an undeducted personal contribution.

In a letter from the fund trustee your client was advised that part of the contribution was classified as a deductible contribution and that contribution tax was deducted from the contribution. This letter was the written notice from the fund trustee acknowledging receipt of your client's notice in respect of the contribution.

A Government co-contribution and an SGC preserved amount were deposited into a superannuation fund for your client's benefit.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 82AAS,

Income Tax Assessment Act 1936 Subsection 82AAS(1),

Income Tax Assessment Act 1936 Subsection 82AAS(2),

Income Tax Assessment Act 1936 Subsection 82AAS(3),

Income Tax Assessment Act 1936 Sub-subparagraph 82AAS(3)(a)(i)(A),

Income Tax Assessment Act 1936 Section 82AAT,

Income Tax Assessment Act 1936 Subsection 82AAT(1),

Income Tax Assessment Act 1936 Paragraph 82AAT(1)(a),

Superannuation Guarantee (Administration) Act 1992 Section 12,

Superannuation Guarantee (Administration) Act 1992 Subsection 12(1),

Superannuation Guarantee (Administration) Act 1992 Subsection 12(3) and

Superannuation Guarantee (Administration) Act 1992 Subsection 12(11).

Reasons for decision

Summary

Your client is not entitled to claim a deduction for personal superannuation contributions in the relevant income year because your client has not satisfied the 'ten percent rule', and therefore your client has not satisfied the 'eligible person' requirement. Your client's income from eligible employment is greater than 10% of your client's total assessable income and reportable fringe benefits in this income year.

Detailed reasoning

Prior to 1 July 2007, a person was entitled to claim a deduction for personal superannuation contributions to complying superannuation funds or retirement savings accounts (RSA) under former section 82AAT of the Income Tax Assessment Act 1936 (ITAA 1936).

Former subsection 82AAT(1) of the ITAA 1936 states:

A person who has made a contribution to a fund during a year of income is entitled to an allowable deduction for the contribution in the person's assessment for the year of income if all the following conditions are met:

· the person is an eligible person in relation to the year of income;

· the person made the contribution in order to obtain superannuation benefits for the person or for dependants of the person in the event of the person's death;

· the fund is a complying superannuation fund for the fund's year of income in which the person made the contribution;

· the person has given a notice under subsection (1A) in respect of the contribution and the trustee of the fund has acknowledged that notice under subsection (1A).

The deduction cannot be more than the amount covered by the notice under subsection (1A), and is also subject to the limits in subsection (2).

These conditions are explained in detail in Taxation Ruling TR 2005/24 entitled 'Income tax: deductibility of personal superannuation contributions'.

TR 2005/24 contains the Commissioner's view in respect of the operation of former sections 82AAS and 82AAT of the ITAA 1936. Although TR 2005/24 was withdrawn with effect from 17 June 2009, the views expressed in TR 2005/24 continue to apply in respect to the income years up to and including the relevant income year.

Each of the conditions in former subsection 82AAT(1) of the ITAA 1936 will be examined to determine whether your client can claim a deduction for the personal superannuation contributions your client made to a complying superannuation fund (the fund) late in the relevant income year.

Eligible person and employer superannuation support

The first condition that must be satisfied for a personal superannuation contribution to be allowed as a deduction under former subsection 82AAT(1) of the ITAA 1936 is that the person making the contribution is an 'eligible person' in relation to the relevant year of income.

An 'eligible person' is defined in former subsection 82AAS(2) of the ITAA 1936. In broad terms, a person will be an eligible person in respect of a year of income unless it is reasonable to expect that superannuation benefits and support would be provided for that person in the event of his or her retirement or to dependants in the event of his or her death. Former subsection 82AAS(2) states:

A person (in this subsection referred to as the "relevant person") is an eligible person in relation to a year of income for the purposes of this Subdivision unless:

during the whole or a part of the year of income circumstances existed by reason of which it was reasonable to expect that superannuation benefits would be provided for the relevant person in the event of the retirement of the relevant person or for dependants of the relevant person in the event of the death of the relevant person (whether or not any condition other than the retirement or death of the relevant person would be required to be satisfied in order that those benefits be provided); and

· to the extent to which those benefits would be attributable to the year of income:

· the benefits would be wholly or partly attributable to contributions made, or required to be made, in relation to the year of income:

· to a superannuation fund of the relevant person; and

· by someone other than the relevant person; and

· in connection with the eligible employment of the relevant person in the year of income; or

· the benefits would, in whole or in part, be paid in relation to the year of income:

· out of money (other than contributions made to a superannuation fund) of someone other than the relevant person; and

· in connection with the eligible employment of the person in the year of income.

