Edited version of your written advice

Authorisation Number: 1051267099948

Date of advice: 18 August 2017

Ruling

Subject: Employee or Contractor for PAYG Withholding purposes

Issue 1

Contractors and PAYG.

Question 1

Does the company have pay-as-you-go (PAYG) withholding obligations under section 12-35, of schedule 1 of the Taxation Administration Act 1953 (TAA) with respect to such a contractor caretaker?

Answer

No

Issue 2

FBT and contractors.

Question 1

Does the provision of free accommodation or accommodation for rent below the arm’s length rent to a contractor caretaker or the principal individual behind a contractor caretaker give rise to a provision of  a fringe benefit under section 136-1 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) which is subject to fringe benefits tax?

Answer

No

This ruling applies for the following periods:

1 July 2015 – 30 June 2016

1 July 2016 – 30 June 2017

1 July 2017 – 30 June 2018

1 July 2018 – 30 June 2019

1 July 2019 – 30 June 2020

1 April 2015 – 30 March 2016

1 April 2016 – 30 March 2017

1 April 2017 – 30 March 2018

1 April 2018 – 30 March 2019

1 April 2019 – 30 March 2020

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The company is a entity whose activities involve the provision of affordable housing.

As part of its activities the company undertakes the caretaking of various residential properties – this includes properties which are owned by the company and also properties owned by private owners over which the company has the management rights.

Employees are only entitled to four weeks annual leave and must negotiate with the company as to the timing of their leave.

The company employs caretakers to manage properties that it owns.

The company also engages contract caretakers to manage properties which it owns and also properties which are owned by unrelated parties.

The company usually engages contract caretakers where it does not own a building but has the management rights over a building with its body corporate.

The company has treated the contractor caretakers as independent contractors for tax and superannuation guarantee purposes.

The company has engaged four categories of contractor caretakers whose characteristics are outlined in four scenarios.

Contract caretakers in scenarios B to D are provided with relevant shirts so they can be identified as the on-site caretaker by tenants, contractors and other agents.

Employee caretakers of the company are required to wear the relevant shirts while the contractors are not required to do so but some do choose to wear them.

Scenario A – Mobile Contractor and building owned by the company

These contractor caretakers do not live in the buildings in respect of which they provide services.

The following facts are relevant to scenario A, B, C and D.

1. The contractor caretaker is not entitled to typical employee entitlements such as annual leave, sick leave or long service leave.

2. The contractor has an ABN.

3. The contract caretaker is permitted to delegate its contractual obligations.

4. The contractor caretaker is required to maintain their own insurances.

5. The contractor caretaker is responsible for indemnifying the company against any costs the company may suffer.

6. The contractor caretaker is paid a set fee for their services.

7. The company has no control over the way the contractor caretaker provides their services.

8. In practice save for one exception, the contractor caretakers are responsible for supplying and maintaining their own vehicles and tools of trade (including mobile phones).

9. Contractor caretakers are required to maintain their own licences as necessary to provide their services.

10. Contractor caretakers can source and perform caretaking/handyman work for members of the public.

11. The company does not issue the contractor caretakers any clothing or uniform.

12. A contractor must source a replacement for themselves if taking any sort of leave and must remunerate their substitute caretaker for their work.

The contractor caretaker is responsible for supplying:

(i) all cleaning consumables needed to provide the cleaning services (e.g. cleaning chemicals);

(ii) all standard equipment needed to provide the cleaning services (clause 3.1);

Except for the supply of soil, mulch and fertiliser (which the company is responsible for providing) the contractor caretaker is responsible for supplying:

(i) all gardening consumables needed to provide the gardening services (e.g. fuel, chemicals and pesticides);

(ii) all standard equipment needed to provide the gardening services.

Scenario B – Live-in Contractor (Pty Ltd) and the company only has Caretaking Agreement with body corporate

The facts numbered 1-12 in scenario A are also relevant to this scenario.

The company does not own the buildings.

The contractor caretaker is required to supply all standard equipment and cleaning consumables.

Gardening consumables and consumables for common areas are provided by the body corporate.

The contractor caretaker’s services include acting as an emergency point of contact for emergency services and tenants outside normal set times and assisting the housing manager with the day to day management of the properties in relation to maintenance issues, inspections and viewings of apartments.

The contractor caretaker is required to regularly report to the body corporate.

A contractor caretaker is not entitled to receive overtime.

The company supplies a contractor caretaker with accommodation (unit plus car park) at the relevant building.

The contractor caretaker undertakes work directly as requested by body corporate members.

