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Ruling

Subject: PAYG withholding

Question

Should you withhold an amount from payments made to entity B?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

Entity A owns and operates a business.

Entity B has invoiced entity A for the services of X people. The X people volunteer to entity B. Entity B sustains the X people.

These people were previously employees of entity A and were paid as individual employees.

Entity B has provided a form stating the payment is exempt income and an ABN does not need to be quoted.

Entity A does not have a contract with the Entity B.

The payments for the people will still be based on an hourly rate of pay. These people will still get annual and sick leave entitlements.

Entity A determines the hours that the people work. Entity A has their own insurance policies to cover any workplace injuries.

Entity A provides most of the equipment and materials required.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1, Division 12.

Reasons for decision

Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) outlines the payments from which amounts must be withheld. Section 12-35 of Schedule 1 to the TAA states that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual employee (whether of that or another entity).

Generally section 12-35 of Schedule 1 to the TAA does not apply to payment made to other entities - provided that arrangement is not a mere redirection of an employee's salary or wages. A redirection occurs where, for example, a payment is made to a third party in discharge of the obligation to pay an amount of salary or wages to an employee. A payment to a third party is treated as a redirection of an employee's salary or wages in circumstances where the payment to the third party is attributable to salary and wages for services rendered by the employee in the course of that employment.

Taxation Ruling 2005/16 provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA.

Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them.

An employer/employee relationship 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.

If the underlying reality of the relationship is one of employment, the parties cannot alter that fact by merely having the contract state that the worker's status is that of an independent contractor.

The types of factors to be considered in determining whether an employer/employee relationship exists are outlined below.

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.

The 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. An employee is generally told what work is to be done, and how and where it is to be done.

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

Conditions of engagement

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

Hours of work

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

Business risk and expenses

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. 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.

Place of performance

Employees 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.

Conclusion

In this case, after considering the specific circumstances and the above factors, it is considered that there is an employer/employee relationship.

Making the payments to entity B is a continuation of the previous arrangement with two individual employees. The arrangement has not changed greatly.

As the payment represents an amount of salary for the two employees, entity A has an obligation to withhold an amount from the relevant payment. That is, entity A is required to withhold the relevant amount from the payments made to entity B.

The ATO publishes tax tables that show the amounts to withhold from salary and wage payments. The amount of tax withheld depends on the amount of salary and wages paid.

It is acknowledged that a payer does not need to withhold an amount if the payment is exempt income. Income is exempt income if it is made exempt from income tax by legislation. There is insufficient information to show that the payments are exempt income under the ITAA 1997. As there are no other exceptions that apply, entity A is required to withhold a PAYG amount.

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