Edited version of your private ruling

Authorisation Number: 1012480519706

Ruling

Subject: Employee vs. Independent contractor

Question 1

Are the sub-contractors engaged by the Company considered to be employees for the purpose of Pay As You Go (PAYG) withholding pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953?

Answer

No

This ruling applies for the following periods:

01 July 2013 to 30 June 2016

The scheme commences on:

01 July 2013

Relevant facts and circumstances

The Company supplies a construction product.

The Company engages sole traders or companies to carry out installation works on the products that its clients have purchased.

Sub-contractors are engaged either by being approached by the Company or by approaching the Company themselves.

The Company has provided a copy of the Contract for Sub-Contractors along with a schedule of rates which governs the basis upon how sub-contractors are paid and their scope of works and it is the agreement upon which all contractors are contracted for.

The schedule of rates are set by the Company. The schedule specifies the hourly rate of a tradesperson and lists the rate payable for installation of the various products.

Some of the conditions set out in the Contract are:

The sub-contractor:

· is required to complete all the works in the project agreed upon and any unreasonable delays in doing so are at the sub-contractors expense;

· is to co-ordinate his works with the builder and other trades;

· is to rectify any defective work at their own cost;

· shall replace at their own expense any materials damaged, lost or incorrectly installed;

· must provide their own personal protective equipment specific to the site they work on;

· has the discretion to accept personal protective equipment from the Company with the Company logo but not obliged to wear it;

· must provide the Company with a tax invoice for payment of services;

· is required to have Public Liability certificate of currency, Workers Compensation certificate of currency or Personal and Accident certificate of currency;

· can be reimbursed for the purchase of materials and/or equipment only if an agreement is made with the Company prior to the commencement of the project or the purchase of said materials and/or equipment; and

· will be provided with screws, glues and other miscellaneous material unless nominated within the door installation rates.

The sub-contractor is not paid any sick leave, annual leave or long service leave.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-35.

Reasons for decision

Summary

Upon consideration of a number of factors, it has been determined that the relationship between the Company and its sub-contractors is that of a principal/independent contractor. The factors considered are the terms of the contract, who exercises control over the project, whose business the sub-contractor works for, whether the contract was for a result, whether work can be delegated, and who was responsible for defective work and for payment of materials and equipment required for the job.

Detailed reasoning

In accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) an employer must withhold amounts from the salary or wages of its employees.

In circumstances where an entity has sub-contractors, it is necessary to determine whether the true nature of the relationship is an employer/employee relationship or one of a principal/contractor.

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

An independent contractor works in his or her own business (or on his or her own account); an employee works in the service of the employer, that is, in the employer's business.

The term 'employee' is not defined in the TAA 1953 and it takes on its ordinary meaning.

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 having regard to the key indicators expressed in the relevant court cases. A number of factors need to be examined within the context of the relationship between the parties. No single factor determines the nature of the relationship.

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees provides guidance on the factors to consider when determining whether someone is an employee. The key factors will be discussed below.

Terms of the contract and circumstances forming it

Paragraph 20 of TR 2005/16 outlines that consideration must be given to the terms and conditions of the contract between the parties, whether expressed or implied, in light of the circumstances surrounding the making of the contract.

In this case, the parties have a written contract which sets out the conditions of engagement. The content of this document will be considered when forming a decision on the issue.

Control

The basic test for determining the nature of a relationship between the employer or principal and the person engaged to perform the work is the degree of control which the former can exercise over the latter. It's not so much the actual exercise of control as to the right of the employer to exercise it.

A common law employee is told not only what work is to be done but how and where it is to be done. However, even though a contract may specify in detail how the contracted services are to be performed, it doesn't 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 terms of the contract; otherwise the contractor is free to exercise their discretion.

In this case, there is no direct control exercised by the Company on the sub-contractors. A sub-contractor is advised on what their project entails and where the location of the job is and the Contract stipulates a few minor requirements such as ensuring rubbish is removed from site and doors are primed but mostly the sub-contractor is left to their own devices in regards to the installation work. The Contract also state that the sub-contractor is required to complete the job within a set timeframe or the costs of delay are at their expense. It also states that it us up to the sub-contractor to co-ordinate their works with the builder or other tradesmen on site. All of these factors are indicative of a principal/independent contractor relationship.

