Edited version of your written advice

Authorisation Number: 1013055159860

Date of advice: 25 July 2016

Advice

Subject: Superannuation guarantee: status of the worker

Question

Are the relationships between the Principal and incorporated Workers under the Licence Agreement ones of employer/employee under section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. Please see 'Reasons for decision' below.

This advice applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The arrangement commences on:

1 July 2013

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

The Commissioner received a request from the Principal for binding advice in respect of superannuation guarantee (SG) obligations. The following information was provided with the application:

• The Principal carries on a franchise business and grants licences to entities (the Workers) who wish to operate a business under the Principal's brands using the intellectual property and systems of the Principal within a particular specialisation and territory.

• The Principal charges the Workers an initial fee on the grant of a licence and monthly royalty fees consisting of a fixed royalty fee and a variable royalty fee from gross income received by the Workers. The Principal is also reimbursed by the Workers for any costs incurred by the Principal for the Workers.

• Generally, the Licence Agreement is renewable with a renewal term. There are, minimum performance obligations imposed on the Workers under the Licence Agreement. The Workers need to generate a minimum gross income (invoiced and collected) each income year within the licence term.

• Under the Licence Agreement, the Workers appoint the Principal as agent to exclusively undertake all billing and collection services on behalf of the Workers in respect of the Workers' business.

• The Principal issues tax invoices on behalf of the Workers for any services provided by the Workers to their clients. The tax invoices (except royalty fees) issued by the Principal are issued as agent for the Workers and the invoices display the Workers' business name, trading name and ABN.

• All funds are received by the Principal on behalf of the Workers and are deposited into the Principal's holding account. The parties agree under the Licence Agreement that no trust of any nature arises over receipt of such monies.

• As agreed by the parties under the Licence Agreement, the Principal is solely entitled to any and all interest accrued on the funds received into the Principal's bank account, as part of the royalty fees defined in the Licence Agreement.

• The Principal pays to the Workers all monies received on behalf of the Workers for a particular month, less the royalty fees payable to the Principal and any payments due to third parties which are paid by the Principal on behalf of the Workers. The Workers are only entitled to their payments after the Principal receives payments from the clients of the Workers.

• The Principal issues the Workers a tax invoice at the beginning of the following month showing the breakdown of the royalty fees, any third party invoices or disbursements paid for that previous month.

• The Principal undertakes some administrative functions for the Workers in relation to their business.

• The Principal provides business premises to the Workers to operate their business. The Principal provides business cards to the Workers. The overhead costs and administration services are recovered by the Principal through the monthly royalty fees.

• The Workers are responsible for their own equipment necessary for carrying on business by the Workers. The Workers are required to take out their own public liability insurance and professional indemnity insurance.

• The Workers have their own business trading name. The Workers are required to display at their business premises a sign identifying the Worker's name and the registered business name.

• The Workers are allowed to employ staff to operate and manage their business and are solely responsible for the employment related obligations for those staff.

• All services provided by the Workers are displayed on the Principal's website. The Workers are not allowed to have their own websites for quality control and branding purposes.

• Currently Workers are incorporated, though the Licence Agreement sets out the particular arrangements required if the Worker is a trustee. The Workers have one or two individual principals working for their respective entities.

• All Workers have an ABN and are registered for GST.

• The Principal is registered for GST.

• The Principal's business is governed by the Competition and Consumer (Industry Codes - Franchising) Regulation 2014.

• The Applicant provided copies of the following documents:

• Generic Licence Agreement.

• A Tax Invoice issued by the Principal to a client on behalf of the Worker

• A Tax Invoice issued by the Principal to a Worker for royalty fees and disbursements.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 section 12

Reasons for decision

Summary

Having considered the nature of the working relationship between the parties, it has been determined that neither a common law employment relationship nor an extended definition employment relationship exists between the Principal and the Workers.

It follows then that payments made by the Principal to the Workers after the subtraction of royalties and fees due to the Principal from the Workers do not trigger SG obligations for the Principal in relation to the individual principals of the incorporated Workers.

Detailed reasoning

Employment Relationship

The SGAA defines 'employee' in section 12. The definition is both a clarifying and extending provision. Subsection 12(1) defines the term 'employee' as having its ordinary meaning - that is, its meaning under common law. If a worker is held to be an employee at common law, then they will be an employee under the SGAA (unless one of the limited exceptions in subsections 12(9A) and (11) applies).

Superannuation Guarantee Ruling, Superannuation guarantee: who is an employee? (SGR 2005/1) explains when an individual is considered to be an 'employee' under section 12 of the SGAA.

The expressions 'employee' and 'employer' in the SGAA have both their ordinary meaning and an extended meaning. SGR 2005/1 also discusses 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. In addition, it clarifies which persons are employees under the extended definition and also considers the circumstances in which an individual who may otherwise be an employee is specifically exempted from the scope of the SGAA.

Of particular reference to your enquiry is the following paragraph 13 of SGR 2005/1 which states:

Where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be the employee of the intermediary company or trust, depending on the terms of the arrangement.

In Appendix A of your application for binding advice in relation to the SG implications of the Licence Agreement, you stated that:

We understand that the Full Federal Court decision in [Roy Morgan Research Pty Ltd v FC of T (2010) ATC 20-184 (Roy Morgan Research case)] suggested that a SG liability could still arise where the individuals were actually engaged in the business of the taxpayer even if the contractors were incorporated.

We have formed a view that the principles set out in the Roy Morgan Research case should not apply to the [Principal]. This is because the franchise business model established by the [Principal] demonstrates that the Workers operate an independent business on their own account. As such, the principals of the Workers should not be common law employees of the [Principal].

We confirm your contention in relation to the Roy Morgan Research case in as much as the principles of this case do not apply to your Licence Agreements with the incorporated Workers because the agreements under consideration here are genuine, whereas the Full Federal Court indicated that this was not the case for the agreements in Roy Morgan Research. The question of whether or not the Workers operate independent businesses on their own account is beyond the scope of this written binding advice.

Application of SGR 2005/1 to your circumstances

You have provided a copy of the generic Licence which the Principal provides to the Workers wishing to use the Principal's intellectual property under franchise terms and the agency services of the Principal. This agreement clearly shows that the parties to this agreement are the Principal and the incorporated Workers either directly or as trustees for a trust. You stated that currently all Workers are incorporated with one or two individual principals working for their entity.

Based on this evidence there is no employment relationship between the individual principals of the Workers and the Principal. This is because the Principal has clearly entered into an agreement with the incorporated Workers to provide the Principal's intellectual property and agency services in exchange for royalties and fees from the Workers. The agreements between the Principal and the Workers do not fall within the scope of an individual employee as per paragraph 13 of SGR 2005/1 and as such the incorporated Workers are not employees of the Principal for SG purposes.

It follows then that the individual principals of the Workers are not considered to be employees of the Principal either at common law or under the extended definition of an employee in section 12 of the SGAA. Accordingly, payments made by the Principal to the Workers after the subtraction of royalties and fees due to the Principal from the Workers do not trigger SG obligations for the Principal in relation to the individual principals of the incorporated Workers.

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