Edited version of your written advice

Authorisation Number: 1012702527017

Ruling

Subject: Obligation to withhold from payments and GST liabilities

Issue 1

Question

Is there an obligation on the entity to withhold from payments made to workers under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

The entity operates a business and is registered for GST.

The entity engages workers who specialise in different areas.

All workers enter into an agreement.

Some relevant clauses within the agreement are:

• The entity agrees to hire the premises and equipment to the worker in their capacity as a self-employed business/company

• Workers reserve the right to employ their own staff/contractors to complete the services requested by the entity

• It is the sole obligation of the worker to issue invoices to the entity at a mutually agreed time and day on a weekly basis but never more than one week ahead or behind of the completed or commenced contracted services

• A deposit is required from workers to cover damage to the premises or property

• Workers pay an ongoing fee to the entity of an hourly basis of $XX per client with a minimum rate of $XX per week, whichever is higher

• The entity provides a receipt for the payments it receives

• Group training is $X per client per hour in addition to the $X per client per hour (ongoing fee)

• The workers invoice you on the same day each week and you pay them on the following weekday less rent which is operated on their own time and own terms

• The entity can terminate the contract because of any missed or late payments

• Workers use the entity's computer to book time slots and space within the area

• Workers must comply with reasonable directions of the entity in relation to actual or potential conflicting activities within the entity

• Workers must have obtained valid insurance throughout the whole period of the agreement which covers their activities (at a minimum the worker must have public liability and professional indemnity insurance)

• Workers must be qualified to perform this work

• Workers are liable to compensate the entity for any damage to the premises and/or equipment

• Workers must enter into an agreement with their clients which states:

• they are providing a service in their capacity as a self-employed worker and they are not affiliated with the entity; and

• They release and indemnify the entity from any liability for any injury, damages or loss suffered as a result of any acts or omissions by the trainer in the trainer's personal, group or class fitness training session

• The workers indemnify and release the entity to the full extent permitted by law from against all liability, damages, loss, expenses, actions, claims and demands in respect of damage to or loss of property, death or personal injury sustained in or connected with activities associated with the services provided or any other use of the premises

The entity supplies space within the venue and includes all equipment to workers.

Clients in group sessions belong to the worker and pay the workers directly

You first advertised for workers by tender.

Workers and representatives of the entity negotiate on a workable roster to suit everyone.

The rep from the entity doesn't mind which workers takes which tasks. If a worker cannot take their rostered time they organise for another worker to take their place and pay the other worker for their time.

The workers have no entitlement to take paid breaks.

Workers are free to employ their own workers to conduct their activities.

The workers are not supervised. The manner in which they choose to run their activities is left up to them. The entity gets feedback from clients as to how the workers are performing.

The entity has many members and the way the activities are structured is entirely up to the worker.

Workers can refuse to do a particular task if they want.

Workers have their own flyers and other promotional ideas to build their individual profiles.

Individual workers put their names on flyers, emails, social media releases or member information mail-outs done by the entity.

Workers set their own fees and are free to increase them.

None of the workers receive any form of allowance or payments for expenses, holiday or sick pay, worker's compensation, superannuation or training from the entity.

The entity does not deduct any amounts from the workers for income tax, superannuation or for union fees etc.

The entity has public liability insurance however, the workers all have private accident insurance.

Workers who damage equipment or the premises must replace and/or repair the damage at their own cost.

Assumptions

Nil

Relevant legislative provisions

Schedule 1 to the Taxation Administration Act 1953 Section 12-35

Reasons for decision

Summary

Based on the information you have provided, the Commissioner considers that there is no requirement for the entity to withhold from payments made to the workers under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from a payment of salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all of the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16 considers the various indicators the Courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

These indicators include:

• The control test: The degree of control which the payer can exercise over the payee.

• The organisation or integration test: Whether the worker operates on their own account or in the business of the payer.

• The results test: Whether the worker is free to employ their own means and is paid to achieve the contractually specified outcome.

• The delegation test: Whether the work can be delegated or subcontracted (with or without the approval or consent of the principal).

• The risk test: Whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

• Which party provides tools, equipment and payment of business expenses?