At paragraph 13 of TR 2005/24 the Commissioner states:

Ordinarily, a taxpayer will not be an 'eligible person' because it is reasonable to expect that superannuation benefits would be provided for the taxpayer by another person in respect of a year of income if:

· the person's employer actually makes contributions to a superannuation fund for the benefit of the taxpayer in respect of that year of income;

· another person has an obligation to make superannuation contributions on behalf of the taxpayer in connection with eligible employment in respect of that year of income…

An obligation to make superannuation contributions may arise as a result of an occupational superannuation arrangement, an award, or under the terms of a trust deed. An obligation to make superannuation contributions may also arise under the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Thus employer superannuation support in any form (including Superannuation Guarantee (SG) contributions made to a complying superannuation fund or an RSA for the purposes of the SGAA at any time during a year of income will usually mean that a taxpayer will not be an eligible person.

In this instance, your client was employed by a company during the first quarter of the relevant income year. The company made superannuation contributions to a superannuation fund for your client's benefit in respect of this employment in this income year.

Your client was also employed by a trust during the fourth quarter of this income year. The trust also made contributions to a superannuation fund for your client's benefit in respect of this employment in this income year.

Consequently, as your client was engaged in eligible employment for the purposes of the SGAA, superannuation contributions were made to a superannuation fund in respect of your client's eligible employment with the company and the trust in the relevant income year. In addition an SGC preserved amount was also deposited into a superannuation fund for your client's benefit in respect of this income year.

On the facts provided, it is considered that your client has not satisfied the requirements in former paragraph 82AAS(2)(a) of the ITAA 1936.

Eligible person and the ten per cent rule

Prior to 1 July 2007, a person who receives or expects to receive only small amounts of employer superannuation support may still be treated as an eligible person if they satisfy the requirements of former subsection 82AAS(3) of the ITAA 1936. This is known as the 'ten per cent rule'.

Under the 'ten percent rule' a taxpayer, who is engaged in eligible employment, will be considered an eligible person if his or her assessable income from that employment (including reportable fringe benefits or exempt income, if any) is less than ten percent of his or her total assessable income and reportable fringe benefits (if any) for the income year.

As noted previously, your client was engaged in eligible employment for the purposes of the SGAA with the company during the first quarter of the relevant income year, and with the trust during the fourth quarter of this income year. However, to apply the threshold test set out in former subsection 82AAS(3) of the ITAA 1936, it is first necessary to determine whether your client was also engaged in eligible employment with the principal during this income year.

Eligible employment and employee for the purposes of the SGAA

Former subsection 82AAS(1) of the ITAA 1936 defines 'eligible employment' as:

· the holding of any office or appointment; or

· the performance of any functions or duties; or

· the engaging in of any work; or

· the doing of any act or things;

that results in the person being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that Act had not been enacted).

Subsection 12(11) of the SGAA operates to exclude from the definition of 'employee' persons who are paid to do work wholly or principally of a domestic or private nature of no more than 30 hours per week. For the purposes of the definition of 'eligible employment' in former subsection 82AAS(1) of the ITAA 1936, subsection 12(11) of the SGAA is ignored.

Employee at common law

Section 12 of the SGAA states that the terms employee and employer have their ordinary meaning for the purposes of the SGAA. Superannuation Guarantee Ruling SGR 2005/1 entitled 'Superannuation guarantee: who is an employee?' explains when an individual is considered by the Commissioner to be an 'employee' under section 12.

In paragraph 21 of SGR 2005/1 the Commissioner explains that subsection 12(1) of the SGAA 'defines the term "employee" as having its ordinary meaning - that is, its meaning under common law'. The Commissioner further notes, at paragraph 8, that if a worker is held to be an employee at common law, then they will be an employee under the SGAA. In other words, the simple fact of being a common law employee results in an individual being treated as an employee for the purposes of the SGAA.

Employee under the extended meaning in section 12 of the SGAA

The term 'employee' in the SGAA has both its ordinary meaning and an extended meaning (SGR 2005/1, paragraph 1) and section 12 of the SGAA 'is both a clarifying and extending provision' (SGR 2005/1, paragraph 21).

