Edited version of private ruling

Authorisation Number: 1011501878972

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Ruling

Subject: employees and independent contractors

Question 1

Are service providers of Entity X employees or independent contractors?

Answer

Independent contractors.

Question 2

Does Entity X have any taxation obligations in relation to the service providers?

Answer

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commenced on

1 July 2009.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You operate an entertainment venue at which individual dancers provide 'lap dances' to patrons of the venue, herein called service providers.

The venue trades under the name Entity X which is prominently displayed at reception and throughout the premises.

You provide the venue, security, advertising, licences, stock, furniture and fittings for the service providers to earn income dancing for the patrons.

The business provides advertising for the services provided on the premises. You advertise in newspapers, magazines, and internet websites as well as throughout the venue.

The patrons pay an entry fee to the venue at the reception area where they can also view the fixed pricing for the personalised dancing provided by the service providers. It is at this point that they can view a notice board with the separate fees for admittance to the venue, the "seat" fee and the payment amounts for the services provided which are to be transacted directly with the service provider.

The 'seat' fee and the service providers' fees are set by you in order to maximise the patronage of the establishment and that of the service providers. The fixed pricing policy for the service providers was instigated to stop the charging of flexible prices in regards to market norm which previously limited the amount of people frequenting venues and therefore affecting the total revenue received by you and the service providers.

Pricing and income received for any other personalised services by the service providers whilst working the dance floor, other than those advertised, is agreed between the patron and the service provider.

You do not collect any money for services rendered by the service providers or hold any money on their behalf for security purposes, as they collect their fees directly from the patron.

You provide a 'cash out' facility for credit and EFTPOS card transactions by the patrons so that they may pay the service providers directly.

The service providers control the number of hours they work on any given day, the type of services that they provide to the patrons, within the law, and to which patron those services are provided.

You maintain records of the service providers such as name, address and ABN for legal purposes of identification and authentication.

Your daily sales sheets only record the amounts received for entry into the venue by the patrons, the sale of food and drinks and for the 'seat' fee. You do not monitor or handle any of the transactions undertaken by the service providers and therefore these amounts are not included in your revenue books.

Each service provider is required to sign a contract which is signed by the service provider and representative of Entity X that outlines the conditions of employment, including that the service providers are responsible for their own GST and income tax obligations.

You believe that the service providers are not employees of Entity X for the following reasons:

They are paid directly by patrons for specified services.

They provide the materials and labour to complete the work as specified in the contract and provide additional services by agreement with patrons.

· They can delegate the work to other persons subject to the patron's approval.

· They bear the risks including the liability for sub-standard work.

· They have the freedom in the way the work is carried out.

· They provide services to other businesses.

· They are free to accept or refuse the work.

· They are in a position to make a profit or loss.

· Payment is dependent on the performance of the contract services.

· They are responsible for the capture, accuracy, registration, control, access, tracking and storage of their own records and liabilities for GST and income tax purposes.

· They have provided an ABN in order to conduct their business on the premises of Entity X.

You further believe that the case of Harrison's Case does not apply in your situation for the following reasons:

· You do not collect or safeguard any of the service providers' income.

· You have fixed the prices for some of the services provided by the service providers albeit the contract for the provision of the service is conducted by the service provider and the patron.

· Your daily sales records only include the takings for entry to the premises, consumables like food and drink sold on the premises and the 'seat' fee.

· You do not control the distribution of work between the patron and the service provider or the amount of work provided by the service provider.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35.

Income Tax Assessment Act 1997 Section 960-100.

Reasons for decision

Employee v Contractor

Under section 12-35 Schedule 1 to the Taxation Administration Act 1953 (TAA) an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that entity or another entity).

An 'entity' is defined under section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust and a superannuation fund.

Where section 12-35 Schedule 1 to TAA refers to an employee, the reference is to an employee at common law.

Who is an 'employee' within the ordinary 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 employee and employer is said to be a contract of service, and has been referred to as a master/servant relationship. Such a relationship is typically contrasted with the independent contractor/principal relationship which is said to be one for services. An independent contractor contracts to achieve a result whereas an employee contracts to provide his or her labour, or personal exertions of some other kind (typically to enable the employer to achieve a result).

At either end of the spectrum, it is a simple matter to recognise the classic employer/employee relationship and independent contractor. It is sometimes difficult to define the nature of the relationship where the factors are not so clear. The emergence of performance-based contracts, flexible working hours and work from home arrangements represent a trend that is blurring the traditional distinctions between employee and independent contractor.

In Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16 the High Court stated the common law meaning of the term 'employee'. The Court said that there is no single objective test to be applied. It is the totality of the relationship between the parties which must be considered.

Taxation Ruling TR 2005/16 provides guidance to the types of factors to be considered in each case. The features discussed below, have traditionally been regarded by the courts as indicators to assist in determining the true nature of the contract.

Terms and circumstances of the formation of contract

Where there is a written contract between the parties, it is the express and implied terms of the contract that evidence the intention of the parties at the time the contract was formed. Conduct after the contract is formed is only relevant to show that the original contract has been modified.

A clause in the contract that labels the relationship between the parties must be considered with all other terms of the contract. The true substance of the relationship will determine its status and not the label given. Such a clause may be useful in overcoming ambiguity as to the true nature of the relationship.

