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Ruling

Subject: Employment status of independent contractors for PAYG Withholding and Superannuation Guarantee purposes

Question 1

Are the General Practitioners (Contracted GPs) of The Trust employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No

Question 2

Are the Contracted GPs of The Trust employees for the purposes of section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Contracted GPs working at medical practices managed by The Trust are sole practitioners. They have their own provider number, Australian Business Number (ABN) and are registered for Goods and Services Tax (GST).

The GPs are contracted (The Contract) by The Trust to provide General Practitioner (GP) services.

The GP services are invoiced to patients by the administration staff of The Trust and the Contracted GP's provider number appears on the patient's invoice

The amount of fees generated by each Contracted GP is recorded in a computer program by the administration staff of The Trust.

The fees generated by each Contracted GP are calculated on a fortnightly basis, charges are deducted for incidentals.

Contracted GPs are paid fortnightly via a recipient generated tax invoice.

GPs are paid a percentage of total billings.

The Trust retains the balance of the billings to cover costs such as reception staff, consulting rooms, procedure rooms, and medical equipment used by the Contracted GP.

Contracted GPs are expected to provide medical equipment required to practice in any specialty area of medicine.

Under the terms of The Contract Contracted GPs:

§ are free to pursue income from other sources,

§ must engage and pay for a locum if they are unable to attend the practice as required,

§ are responsible for all insurance associated with personal income protection, professional indemnity and any other reasonably required cover,

§ acknowledges that they provide services to the Trust as an independent contractor, and

§ indemnifies The Trust against all claims, demands, liabilities, suits, costs and expense whatsoever and however arising out of the performance of the Services under the Contractor Agreement and all claims whether for Workers Compensation or otherwise that The Trust or any Related Body Corporate may sustain or incur as a result.

The Contract is titled 'Independent Contractor Agreement'.

The Contracted GPs in the contract are referred to as 'The Contractor'.

Relevant legislative provisions

Taxation Administration Act 1953 (TAA 1953) section 12-35 of schedule 1

Superannuation Guarantee (Administration) Act 1992 (SGAA) section 12

Reasons for decision

Issue 1

Question 1

Summary

The Contracted GPs of The Trust are not employees for the purposes of section 12-35 of schedule 1 to the TAA 1953.

Detailed reasoning

An entity is required, under section 12-35 of schedule 1 to the TAA, to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

Paragraph 6 of Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees states that:

The term 'employee' is not defined in the TAA 1953. For the purposes of withholding under section 12-35 the word 'employee' has its ordinary meaning.

Broadly, whether a person is an employee of another person or an entity is a question of fact to be determined by examining the terms and circumstances of the contractual arrangement between the parties. This, in turn, involves the examination of a range of common law indicators as expressed in relevant case law. Of these indicators, there is no one indicator of itself that is determinative of that relationship. The totality of the relationship between the parties must be considered.

Paragraph 17 of the TR 2005/16 states:

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).

Terms and circumstances of the formation of the contract

It is important to consider all the terms and conditions of a contract between parties to determine the true nature or the underlying reality of the contractual relationship. How parties label their relationship does not change its characterisation to that of an independent contractor when the underlying reality of the arrangement is that of an employer employee relationship.

In Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 at 184, Gray J stated:

A Court will always look at all the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it.

However, such a clause may be used to overcome any ambiguity as to the true nature of the relationship: Australian Mutual Provident Society v Chaplin and Anor (1978) 18 ALR 385 at 389-390.

In the present case, The Contract is titled as an 'Independent Contractor Agreement' and the GPs are referred to as Contractors. The Contract provides that the agreement between the parties does not create a relationship of employment or agency between the parties.

Despite such clear characterisation of the relationship, the terms and conditions of the agreement between the parties must be examined to determine the true essence of the relationship.

Control

Paragraph 26 of the TR 2005/16 states:

The classic 'test' for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done.

This is to be contrasted with paragraph 28 of TR 2005/16 where it states:

The mere fact that a contract may specify in details 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 their discretion (subject to any terms implied by law). This is because the contractor is working for themselves.

In the present case, the Contracted GPs enter into The Contract with The Trust to provide general practitioner (GP) services in their capacity as a medical practitioner. In providing this service, the Contracted GPs are bound by certain terms and conditions specified in the Contract.

For instance The Contract specifies that the Contracted GP does not have any exclusive rights under The Contract and The Trust has the right to appoint other GPs to provide the same or similar services.