Subsections 12(2) to 12(11) of the SGAA list a number of categories of persons who are also treated as employees'. Persons who come within these provisions are deemed to be employees for the purposes of the SGAA. For example, a person who works under a contract that is wholly or principally for the labour of the person would be deemed an employee for the purposes of the SGAA (subsection 12(3) of the SGAA).

In this respect, the Commissioner notes at paragraph 11 of SGR 2005/1:

For the purposes of subsection 12(3), where the terms of the contract in light of the subsequent conduct of the parties indicate that:

· the individual is remunerated (either wholly or principally) for their personal labour and skills;

· the individual must perform the contractual work personally (there is no right of delegation); and

· the individual is not paid to achieve a result,

· the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

Resort to the extended definition of 'employee' in the SGAA is necessary where there is some doubt as to whether the individual is a common law employee. In this context, the Commissioner explains in paragraph 23 of SGR 2005/1 that:

If it is considered that the relationship at common law is one of principal and independent contractor or the determination of the status of the worker is unclear, the extended definition of 'employee' in the SGAA must be considered.

'Employee' within the ordinary and extended meaning of that expression

There is no one factor that determines whether a person is an employee or an independent contractor. A number of factors must be considered.

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services (Commissioner of Payroll Tax (Vic) v. Mary Kay Cosmetics Pty Ltd (1982) 82 ATC 4444; (1982) 13 ATR 360, per Justice Gray).

Whatever the facts of each particular case may be, there is no single feature which is determinative of the contractual relationship; the totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor (Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16; (1986) 63 ALR 513 at CLR 29; ALR 521, per Justice Mason).

Indicators which may be persuasive of an employer/employee relationship are:

· the provision of benefits such as annual, sick and long service leave;

· payer prescribed times and location for the performance of work;

· payer's discretion in respect of task allocation and termination of engagement;

· the worker uses the assets or materials provided by the payer, or is reimbursed or paid compensatory allowance for expenses incurred in the use of their own assets and materials; and

· the method of remuneration.

The list is not exhaustive and it must be emphasised that there is no standard set of conditions applicable to an employee and another to an independent contractor.

It might be argued that the parties' intention in forming a contract is not subjective, but an objective one; that is, the task is not to discover the intention of the parties involved but to decide what each could reasonably conclude from the actions of the other. In the observation made by Justice Isaacs in Curtis v. The Perth and Fremantle Bottle Exchange Co Ltd (1914) 18 CLR 17; (1914) 20 ALR 313; [1914] HCA 21:

Where parties enter into a bargain with one another whereby certain rights and obligations are created, they cannot by a mere consensual label alter the inherent character of the relations they have actually called into existence. Many cases have arisen where Courts have disregarded such labels, because in law they were wrong, and have looked beneath them to the real substance.

Therefore, simply defining someone as a contractor does not necessarily lead to the conclusion that the individual is providing services as part of an operation of their own independent business.

Control test

A prominent factor in determining the nature of the relationship between parties is the degree of control which the employer has over the employee, as it goes to the root of the classical view of the master-servant relationship. The degree of control varies on the type of job, as the increasing usage of skilled labour has seen a consequential reduction in supervisory functions. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but rather whether they have the right to exercise it.

The degree of control will vary according to the type of work, but the general rule is that the greater the obligation on a person to obey the orders of another as to the manner of the performance of work, the more conclusive it will be that the worker is the employee of the principal/payer.

It is not necessary for the employer to exercise day to day control over the worker. What is important is that the employer has the legal right of control. As stated by Justice Dixon in Humberstone v. Northern Timber Mills (1949) 79 CLR 389; (1949) 23 ALJ 584; [1950] VLR 44; [1949] ALR 985:

The question is not whether in practice the work was done subject to direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in performance of his work resided in the employer so that he was subject to the latter's orders and directions.

The classic test for determining a common law relationship is to consider if the worker is told what work needs to be done, when it is to be done, how it is to be done and where it is to be done.

Your client was engaged by the principal for a number of weeks commencing in early November of the relevant year, to provide professional services on a relief basis.

Your client was required to follow a calendar of booked appointments, and your client's hours per week were set by these appointments. Your client's hours per week were varied as required by the principal in accordance with the appointments made on your client's behalf.

Your client had the right to refuse a particular job, but did not have the occasion to exercise that right.

Your client performed the work at the principal's premises, and your client did not perform the work elsewhere. It is also noted that your client did not perform the same sort of work for any other businesses during the time your client worked for the principal.

The principal expected your client to provide all professional services personally, and your client was not able to engage the help of other people in performing the work for the principal.

