Edited version of your written advice

Authorisation Number: 1051215810339

Date of Advice: 28 April 2017

Ruling

Subject: PAYG Withholding - Employee or Contractor

Question

Are the workers engaged by the Trustee for AJ Ireland Trust considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The entity intends to acquire an existing courier business. The Worker currently contracts to the business that the entity intends to purchase. The Worker has an ABN and is able to have someone to do the work for them.

The entity intends to have a separate agreement with the Worker.

The worker is not provided with any training. The only instructions provided to the worker are in relation to the jobs and requests for courier services.

The worker can choose the hours that they work. However, the work requests are set by the client. For example, the mail must be picked up first thing in the morning.

The courier must be available full time Monday to Friday. How the work is undertaken during those hours is at the courier's discretion.

No supervision is provided to the worker. The only information reported by the worker relates to specific information for billing. If the worker gets a call for other work for the entity, then they will inform the entity for billing purposes.

The worker is theoretically able to refuse to do a particular job or task. However, there are no other workers to service the contracts for the entity and as the worker has agreed to take on the work for the entity, it is expected that they will service the client.

The worker is able to provide their services to other individuals or businesses. However, the worker only works full time for this entity as it occupies full time hours. If the work demands decrease then the worker could pursue other work.

The worker works alone.

The worker does not wear a name badge, clothing or a uniform promoting the business name.

The worker submits invoices for payment fortnightly. The worker works full time and they are the same amount each fortnight. The worker charges an hourly rate, not on the contract or work undertaken.

The worker does not set their own fees. The contracts/agreements are with companies only and are at a set price. The worker is paid for the amount on the invoice which is determined by set contracts. If the contracts were to cease, the worker would be paid for the work that is done.

You do not perform any checks on whether the work is complete prior to payment.

You do not give any instructions as to whether the worker must perform the tasks personally.

The worker is responsible for paying their own insurance.

The worker is supplied with a car/vehicle and mobile phone to complete the work.

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.

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?

Terms and the circumstances of the formation of the contract

In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties whether express or implied, in light of the circumstances surrounding the making of the contract.

Contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole- that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of the relationship is one of employment the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor.

As Gray J stated in Re Porter: re Transport Workers Union of Australia:

Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

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 works on a full-time basis Monday to Friday to fulfil the requirements of the job. How the work is completed during those hours is completely at the worker's discretion. The worker submits invoices to the business which are always charged at an hourly rate. No supervision is provided for the worker.

These are indications that the worker is not an employee of the entity rather an independent contractor providing services for the entity.

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, the worker has their own ABN and works on a full time basis to complete the contracts. There is no identifying logo on the mobile phone or vehicle that is provided by the business. It does not indicate that the worker has been integrated as part of the business.

It appears that the relationship between the worker and the business is characterised as being that of a principal and contractor.

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 payment under the contract is linked to the outcome of the result, which in the present circumstances, is the completion of services. Although the invoice is charges at an hourly rate, the nature of the contract is to complete a set number of tasks as required.

It appears that the basis of the contract is to achieve a specified result, that is the completion of the services provided under the contract. There is no indication that the worker is to be renumerated at any point prior to the completion of their task.

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, in theory the worker can refuse a particular job or task but practically they could not as there is no other worker to service the contracts. The worker is able to provide their services to other individuals or businesses, however they have not actively sought other work at this time.

These are indications that the worker is not an employee of the entity rather an independent contractor providing services for the entity.

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.

The worker is legally responsible for their work and liable for the cost of rectifying any defects in their work.

In this case, the worker is responsible for paying their own insurance. The information provided indicates that the risk is mainly held by the worker and indicates a contractor 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, the worker was provided with a mobile phone and a vehicle for his work and no other tools or materials were required. Therefore, the business provided all that was necessary for the worker to perform his work.

Based on this information, the results of this test indicate an employee employer relationship.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the worker is acting as an independent contractor, and is not an employee for PAYG Withholding purposes. Therefore there is no obligation on the entity to withhold from payments made to the worker.

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