The Contract imposes obligations on the Contracted GPs:

§ they must provide services during certain times according to a roster,

§ ensure that patients and cases are attended to promptly with all reasonable care,

§ provide services in a manner consistent with the best interests of The Trust,

§ follow reasonable directions by persons nominated by The Trust, and

§ perform their work to a suitable standard.

The Contract also specifies that GPs should perform their services in accordance with the ethics and customs pertaining to the practice of medicine, including the AMA Code of Ethics.

The Contracted GPs under the contract are required to conform to the same standard of professional conduct as may normally be expected from persons performing similar services utilising their professional skills. In order to carry out their obligations under The Contract, Contracted GPs must ensure they hold all appropriate licences, registrations, approvals and qualifications to adequately perform the services, including the use of their provider number on invoices to patients.

While the terms of The Contract impose certain controls on the Contracted GPs, they are essentially guidelines of a general nature governing the conduct of the Contracted GPs designed to protect the interests of the Trust under the terms of a contract for services. The terms of The Contract does not control how Contracted GPs should apply their professional skills and judgement to provide medical services to patients. Within the terms of The Contract, Contracted GPs are free to choose how many patients they see and to determine appropriate treatment.

Contracted GPs do not derive their income as employees of The Trust, rather they are paid a percentage of the fees billed to patients using their personal provider number as a qualified medical practitioner.

On balance it must be concluded that while The Trust does exercise a degree of control in the manner in which services are provided, The Contract has little scope for detailed control over the manner in which Contracted GPs exercises their skill in determining appropriate treatment for patients. The control exercised by The Trust over Contracted GPs is a contract for services, rather than a contract of service.

Does the worker operate on their own account or in the business of the payer?

In Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210, Windeyer J stated:

.… the distinction between an employee and independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.

In the present case, the Contracted GPs are conducting their professional practice of medicine as a GP, facilitated by The Trust. The use of the Contracted GPs provider number on patient invoices indicates that they are running their own business rather than operating in the business of The Trust. The Trust as part of their business provides Contracted GPs with premises, reception staff, consulting rooms and procedure rooms along with administrative support them to practice medicine.

The relationship between the parties amounts to a fee splitting arrangement where Contracted GPs receive a percentage of the total billing for their GP services with the remainder retained by The Trust to provide enabling facilities to the Contracted GP.

It is considered that the relationship between The Contracted GPs and The Trust amounts to Contracted GPs practicing medicine on their own account.

Results contracts

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: paragraph 35 of TR 2005/16. The TR 2005/16 cites the case World Book (Australia) Pty Ltd v FC of T, 92 ATC 4327, where Sheller JA held that:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.

In this instance, the result for which the parties entered into the contract is to provide GP services. The nature of the relationship is a contract for service based on the number of consultations made by Contracted GPs. Payment is made under the terms of The Contract for a negotiated percentage of billings, not an hourly rate. The Contract specifies that the Contracted GP receives a percentage of total billings with the remainder kept by The Trust. This arrangement amounts to a results based contract between the parties.

Whether the work can be delegated or subcontracted

Paragraph 41 of TR 2005/16 states that:

The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) is a significant factor in deciding whether a worker is an employee or independent contractor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee.

The Trust has contracted with GPs to provide medical services. While it is clear from the terms of The Contract that the Contracted GPs are responsible for providing medical services on certain days and at certain times as per a roster, the ability to delegate work to a locum GP during prolonged absences rests with The Contracted GP. While under the terms of The Contract the Contracted GP is obliged to discuss locum arrangements with The Trust and obtain The Trust's written approval, the responsibility to provide and pay the locum rests with the Contracted GP. Furthermore The Contract does not provide the Contracted GP with exclusive rights to provide particular services, allowing The Trust to appoint other Contracted GPs to provide medical services to patients as necessary.

Thus, within certain constraints, the ability to subcontract or delegate work exists within this arrangement, this is indicative of an independent contractor relationship as opposed to an employment relationship.

Risk

Paragraph 44 of TR 2005/16 states:

Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee. 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. An independent contractor often carries their own insurance and indemnity policies.

In accordance with clause 6.1 of The Contact, the Contracted GP is required to maintain their own insurance policies to cover all liability they might incur through providing the GP services to patients.

The Contracted GP is also required to indemnify The Trust, under the terms of The Contract, in respect of all claims, demands, liabilities, suites, costs and expenses made against The Trust however arising out of the performance of the services under The Contract.

Based on this it is considered that the Contracted GP bears the risk associated with the provision of medical services to patients, which indicates that the Contracted GP is an independent contractor rather than an employee.