Taking all of the above into account, the Commissioner can effectively conclude that the principal had ultimate right of control over when and where the work was required to be done. However, it is not clear whether the principal had right to control what work needed to be done and how it was to be done.

Therefore, the results of this test are inconclusive.

Integration test

The integration test is primarily concerned with establishing whether the individual providing the service/s does so as an individual carrying on a business of their own or as an integral part of another's business organisation.

Whether the worker operates on their own account or as part of a business of the payer is sometimes viewed as a consideration of whether the worker would be viewed by a third party as carrying on their enterprises as independent contractors and whether they could be expected to generate goodwill in their own right.

In the case of Stevenson, Jordan and Harrison v. MacDonald and Evans [1952] 1 TLR 101; (1952) 69 RPC 10, Lord Justice Denning said:

...under a contract of service a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

The skills involved in carrying out the work are also a useful guide in determining whether a person is carrying on their own business or not. The provision of professional skill or skilled labour may imply that the contractor is able to make an independent career by selling that skill. In the case of a contractor with an independent career, it may be implied that the contractor is able to conduct their own business using those skills.

The factors to be taken into account in deciding whether the integration test is satisfied include:

· whether the relationship between the worker and payer is an ongoing one,

· whether the worker's activities are effectively restricted to providing services to only one master, and

· whether the worker will generally profit commercially from sound management in the performance of his or her tasks (that is, whether the worker is so inextricably integrated in the business' organisation that any benefit from the worker's performance would flow to the business organisation).

As noted above, your client was engaged by the principal for a number of weeks commencing in early November of the relevant year, to provide professional services on a relief basis. During the time your client worked for the principal your client did not perform the same sort of work for any other businesses.

The fact that your client also has an independent business does not alter the character of the work that your client performed for the principle.

Based on the facts of this case, it is not evident that your client was operating an independent business in the performance of the work undertaken for the principal.

It is likely that the clients of the principal were more likely to view your client as an employee of the principal rather than being engaged as an independent contractor.

Therefore, while it is evident that your client did operate an independent business, the Commissioner finds that during the period commencing in early November of the relevant year your client was integrated into the principal's business as an employee because of the terms under which your client was expected to work. Further, it is considered that third party observers would most likely have viewed your client as a representative of the principal rather than someone running an enterprise.

The findings of this test support the view that there was an employer/employee relationship for the period your client worked for the principal.

Results test

A contract to produce a given result is one in which the focus is on what ultimate result the contract requires, rather than what must be provided during the performance of the required tasks. Satisfactory completion of the specified services is the result for which the parties have bargained.

The meaning of the phrase 'producing a result' means the performance of a service by one party for another where the first mentioned party is free to employ his/her own means to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do the work. That is, a payment becomes payable when, and only when, the contractual conditions have been fulfilled.

While the notion of payment for result is expected to be a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v. Vabu [2001] HCA 44; (2001) 106 IR 80; (2001) 75 ALJR 1356; (2001) 181 ALR 263; (2001) 2001 ATC 4508; (2001) 33 MVR 399; (2001) 47 ATR 559; [2001] Aust Torts Reports 81-615; (2001) 50 AILR 4-476; (2001) 207 CLR 21, considered that the payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in the case of the Commissioner of State Taxation v. The Roy Morgan Research Centre Pty Ltd [2004] SASC 288; (2004) 2004 ATC 4933; (2004) 90 SASR 12 found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

Your client was paid an hourly rate which was agreed before your client entered into the engagement with the principal. Your client was not paid any allowances, and your client received weekly gross payments under engagement.

This clearly indicates that your client was not paid by the principal to achieve a result and thus favouring an employer/employee relationship for the period your client worked for the principal.

Delegation test

The unlimited power to delegate or subcontract work is a significant factor in deciding whether the worker is an employee or an independent contractor. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is being engaged as an independent contractor.

Delegation is not simply the distribution of the task from one employee to another or the ability to swap shifts or request a colleague to perform some of the duties on their behalf. It is the right for a worker to employ their own means to achieve a specified outcome for the other party of the contract. Practically speaking, we consider that professional independence of the worker will be a critical consideration and whether the worker would be responsible for paying others who perform some of the work on their behalf.

In the present case the principal expected your client to provide all professional services personally, and your client was not able to engage the help of other people in performing the work for the principal. Clearly your client did not have the power to delegate the work, and your client did not have the right to pay another person to perform the work under the engagement.