The contractor caretaker is directly responsible to body corporate for the compliance and safety of the building. This involves:

(a) organising and ensuring that any mandatory servicing of the equipment on site is carried out i.e. of lifts, fire equipment, back flow devices, roller doors etc.;

(b) obtaining quotes for rectification work on any equipment that needs to be repaired or for the future maintenance of facades, gardens, etc.

(c) obtaining quotes for all servicing of equipment when the body corporate members decide to change contractors or get a better price for services;

(d) organising tradesmen to rectify any issues throughout the complex for the body corporate – this is done independently and without the need for the company’s approval. The contractor caretaker may arrange for tradesman to undertake rectification work even if the tradesman is not one on the company’s recommended list.

The contractor caretaker also approves the invoices issued by contractors for work done in relation to the building.

A contractor caretaker is free to provide their services in any manner they wish

Scenario C – Live-in Contractor (Sole Trader / Individual) and the company only has Caretaking Agreement with body corporate

The facts numbered 1-12 in scenario A are also relevant to this scenario.

The live-in contractor caretaker was an individual who was previously employed by the company to provide caretaking services at another building owned by the company.

The contractor caretaker chose to move from property A (where they were an employee receiving superannuation and leave entitlements) to property B (where they became a contractor caretaker).

Whilst residing at property A the contract caretaker was required to pay rent (although utility bills were included). The contract caretaker was provided with free accommodation at property B.

The company was responsible for supplying all consumables necessary for the contractor caretaker to provide the cleaning services.

The company provided the standard equipment necessary for the contractor caretaker to provide their cleaning, gardening and maintenance services

The company was responsible for supplying all gardening consumables needed to provide the gardening services.

The contractor caretaker’s services included:

(i) acting as an emergency point of contact for emergency services (e.g. contractor tradesmen wishing to gain access to the property) and tenants outside normal set times and

(ii) assisting the housing manager with the day to day management of the properties in relation to maintenance issues, inspections and viewings of apartments.

The contractor caretaker was required to report regularly to the body corporate.

The contractor caretaker was required to maintain a residential letting agent licence at their own cost.

The contractor caretaker was not entitled to receive overtime.

The company supplied the contractor caretaker with accommodation (unit plus car park) at the relevant building.

The contractor employed no staff.

The contractor caretaker did not undertake property letting activities.

In practice the contractor caretaker undertook work directly as requested by body corporate members.

The contractor caretaker was directly responsible to body corporate for the compliance and safety of the building. This involved the tasks outlined in scenario B plus liaising directly with unit owners and providing services such as bin cleaning for the body corporate and exit cleans and lock out services for tenants for a fee.

The contractor caretaker also approved the invoices issued by contractors for work done in relation to the building.

The contractor caretaker was free to provide their services in any manner they wished.

Scenario D – Contractor Caretaker who is both Mobile and Live-in

The facts numbered 1-12 in scenario A are also relevant to this scenario.

The Mobile Caretaking contract is for the provision of mobile caretaking services including gardening, cleaning and maintenance services across properties agreed to between the company and the contractor caretaker

The contractor caretaker is responsible for supplying all standard equipment needed to provide the cleaning and gardening services.

The company is responsible for supplying all cleaning consumables needed to provide the cleaning services

The company is responsible for supplying all gardening consumables needed to provide the gardening services.

The company is responsible for providing amenity supplies for the common area toilets and common areas.

The contractor caretaker’s services include assisting the housing manager with the day to day management of the properties in relation to maintenance issues, inspections and viewings of apartments.

The contractor caretaker is required to regularly report to the body corporate.

A contractor caretaker has the freedom to choose when they provide their services.

The contractor caretaker has taken advantage of this flexibility in that they have chosen to additionally take up a live-in Caretaking contract (as described above in Scenario B).

In practice the contractor caretaker undertakes work directly as requested by body corporate members.

The contractor caretaker is directly responsible to body corporate for the compliance and safety of the buildings covered by the Mobile Caretaking contract and live-in Caretaking contract as outlined in scenario B.

The contractor caretaker also approves the invoices issued by contractors for work done in relation to the building.

The contractor caretaker is not entitled to any overtime.

Other facts

The substitute contractor caretaker must have appropriate insurances before they can provide their services.

The live in contractor caretakers are provided with a unit of accommodation at the relevant property to which they care-take for free for the period of their contract.

It is not a serviced apartment.

Contract caretakers are required to pay utilities but not for repairs to the property.

Relevant legislative provisions

Section 12-35 of the TAA 1953

Subsection 136(1) of the FBTAA 1986

Reasons for decision

Issue 1

Question 1

Summary

Based on the information you have provided, we consider that the contract caretakers will be independent contractors, rather than employees, in the income years in question.

Therefore, you are not required to withhold PAYG withholding tax for remittance on behalf of these contractors.