Provision of tools and equipment and payment of business expenses

Paragraph 45 of TR 2005/16 states that:

It had been held that the provision of assets, equipment and tools by an individual and the incurring of expenses and other overheads is an indicator that the individual is an independent contractor.

However, provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. It will depend on the particular circumstances and the context and nature of the contractual work: paragraphs 48-49 of TR 2005/16.

Again, an employee, unlike an independent contractor, is often reimbursed (or receive an allowance) for expenses incurred in the course of employment, for the use of their own asset: paragraph 50 of TR 2005/16.

Under the terms of The Contract, The Trust is required to provide the premises, reception staff, medical procedure rooms and some equipment to the Contracted GP. The Trust retains a portion of total billings raised by the Contacted GP to facilitate this. Under the terms of The Contract, The Contracted GPs are required to provide specialist equipment relating to specialty practice.

It is considered that under this arrangement The Trust facilitates the medical services provided by Contracted GPs providing the necessary infrastructure to enable them to practice medicine. The provision of these services is specified in the Terms of The Contract and paid for by Contracted GPs by allowing The Trust to retain a portion of their billings. This arrangement does not amount to an employer employee relationship.

Conclusion

It is concluded when the nature of relationship between the parties is considered in its entirety along with the key indicators outlined in TR 2005/16, that the Contracted GPs of The Trust are not employees for the purposes of section 12-35 of Schedule 1 to the TAA 1953.

Issue 2

Question

Summary

The Contracted GPs of the Trust are not employees for the purposes of section 12 of the SGAA.

Detailed reasoning

Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? explains when an individual is considered to be an 'employee' under section 12 of the SGAA. Essentially the expression 'employee' in the SGAA take its ordinary meaning with some statutory extensions.

The statutory extensions to the term 'employee' are contained in Subsections 12(2) to 12(11) of the SGAA; these are outlined in paragraph 10 of SGR 2005/1:

The classification of a person as an employee for the purposes of the SGAA is not solely dependent upon the existence of a common law employment relationship. While the definition includes persons who at common law would be regarded as employees, it also extends to:

§ a person who is entitled to payment for the performance of duties as a member of the executive body of a body corporate (subsection 12(2));

§ a person who works under a contract that is wholly or principally for the labour of the person (subsection 12(3)) (see paragraph 11);

§ members of the Commonwealth and State Parliament, members of the ACT Legislative Assembly and members of the NT Legislative Assembly (subsections 12(4) to (7));

§ a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills (paragraph 12(8)(a));

§ a person who is paid to provide services in connection with any activity referred to in paragraph 12(8)(a);

§ a person who is paid to perform services in, or in connection with, the making of any film, tape or disc or of any television or radio broadcast (paragraph 12(8)(c));

§ a person who holds, or performs the duties of, an appointment, office or position under the Constitution or under the law of the Commonwealth, State or Territory (paragraph 12(9)(a));

§ a person who is otherwise in the service of the Commonwealth, of a State or of a Territory, including service as a member of the Defence Force or as a member of the police force (paragraph 12(9)(b)); and

§ a person who is a member of an eligible local governing body (subsection 12(10)).

The common law indicators relating to the term 'employee' as set out in SGR 2005/1 are the same as those discussed in the previous section in relation to TR 2005/16 under issue 1. As it has already been concluded that the Contracted GPs are not common law employees it is also considered that the same conclusion applies regarding their common law status as employees for the purposes of the SGAA.

With regard to the expanded statutory meanings within subsection 12, the only provision with potential to apply is subsection 12(3). Tests for subsection 12(3) can be found in SGR 2005/1 at paragraph 11, which reads:

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.

As Contracted GPs are providing professional services to patients in their capacity as medical practitioners using their personal provider number under a bill splitting arrangement with The Trust, it is considered that subsection 12(3) of the SGAA does not apply.

Even if it were to be found that Contracted GPs are providing a service to the Trust, it would still need to be established for subsection 12(3) of the SGAA to apply that they are being paid wholly or principally for their labour.

A payment for labour is usually an hourly rate taking the form of salary or wages. The Trust is not paying either one to Contracted GPs. Instead, Contracted GPs receive a set percentage of their billing. The distributions received by Contracted GPs are in respect of, and conditional on, the completion of each of their patient consultations, making the agreement results based.

Neither the common law, nor extended meaning under Section 12 of the SGAA of employee applies to the Contracted GPs. Therefore, for section 12 of the SGAA purposes, the Contracted GPs are not employees of The Trust.

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