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

Another significant factor in establishing the nature of a contractual relationship at common law is the issue of whether the worker operates on their own account or as part of the business of the payer. An employee is one who operates within the employers business and is a part of it. A contractor operates their own business independently from the principal. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

In Hollis v Vabu 2001 ATC 4508, the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210;

'…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 this case, the Company engages individuals and companies for the sub-contracting work. The Contract stipulates that the contractor must have their own Public Liability, Worker's Compensation and Personal and Accident cover. The contractor supplies the Company with an invoice for each job completed. In some instances the Company may supply the contractor with protective clothing including the Company's logo but they are not obliged to wear it.

Where the work is sub-contracted to companies, they are clearly a separate business from the Company and therefore are not considered employees of the Company.

Where the work is sub-contracted to individuals, the characteristics examined above indicate that it is mostly a principal/independent contractor relationship with the Company than an employer/employee one.

Results contract

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. In World Book (Australia) Pty Ltd v FC of T 92 ATC 4327, Sheller JA said:

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

In contracts for a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. However, there are also results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task. There are also employer/employee contracts where the employee is paid not on the basis of time but on the completion of set tasks such as was the case is Hollis v Vabu.

In Hollis v Vabu workers contracted as bicycle couriers were considered as employees rather then contractors despite being paid per delivery rather then the time period engaged. The courts considered other factors such as the lack of control the courier had over the manner of performing their work, the fact that the couriers wore the uniform of their employer and that they were not operating an independent business from that of the employer.

In this case, the Contract and Schedule of Rates indicate that the workers are contracted for a particular job. They are paid for a result, being for the number and type of units installed although there is also some scope to pay by the hour (presumably for works that may fall outside of the installation rates, such as repair jobs etc). The worker then invoices the Company at the completion of each job. These characteristics are indicative of a principal/independent contractor relationship.

Delegation

An unlimited power to delegate work is an important indication that the worker is an independent contractor. Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

In this case, as the Contract does not require the sub-contractor to perform the work there is an implied ability for them to delegate the task. This is indicative of a principal/independent contractor relationship.

Risk and rectification of work performed

Whether the worker is contractually obliged to be liable for the cost - in terms of time or money - for the rectification of faulty 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 or entity would solely bare the risk and responsibility of liability for their work if it is not up to an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. This means that an independent contractor will often carry their own insurance and indemnity policies.

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

The Contract specifies that the sub-contractor is required to rectify at their own expense, any defective work carried out. They are also required to replace materials damaged, lost or incorrectly installed at their own expense.

Accordingly, with respect to the risk test, the sub-contractors are considered to be independent contractors.

Provision of tools and equipment and payment of business expenses

Another consideration of relevance is whether the worker provides their own tools and equipment and pays their own business expenses. It has been held in a variety of cases 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.

There are situations where, having regard to the custom and practise 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 alone will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this - or any other indicator - depends on the particular circumstances, the context and the nature of the contractual work.

Unlike an independent contractor, an employee is often reimbursed or receives an allowance for expenses incurred in the course of employment - including for the use of their own assets such as a car.

In this case, any reimbursable expenses with regards to purchasing of material and/or equipments by the sub-contractor need to be agreed with the Company prior to commencing a project. Although there appears to be some form of reimbursement in the arrangement between the Company and its sub-contractor, given that it's not automatic and needs to be agreed upon prior to a job being carried out or expense incurred this will not detract from the relationship being considered as one of a principal/independent contractor.

Other factors

Provision of sick, annual and long service leave are indicators of an employment relationship existing between the contracting parties but the absence of it in a contract, on its own, will not indicate it's a principal/independent contractor relationship. However it is noted that in this case the sub-contractors are not given sick, annual or long service leave, which is consistent with a principal/independent contractor relationship.

The requirement that a worker wear a company uniform is an indicator of an employment relationship existing between the contracting parties. In this case, there is no requirement for sub-contractors to wear a uniform but there may be instances where they are supplied personal protective equipment that may bear the company logo. The sub-contractor is under no obligation to wear the equipment and as such, this does not indicate an employment relationship.

Conclusion

Upon consideration of all of the factors, it has been determined that the relationship between the Company and its sub-contractors is that of a principal/independent contractor. As such the Company is not required to withhold any PAYG amounts from payments made to the sub-contractors.

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