Control

The 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. The importance of control lays not so much in its actual exercise as in the right of the employer to exercise it.

A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services.

Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, otherwise the contractor is free to exercise their own discretion, because they work for themselves.

In this case individual workers are not supervised and are free to run their specific tasks how they wish. The entity supplies a venue which includes equipment for workers to use while performing their tasks. The entity and the workers negotiate a workable roster which suits all parties.

Organisation or integration

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it.

In this case all workers have a high degree of flexibility on how they do their tasks. They also have the discretion of not doing a particular task or subcontracting that task to another worker.

Results

Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services.

'The production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

In this case all workers are free to employ any method they choose to do their tasks. They are free to employ others or subcontract to another worker, either internally or externally.

Delegation

The power to delegate or subcontract 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.

Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. 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 these circumstances, the contractor is the party responsible for remunerating the replacement worker.

A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. When an employee asks a colleague to take an additional shift or responsibility, the employee is not responsible for paying that replacement worker, rather the workers have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor.

In this case all workers are free to subcontract their services to other workers without permission from the entity. If an individual worker engages another worker he is responsible for paying them.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

Whether the worker is contractually obliged to accept liability 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 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 the employee, either to a third party or otherwise, would fall to the employer in terms of the burden of cost or time for rectification.

In this case all workers pay an amount as a deposit in case any equipment is damaged whilst the workers are doing their tasks. All workers are required to have, as a minimum, public liability insurance and professional indemnity insurance.

Provision of tools and equipment and payment of business expenses

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, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor.

There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work.

Further, an employee, unlike an independent contractor, 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 workers use the entity's premises and equipment provided. No allowances are paid to the workers nor are the workers' expenses reimbursed.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that there is no obligation on the entity to withhold from payments made to workers as they are not considered employees.

Issue 2

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(asterisks denote a term defined in section 195-1 of the GST Act)

Section 9-10 of the GST Act provides that a supply is any form of supply whatsoever. It includes a supply of goods; services; advice or information; a grant, assignment or surrender of real property; a creation, grant, transfer, assignment or surrender of any right.

Taxable supplies made by the contractors

In this case, the workers supply their services to you when they perform tasks. The supply of these services to you will be for consideration, it is made in the course of an enterprise that the workers carry on and the supply is connected with Australia.

What remains to be determined is whether the workers are registered for GST.

If a worker is registered for GST, then the supply of his services to you will be a taxable supply under section 9-5 of the GST Act and you have to pay the GST charged on the services provided to you. On the other hand if the worker is not registered for GST, then his supply of the service to you is not a taxable supply and your consideration will be exclusive of GST.

Creditable acquisition by you

Section 11-5 of the GST Act provides that you make a creditable acquisition if you acquire anything solely or partly for a creditable purpose; and the supply of the thing to you is a taxable supply; and you provide, or are liable to provide consideration for the supply; and you are registered for GST.

In your case, if a worker is registered for GST, the acquisition of the services from the worker will be creditable acquisition as you acquired it solely for your enterprise, the supply is a taxable supply, you provide consideration for the supply and you are registered for GST.

As it is a creditable acquisition, you are entitled to claim the input tax credit (GST paid) under section 11-20 of the GST Act.

Under subsection 29-10(2) of the GST Act, if you account on a cash basis, the input tax credit to which you are entitled for a creditable acquisition is attributable to a tax period where consideration is provided and to the extent of the consideration provided.

Taxable supply made by you

As you hire the premises and equipment to the workers, you also make a supply of hiring of the premises and equipment to the contractors.

The supply by you will be for consideration, it is made in the course of an enterprise that you carry on, the supply is connected with Australian and you are registered for GST.

Accordingly, the supply of hiring the premises and equipment to the contractors will be a taxable supply under section 9-5 of the GST Act.

Under section 9-70 of the GST Act, the amount of GST on a taxable supply is 10% of the GST exclusive value of the supply.

Under section 9-40 of the GST Act, you must pay the GST payable on any taxable supply that you make.

Under subsection 29-5(2) of the GST Act, if you account on a cash basis, then the GST payable by you on a taxable supply is attributable to a tax period, where consideration is received and to the extent of the consideration received.

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