Detailed reasoning

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

The term 'employee' is not defined in the TAA 1953. For the purposes of (income tax) withholding under section 12-35 of the TAA 1953, the word 'employee' has its ordinary meaning at common law. 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.

Employee Vs Independent contractor

The distinction between employment and contract is the difference between a contract of service indicating an employee/employer relationship and a contract for service indicating a contractor/principal relationship.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship).

The relationship between the independent contractor and the principal is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result).

An independent contractor works in his or her own business (or on his or her own account); an employee works in the service of the employer, that is, in the employer's business.

However, it is necessary to examine all the terms of the contract and to determine whether, on balance, the person is acting as an employee of another or is acting on his or her own behalf.

Whether the true nature of an arrangement between a payer and payee is that of employer/employee or principal/independent contractor is a determination which must be made by reference to the various indicators developed by the Courts. These indicators have been collated in Taxation Ruling TR 2005/16.

TR 2005/16 paragraph 7 provides:

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 of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

The ruling has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law.

Terms and circumstances of the formation of the contract

The fundamental task with respect to the terms of engagement test is to determine the nature of the contract between the parties. We must determine the nature of the contract between the parties, consider whether the contract is written or verbal, and whether the terms and conditions are expressed or implied. These factors are important in characterising the relationship between the parties.

When considering the intentions of the parties in forming the contract, the task is to decide what each party could reasonably conclude from the actions of the other. Simply defining someone as a contractor does not necessarily lead to the conclusion that the individual is providing services as part of an operation of their own independent business.

Control

The extent to which the engaging entity has the right to control the manner in which the work is performed is the classic test for determining the nature of a working relationship. A common law employee is told not only what work is to be done, but how and where it is to be done. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lays not so much in its actual exercise, but in the right of the employer to exercise it.

Even though the modern approach to defining the contractual relationship is to have regard to the totality of the relationship between the parties, control is still an important factor to be considered. This was recognised by Wilson and Dawson JJ in Stevens v. Brodribb ((1986) 160 CLR 16 at 36) (Stevens v. Brodribb), where they state:

In many, if not most cases, it is still appropriate to apply the control test in the first instance because it remains the surest guide to whether a person is contracting independently or serving as an employee.

Does the worker operate on his or her own account or in the business of the payer?

If the worker’s services are an integral and essential part of the business that engages them (under a contract of service), they are considered by the courts to be a common law employee. If the worker is providing services as an individual carrying on their own business (under a contract for services), they are an independent contractor. It is necessary to keep in mind the distinction between a worker operating their own business and a worker operating in the business of the payer. This is also known as the integration test.

The professional skills involved in carrying out the work are also a useful guide in determining whether a person is carrying on their own business or not. The provision of professional skills or skilled labour may imply that the contractor is able to make an independent career by selling that skill. In the case of a contractor with an independent career, it may be implied that the contractor is able to conduct their own business using those skills.

'Results’ contracts

The meaning of the phrase 'producing a 'result’ means the performance of a service by one party for another where the first mentioned party is free to employ their own means (that is, third party labour, plant and equipment) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

Satisfactory completion of the specified services is the result for which the parties have bargained. That is, a payment becomes payable when, and only when, the contractual conditions have been fulfilled. Payment is often made for a negotiated contract price, as opposed to an hourly rate.

Whether the work can be delegated or subcontracted

The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) 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.

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 employee has merely substituted or shared the workload.

However, a clause in the contract may permit the worker to delegate the task to another worker subject to approval of the principal, as the principal may not want an unknown worker to be working on their site or who may not be suitably qualified.

Therefore, under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). A person who has a right to delegate work (whether or not that right is exercised in practice) does not work under a contract wholly or principally for their labour. Unless the contract expressly requires the service provider to personally perform the contracted services, the contractor is free to arrange for his or her employees to perform all or some of the work or may subcontract all or some of the work to another service provider.

Risk

Generally speaking, employers are vicariously liable for negligence and injury caused by their employees, whereas a principal will not be liable for negligence or injury caused by an independent contractor.

Another consideration of risk is the liability for the cost of rectifying faulty work. That is, the key underlying consideration is whether the individual is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work.

This is consistent with the focus on the chance of profit and the risk of loss as a traditional indicator that a worker is an independent contractor conducting their own business.

Provision of tools and equipment and payment of business expenses

A worker/payee who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required to complete their work by the employer. Furthermore, the employer is often also responsible for the business expenses incurred by the worker, since the worker has been integrated into the employer’s business.

Independent contractors carrying on their own business often provide and pay for their own assets, tools, equipment, maintenance costs and other expenses. Usually, they will have factored these costs in their overall fee or they will seek separate payment for such expenses from the principal.

