Edited version of your written advice

Authorisation Number: 1012830567258

Date of advice: 30 June 2015

Ruling

Subject: Whether there is an obligation to withhold from payments made to workers

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 periods

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on

1 July 2014

Relevant facts

The entity operates a business.

Workers are used in that business.

The company will not provide training as the engaged workers will have sufficient "client feedback" and they will also be familiar with the industry before being engaged.

Workers will indicate their roster preference and the rosters will be constructed taking into account the performance and preference of the workers as well as the needs of the entity.

The entity will provide the workers with a working roster and the workers will accept the shift. During the shift the workers must take any tasks allocated to them by the entity.

It is anticipated that workers will be free to provide their services to other individuals or businesses.

The workers will not be training, supervising or assessing the work of other workers.

Rosters will be constructed taking into account the workers' preferences. The expectation will be that if either party wishes to rearrange rostered times that will be communicated on a needs basis. The expectation would be that the worker would give enough notice so that another worker could be arranged.

Workers will not be directly supervised. Their performance will however be monitored through customer feedback.

Workers are not entitled to breaks.

All jobs are allocated by the entity. The entity will set the compensation, not the workers.

Workers cannot pick or choose jobs without the approval of the entity nor can the workers renegotiate their reward or terms and conditions.

Workers do not collect money as all customer payments are made through the entity's website.

Workers cannot assign the work to others nor can they canvas for work.

The entity has put in place an Independent Contractor Agreement (agreement) which is used for all engaged drivers.

The agreement in part states:

• The engagement with the workers will commence on the commencement date and end after a specified number of months

• The workers will be liable for all traffic fines and penalties while they are providing services

• The workers are responsible for paying for any insurance excess payable as a result of any damage caused

• The workers will be liable for all damage in circumstances where the conduct and capacity of the driver has the effect of voiding any insurance cover

• The entity has set the price and will pay the worker an agreed fixed percentage of X% inclusive of GST of the fee for the provision of services that the worker has carried out with the company retaining Y% inclusive of GST

• The entity and the worker may agree on a fixed fee for the provision of all or any part of the services, if this occurs the agreement is terminated

• Where a replacement guarantee comes into effect, requiring the worker to repeat services at no extra charge, the worker will make every effort to undertake the services. Where this is not possible the worker will refund to the entity the applicable full fees so that it may arrange for alternative provision of the services. Details of any replacement guarantee, if relevant, will be agreed separately in writing by the parties

• The worker's recipient created tax invoice, which will be prepared by the entity on behalf of the workers, will give details of each task completed by a worker, applicable project, sales or contract references and the amount of fees payable

• The worker must notify the entity immediately of any other paid work either actual or proposed both at the time of commencing this contract and during its term so that the entity can determine that there is no conflict of interest in the activities. If it is determined that such a conflict exists then the worker must cease immediately this work or not agree to the proposed work

• The worker may not assign or purport to assign the benefit of this agreement or independently subcontract this agreement in part or whole without the prior written consent of the company.

The agreement may be terminated by either party without notice if either party shall have committed any serious breach or repeated or continued any material breach of its obligations.

Workers will only be paid a percentage of money taken and no retainer is in place.

Workers will be paid directly into their bank account after submitting a tax invoice.

Workers cannot delegate their tasks to anyone else.

If a worker is sick, or otherwise unavailable, the entity would arrange for an alternative worker.

If a worker made an incorrect decision on the job they would have to correct this error. It would not impact on their portion of the fee.

The entity will not be paying any of the following to its worker:

• car allowance

• tool allowance

• travel allowance

• living away from home allowance

• payment of expenses such as petrol, tools, materials, stationary or phone etc.

• holiday pay

• sick pay

• workers compensation

• superannuation; or

• training.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 to Schedule 1

Reasons for decision

Summary

Based on the information you have provided, the Commissioner considers that there is no requirement to withhold from payments made to workers under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) as they are not employees.

Detailed reasoning

Employee v Contractor - Bailment arrangements

The Commissioner's views on who is an employee for Pay As You Go Withholding purposes are set out in Taxation Ruling TR 2005/16.

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

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 case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

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; (1992) 27 NSWLR 377 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'.

Similarly, the couriers in Vabu Pty Limited v FC of T 96 ATC 4898; 33 ATR 537, were engaged to perform a result, the delivery of parcels, etc, rather than engaged to perform labour. They were thus employed in their own business, on their own account, and were not employees of the business conducted by the appellant in that case. Their contracts were not contracts wholly or principally for their labour.

There are circumstances in which the relationship between a person who engages another to perform work and the person engaged does not give rise to a payment for services rendered or provision of labour but rather a payment for something entirely different, such as a lease or 'bailment'. In these circumstances, a person enters into a lease or bailment for the use of property owned by another person, and the payments are made from the lessee or bailee to the lessor or bailor. Consequently, the lessee or bailee, rather than being a provider of services to the owner of the asset, acquires a right to exploit that asset for their own benefit in return for a 'rental' payment to the owner. This does not give rise to an employer/employee relationship for the purposes of the TAA.

The dictionary meaning of bailment is: the temporary placement of control over, or possession of Personal Property by one person, the bailor, into the hands of another, the bailee, for a designated purpose upon which the parties have agreed. During the specific period a bailment exists, the bailee's interest in the property is superior to that of all others, including the bailor, unless the bailee violates some term of the agreement.

A bailment involves only a transfer of possession or custody, not ownership. For example, a bailment is created when a parking garage attendant, the bailee, is given the keys to a motor vehicle by its owner, the bailor. The owner, in addition to renting the space, has transferred possession and control of the vehicle by relinquishing its keys to the attendant.

A common form of bailment relationship is that of owner and taxi driver. In the taxi industry, some drivers who operate under a bailment agreement make a payment to the owner allowing them to use the taxi to drive. These payments may take the form of lease payments or a percentage of shift takings. In FC of T v. De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd & Ors 98 ATC 4466; (1998) 38 ATR 609; (1998) 82 FCR 507, the Full Federal Court held that a taxi licence owner and taxi drivers were not in a relationship of employer and employee. The relationship was rather one of 'bailment', even though the licence owner had a degree of control over the drivers' work. In this case it was also stated that: 'In the present case, even if there could be said to be a payment made by the operators to the drivers, contrary to the facts, that payment could not be said to be one for the labour of the drivers.'

Application to your circumstances

In this case, the entity intends to allow workers to pay to use an asset owned by the entity in accordance with the terms and conditions set out in the Independent Contractor Agreement.

The workers' payments are based on the submission of a tax invoice and are a percentage of the actual fees collected. Upon submission of the tax invoice to the entity, the appropriate percentage of the total of all fees collected by the particular worker is sent to them. As the workers' payments are based on the number of allocated jobs they complete, it is clear that they are paid on a results basis. Regardless of the fact that the entity exercises a degree of control over how their assets are used the fact remains that the workers rent assets from the entity and the right to use these assets for income earning purposes.

It is clear from the definition of 'bailment', the nature of the industry that the workers work in and the working arrangement that will be entered into, it is a bailment arrangement. As such, the workers are not considered to be employees for income tax purposes in this arrangement, therefore there is no obligation to withhold from the payments made to the workers under section 12-35 of Sch 1 to the TAA.

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