Therefore the findings of this test sustain the view that there was an employer/employee relationship for the period your client worked for the principal.

Risk test

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for rectification of fault or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor. Commonly, an independent contractor would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

An employee on the other hand, would bear no such responsibility and the liability for any defective work of an employee, either to a third person or otherwise, would fall to the employer in terms of cost for rectification.

In the present case your client was fully and personally responsible for rectifying any problems with a client's treatment. It is also noted that your client was also responsible for insurance, including professional indemnity insurance, under this contract.

Therefore, the findings of this test support the view that your client was an independent contractor for the period your client worked for the principal.

Capital expenses test

A strong factor indicating that a worker is operating as an independent contractor is where they are required to provide a significant amount of capital investment, and to personally bear the cost of providing and maintaining the capital item, where that capital item is integral or necessary to the performance of the worker's services under the contract. The significance of this indicator is considered greatly reduced where that capital item is merely incidental to the provision of service under the contract of engagement.

A worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for his work, by the employer.

The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance for commercial profit) the more he or she is likely to be regarded as being independent. The higher the proportion of the gross income which the worker is required to expend in deriving that income, and the more substantial the assets which the worker brings to his or her tasks, the more likely it is that the contract is for services.

In the case of Queensland Stations Pty Ltd v. Commissioner of Taxation (Cth) (1945) 70 CLR 539; (1945) 8 ATD 30; [1945] ALR 273; (1945) 19 ALJ 253, it was found that the droving contractor was an independent contractor because he was required to find and pay for all the men, plant, horses and rations necessary and sufficient for the task. Their own means were employed to accomplish a result.

The weight or emphasis given to this indicator depends on the particular circumstances and the context and nature of the contractual work.

Your client used the principal's assets and facilities to provide professional services to clients of the practice. Your client could not treat the clients without using the principal's assets, and did not use any other equipment to perform the work.

Although not decisive on its own, this would support the view that the principal engaged your client as an employee.

Other indicators

In addition to the above, other indicators of the nature of the contractual relationship have been variously stated and have been added to from time to time. Those suggesting an employer-employee relationship include the right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award for employees.

In the present case it is noted that the principal did not provide your client with leave entitlements or worker's compensation cover. This would indicate that your client was not an employee of the principal.

On the other hand your client did not perform work of a similar nature for any other business during the period your client worked for the principal. This, as noted above, would suggest that your client was an employee of the principal for this period.

Your client provided a signed TFN declaration to the principal in order to have tax withheld from the payments your client received under the engagement. In this light, it is noted that your client also provided signed TFN declarations to both the company and the trust for a similar purpose in relation to your client's employment with each entity.

Your client was an employee of the principal for the purposes of the SGAA

Weighing up all the factors discussed above and taking into account the totality of the relationship it is considered that your client was, during the period your client was engaged by the principal, a common law employee. Your client was engaged in a contract of service with the principal and not a contract for services.

As such, your client was an employee for the purposes of the SGAA during this period.

Even if there is some doubt as to the status of your client as a common law employee, your client's engagement is considered to be a contract that was wholly or principally for your client's labour within the meaning of subsection 12(3) of the SGAA.

From the facts, it is considered that in the relevant income year your client was an employee of the principal for the purposes of section 12 of the SGAA. Therefore your client was engaged in eligible employment with the principal during this income year.

Applying the ten per cent rule - subsection 82AAS(3) of the ITAA 1997

Your client's income from eligible employment in the relevant income year is greater than 10% of your client's total assessable income and reportable fringe benefits in this income year. There are no reportable fringe benefits and your client did not receive any exempt income in this year.

Accordingly, your client does not satisfy the 'ten percent rule' set out in former subsection 82AAS(3) of the ITAA 1936.

Not an eligible person in respect of the relevant income year

Therefore your client is not considered to be an eligible person in respect of the relevant income year for the purposes of former subsection 82AAS(2) of the ITAA 1936. Consequently in this situation, your client has not satisfied the 'eligible person' requirement under former paragraph 82AAT(1)(a) of the ITAA 1936.

As your client has not satisfied the 'eligible person' requirement under former paragraph 82AAT(1)(a) of the ITAA 1936, it is not necessary to consider whether the other requirements under former subsection 82AAT(1) have been met.

Deduction not allowable in the relevant income year

As your client has not satisfied all of the requirements under former subsection 82AAT(1) of the ITAA 1936, your client is not entitled to claim a deduction in respect of the personal contributions your client made during the relevant income year.

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