The circumstances surrounding the formation of the contract may assist in determining the true character of the contract. A principal/ independent contractor relationship may be inferred where the contractor advertises their services to the public in the ordinary course of carrying on a business or as a result of a successful tender process. Conversely, the existence of an employer/employee relationship may be inferred where a contract is formed as a result of a job vacancy advertisement or through the services of a placement agency.

The Control Test

The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment.

The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. In fact, a high degree of direction and control is not uncommon in contracts for services. The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract otherwise the contractor is free to exercise his or her discretion (subject to any terms implied by law). This is because the contractor is working for himself or herself.

Under a contract of service, on the other hand, the employer has an implied right within the limits imposed by industrial relations laws, to direct and control the work of an employee. This is because the employee is working in the employer's business and the owner of a business has the right (within the confines of applicable law) to manage that business as the owner sees fit.

The courts stated that what matters is lawful authority to command, so far as there is scope for it.

The more control that is held over the person performing the work, the more likely it is that the person will be an employee.

In your case, there is minimal control (including the right to control) found to be in existence. The control elements of the contract are more a reflection of requirements under a specific Act. The service providers choose their own dates and hours of work. You do not instruct the service providers what services are to be performed, that is dictated by the patrons.

Results Test

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 service.

In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. Conversely, under a contract of service, payment is not necessarily (but may be) dependent on, and referable to, the completion of specified services.

The contract between Entity X and the service provider does not require the service provider to produce anything for the venue. It is a set of conditions applied to the service provider at which premises are provided for the service providers to operate their own business. Its does not specify that payment will be made on completion of any services whatsoever, as the venue does not pay the service provider at any time.

Delegation

The power to delegate was considered to be an important factor in deciding whether a person is an employee or an independent contractor. An unlimited power to delegate work is an important indication that the service provider is an independent contractor.

Although it would probably be rarely accepted (due to the nature of the profession), the contract specifies that service providers are completely independent to Entity X operating their own business on the premise therefore allowing a service provider to exchange a reservation or nominate another service provider to take her place at her discretion.

Conditions of Engagement

Provision of paid leave entitlements, for example, sick leave, long service leave and superannuation, are persuasive indicators of an employment relationship.

It should be noted that there is no standard set of indicators applicable to an employee and a different set applicable to an independent contractor. Most conditions of engagement when viewed individually are equivocal as indicators of the true character of the relationship.

There are no provisions for paid leave entitlements, for example, sick leave, long service leave and superannuation in the contract between Entity X and the service providers. You do not actually make payments to the service providers, they are paid directly by the patrons. Entity X does not obtain the services of service providers by offering positions by formal advertising, or approaching potential service providers. The service providers generally approach the venue after hearing about vacancies via word of mouth.

Hours of Work and Mode of Payment

An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work.

Entity X does not operate a roster or schedule detailing what times the service providers work. There are no minimum hours that the service providers are required to work. The service providers choose the times and dates that they wish to work themselves. They are not penalised or fined if they do attend your premises when agreed to. The service providers are free to work at other venues if they wish to do so.

Business Risk and Expenses

Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being independent. Typically, a worker who derives piece rate payment and sustains large outgoings would be so exposed.

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.

It could not be said that there would be a great deal of risk for the service provider in respect of outgoings versus revenue. If there were no patrons then there would be no profit, but it could not be envisaged that a loss would be incurred. Also, there is a clause in the contract which releases Entity X from any liability for loss or damage as no employee/employer or master/servant relationship exists.

Place of Performance

Workers under a contract of service will generally perform the tasks on the payer's premises using the payer's assets and equipment. A contractor, on the other hand, generally provides all their own assets and equipment.

Whilst the service providers do provide service at the your premises, the nature of your business activity is such that whilst you work in conjunction with one another, it could be safely said that your business and that of the service providers complement each other, they are not restricted to using only your premises. The nature of the profession makes it essential to have these types of premises available.

The service providers are also free to attend other premises to conduct their business and as such have no exclusive usage of the premises.

Integration

The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate that the worker is an integral part of the business.

There appears to be a strong desire to separate the operations of the venue from the service provider. The patron is informed that payment to the venue is for entry to the premises, the 'seat fee and any food or drink consumed at the venue. The patrons will pay the service provider separately for her services. It could be viewed that the service provider and the venue operate jointly but each have distinct characteristics of carrying on a business in their own right.

Application of case law

This case can be distinguished to Harrison and Commissioner of Taxation AATA 155 (Harrison's Case) where it was determined that the brothel proprietor made a taxable supply of sexual services in the course of her enterprise as a brothel where no such contract existed between the owner of the premise and the sex worker. It was also determined that some payments to the sex workers was by way of income splitting for rooms that were hired by way of electronic funds transfer and by the fact that the proprietor held money as a safeguard for the sex workers.

The existence of the contract between Entity X and the service providers distinguishes this application to Harrison's case. The contract clearly outlines the terms of which a service provider runs their own business as a performer on the premises of Entity X.

Conclusion

After consideration of the facts supplied it is clear that the service providers are independent contractors and are not employees of Entity X.

To reach this conclusion we have considered the factors in Taxation Ruling TR 2005/16.

The service providers' activities give the overall impression of a business operation in their own right.

As the service providers are considered to be carrying on a business, they have an obligation to manage their own tax affairs e.g. PAYG withholding, GST and income tax obligations.

As there is no employer/employee relationship between Entity X and the service providers, Entity X does not have any taxation obligations to the services providers.

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