Other Indicators

Other indicators of the nature of the contractual relationship have been variously stated and have been added to from time to time. Other indicators suggesting an employer-employee relationship include:

● the right to suspend or dismiss the person engaged;

● the right to the exclusive services of the person engaged;

● provision of benefits such as annual, sick and long service leave;

● provision of other benefits prescribed under an award for employees; or

● a requirement that a worker wear a company uniform.

In your case (for all four scenarios)

When we apply the facts provided to the terms of engagement test we conclude the following:-

● each contract caretaker has their own ABN and remits GST on the fees paid by the company for their services;

● the company advertises for contractors and engages contractors;

● the contract caretaker is not entitled to entitlements such as annual leave, sick leave or long service leave;

● the contract caretaker is liable to pay public liability insurances;

● the contract caretaker is required to indemnify the company for their acts or omissions;

● the contract caretaker is not restricted from providing their services to other members of the public;

● the contract caretaker can take as much leave as they like so long as they find a replacement contractor and pay them accordingly.

Application of the control test to the facts provided indicate the following:-

● the contract caretaker controls their own scheduling of the work;

● the contract caretaker has control over when and how the tasks are performed;

● the contract caretaker does not have a specific timeframe to finish the work;

● the contract caretaker can take leave at their convenience;

● the contract caretaker can get other people to perform their duties;

● the contract caretaker can choose who should be their substitute whilst on leave/holidays.

By applying the integration test to the circumstances as outlined in the information provided it indicates the following:

● the work is performed using a substantial amount of equipment owned by the worker;

● in some circumstances supplies are provided by the Body Corp or the Body Corp reimburses the company for the cost of those supplies;

● all of the contract caretakers are permitted to work for other people;

● contracts are from 1 – 3 years and be can terminated by giving 30 days’ notice;

● it is not compulsory to wear a company uniform but in some instances some contract caretakers choose to do so (the company does not supply uniforms to all contract caretakers);

● contract caretakers need to find their own substitute contract caretakers when they want to take leave.

Application of the results test when applied to the facts provided:-

● there is a written contract between the company and the contract caretaker;

● the contract caretaker is paid a set amount for producing a result;

● if results are not satisfactory the contract can be terminated by giving 30 days’ notice.

When applying the delegation test to the provided facts we can conclude the following:-

● the contract caretakers may delegate their provision of services to another party and are not personally required to provide the services;

● when taking leave the contract caretaker is required to find their own replacement and renumerate them for their services.

When we apply the facts provided to risk we can conclude the following:-

● the contract caretakers must pay for their own licences and registrations;

● the contract caretakers must take out their own insurance policy including public liability insurance;

● the contract caretaker is responsible for rectifying defects in their work;

● the contract caretakers are paid a set amount and bear commercial risk in relation to their services. If they take more hours in meeting the caretaking specifications outlined by the company, then they bear the profitability cost of doing so;

● the contract caretaker provide most of their own consumables and equipment;

● a contract caretakers services may be terminated by giving 30 days’ notice.

By applying the relevant facts of the case in regards to the provision of tools and equipment and payment of business expenses we can conclude the following:-

● each contract caretaker has their own ABN and remit GST on the fees paid by the company for their services;

● the contract caretakers are responsible for providing their own cleaning and gardening consumables and equipment needed to provide their services;

● some contract caretakers may enter into multiple mobile caretaking contracts which are independent of each other;

● some contract caretakers also provide caretaking services to members of the public.

Other Indicators

In this case, you have no right to the exclusive services of the contractor caretaker as most of them perform work for other clients. There is no provision of the usual employee benefits and no requirement to wear a uniform (although some contractor caretakers choose to wear a company uniform).

These facts are indicative of this arrangement not constituting a principal/contractor relationship.

The above review of the employee/contractor tests indicates that the relationship between the company and the contractor caretaker is not common law employees. It indicates to us that they are independent contractors.

Conclusion

With consideration of all the facts presented in this case and with reference to the indicators provided in Taxation Ruling TR 2005/16, it is clear that the contractor caretakers are engaged by the company as independent contractors and not as employees of the company.

Issue 2

Question 1

Summary

No the provision of accommodation to contractor caretakers does not give rise to a FBT liability.

Detailed reasoning

A 'fringe benefit' as defined in subsection 136(1) of the FBTAA 1986 is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted.

As stated above to be fringe benefit, a benefit must be provided to an employee of the employer concerned.

In question one we determined that the employment relationship between the contractor caretaker and the company was on of an independent contractor and not one of employer/employee.

As there is not employer/employee relationship the provision of an FBT liability does not occur.

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