Edited version of your written advice

Authorisation Number: 1013085697259

Date of advice: 15 September 2016

Ruling

Subject: Employee or contractor

Question

Is the worker engaged by you to provide services considered to be an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

You engaged a worker for two periods.

You engaged the worker to act as a director.

The worker was always engaged as a contractor through their entity.

The worker had limited independence and control over their work originally when they were working on specific projects as the work was done at your direction. In their second period, the worker's duties demanded little control or independence on their part and they were essentially engaged to sign documents as and when directed by you.

Originally the worker worked consistent hours and then worked for approximately 3 - 5 days depending on their workload. During their second period, the worker was called upon to work when there was a certain task that needed to be done.

The worker took holidays at their own instigation and could have declined to do work if they were unavailable.

The worker's representations made on behalf of the Company needed be responsible and in line with Company objectives.

There is no indemnity from the worker to you.

You paid the worker's director's insurance.

You provided a laptop and internet, paid relevant phone expenses and provided a fuel allowance if the worker was traveling for company matters. Training would be encouraged and paid by you if it was in the interest of company matters.

Originally the worker was paid for the days and hours worked before being paid a flat weekly fee.

The worker was not paid annual leave, sick leave or superannuation.

Any goodwill derived from the worker's work went to you

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

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.

Payments made to persons other than individuals

Section 12-35 of Schedule 1 to the TAA 1953 applies to payments made to individuals in their capacity as employees. It does not apply to payments made to other entities - provided the arrangement is not a sham or a mere redirection of an employee's salary or wages.

A sham is an arrangement that creates the appearance of rights and obligations different from those actual rights and obligations that the parties intend to create. The parties must have a common intention that the arrangement is a mere facade, disguise or false front for a sham arrangement to exist

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. For example, where the payer pays an employee's salary into a bank account at the direction of the employee.

Also, a payment to a third party is treated as a redirection of an employee's salary or wages (and hence a constructive payment of salary or wages to the employee) in circumstances where the payment to the third party is attributable to salary, wages etc for services rendered by the employee in the course of that employment.

In this case you have engaged a worker through their entity. It is considered that a redirection is occurring. Therefore section 12-35 of Schedule 1 to the TAA 1953 can apply to your circumstances.

Employee vs contractor

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, so that outside the contractor is free to exercise their own discretion, because they work for themselves.

In this case, the worker had limited independence and control over their work when they were working on specific projects as the work was done at your direction. In the second period the worker's duties demanded little control or independence on their part and they were essentially engaged to sign documents as when directed by you.

The worker has had little control over how they complete a task and have worked at your direction. The lack of control is indicative of an employer/employee relationship.

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 for most of their engagement the worker did not have consistent hours and would work depending on their workload or when there was a certain task that needed to be done.

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 the worker was originally paid for the days and hours worked and then they were paid a fixed sum at regular intervals regardless of how much work was performed. This is indicative of an employer/employee relationship.

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, the worker was not given specific instructions about whether the worker has to complete the work personally.

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, the worker's role is considered to be equivalent to senior management and their representations made on behalf of the company must be responsible and in line with company objectives. Additionally you paid the worker's director's insurance. Therefore the risk is predominantly borne by the entity rather than the worker which is indicative of an employer/employee relationship.

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 you provide a laptop and internet to the worker. While a phone was not provided to the worker all relevant phone expenses were paid by you. You have also provided a fuel allowance if the worker was travelling for company matters and encouraged and paid for relevant training.

As you have provided tools and equipment and pay business expenses, it is more indicative of an employee/employer relationship rather than a contractor relationship.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the worker is an employee, and there is an obligation on the entity to withhold from payments made to the workers

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