Edited version of private advice

Authorisation Number: 1052151675100

Date of advice: 23 August 2023

Ruling

Subject: PAYG (Withholding)

Question 1

Is there an obligation on the organisation to withhold from payments made to workers who are engaged to provide tutoring services to recovering students under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

This ruling applies for the following periods:

Financial year ending 30 June 2024

Financial year ending 30 June 2025

Financial year ending 30 June 2026

Financial year ending 30 June 2027

Financial year ending 30 June 2028

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The organisation provides a tutoring service. Teachers with appropriate qualifications and skills are engaged to provide one hour of tutoring per week to students. In total 40 weeks of tuition are provided to each student. The organisation uses a national program with teachers working with students in each state and territory in Australia.

This is an extension of a current Private Binding Ruling (PBR) that expired on 30 June 2023.

Since the above ruling has issued the program has evolved from a national program administered centrally to a decentralised model administered by each entity in their respective areas.

The organisation is engaging the skills and expertise of the teachers and, because the teachers will be working with children and must meet relevant 'working with children' requirements, the teachers are not generally permitted to assign, subcontract or delegate any of their rights or obligations as a tutor to a third party without the organisations written consent. However this should not be construed as evidence of an employment relationship.

Control

Teachers engaged by the organisation exercise a high degree of control over the manner in which they provide the tutoring services, and in particular:

•         they may (and do in practice) exercise their discretion as to the method of providing the tutoring services to an appropriate standard, including the selection and use of appropriate learning strategies

•         they use their own skill and experience to prepare and provide all necessary teaching materials, and the organisation relies on their professional experience and qualifications to do so

•         they liaise directly with the relevant child's school and parents regarding the relevant child's progress and goals

Whilst teachers are expected to perform their duties at the relevant child's school and during school hours, they are otherwise free to determine the hours that they work.

Organisation or integration

All engaged teachers have specific skills which they carry on in their own right. The teachers are engaged to perform the specific task of providing tutoring and how they do that is basically up to them within the limited guidelines set by the organisation.

Results

The engaged teachers are paid on an hourly basis once a month. Teachers will be paid provided they have performed the tutoring service at the relevant standard, submitted a Student Learning Plan (SLP) for the relevant school term for each student and have provided an appropriate tax invoice. Teachers are free to implement their discretion as to the method of providing the tutoring services to an appropriate standard including the selection of and use of appropriate learning strategies within the organisation's boundaries.

Fees

The standard fee per month per student for tutoring services is $XXX (exclusive of GST) up to a maximum of $XXX per annum per student, based on a standard program of one lesson per week during the school term. Invoices must reflect any variance to this.

Teachers are required to issue itemised invoices to the organisation in order to receive fees, which are calculated based on the number of hours spent providing the tutoring services. Teachers are responsible for any expenses incurred in the provision of the services, as well as payments of GST in relation to the provision of the services.

Exclusivity/Independence

Teachers are not engaged on an exclusive basis and are free to provide tutoring or other teaching services to other organisations. In practice, teachers are frequently employed at the relevant child's school, and they perform the tutoring duties in addition to their regular teaching duties.

To assist the teachers provide the appropriate tutoring services, they are provided with an assessment (an assessment report) of the relevant child's learning needs as prepared by the organisation as well as a template SLP, based on which they are required to develop a curriculum with reference to the relevant child's specific needs as identified in the Assessment Report. However, no other material relevant to the tutoring services, including any tools of trade or learning materials developed by the organisation or any other person are provided to the teachers by the organisation or any other associated entity. Furthermore, whilst the SLP is subject to approval by the organisation, and teachers are also required to submit Tutor Reports to the organisation in relation to each tutored child each term, this limited oversight is necessary to ensure that an adequate standard of tutoring services is being provided and is not indicative of the type of control exercised in an employment relationship.

Teachers are required to submit the SLP at the end of each term to the organisation to review. This limited oversight is necessary to ensure that an adequate standard of tutoring is being provided and is not indicative of the type of control exercise in an employment relationship.

The organisation relies on the professionalism of each teacher to provide the appropriate curriculum content for each child. The organisation does not provide any specific programs or direct teachers in what they must teach.

Ability to delegate

The organisation is engaging the skills and expertise of the teachers and, because the teachers will be working with children and must meet relevant 'working with children' requirements, the teachers are not generally permitted to assign, subcontract or delegate any of their rights or obligations as a tutor to a third party without the organisations written consent. However this should not be construed as evidence of an employment relationship.

Commercial risks

The teacher is responsible for and indemnifies the organisation against liability for all loss, damage or injury caused or contributed to by them in the course of their work.

Provision of tools, equipment and payment of business expenses

Teachers are responsible for any expenses incurred in the provision of services as well as payment of GST in relation to the provision of services. Teachers must also prepare and provide all necessary training materials.

Contractual terms

An example of the standard form contracts required to be exercised between the organisation and the Contractor is provided below. Although there are slight variations between the contracts of each entity, the contractual arrangements are materially similar. Under the terms of the standard form agreement between the teachers and the entity:

•         Teachers are responsible for the payment of all group tax, PAYG, GST, superannuation and any other taxes, levies, deductions charges, duties, penalties or withholding taxes arising out of the provision of the tutoring services

•         Teachers agree to be responsible for and indemnify the organisation against liability for all loss, damage or injury to persons or property caused or contributed to by them in the course of performing the services. If the organisation incurs any expenses or pay any amount in respect of such loss, damage or injury, the organisation may deduct the amount form any monies owing to the teacher

The engagement is not intended to be exclusive, and teachers may accept any other engagement or employment by a third party during the term of the consultancy which will not hinder or interfere with the performance of the tutoring services.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Division 12-35

Reasons for decision

Question

Is there an obligation on the organisation to withhold from payments made to workers who are engaged to provide tutoring services to recovering students under section 12-35 of Schedule 1 to the TAA?

Summary

After considering the facts relating to the engagement of tutors with your organisation, as outlined in your application, against the facts considered by the courts in determining if engaged people may be employees or contractors it has been determined that you are not obliged to withhold from payments made to your tutors under section 12-35 of Schedule 1 to the TAA.

Detailed reasoning

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.

The relationship between an employer and employee is a contractual one. When a business engages a worker, generally it will either be a relationship of employment, often referred to as a 'contract of service', or a principal/independent contractor relationship that is referred to as a 'contract for services'.

The leading case outlining the principles governing the ordinary meaning of 'employee' is Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contacting Pty Ltd [2022] HCA 1 (Personnel Contracting). The majority of the High Court in Personnel Contracting confirmed that whether a worker is an employee of a putative employer is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

Draft Taxation Ruling TR 2022/D3 Income Tax: pay as you go withholding - who is an employee? (TR 2022/D3)provides the Commissioner's current interpretation of the ordinary meaning of 'employee' for the purposes of section 12-35 of Schedule 1 to the TAA.

Consistent with the High Court decisions, TR 2022/D3 reiterates the focus on contractual rights and obligations as being relevant in determining whether the worker is an employee of an engaging entity. The draft ruling provides that the central question in assessment is whether the worker is working in the business of the engaging entity, based on examining the 'totality of the relationship' from construction of the terms of contract.

As such, the totality of the relationship is derived from the rights and obligations created by the contract between the parties, construed at the time they entered into it. Where the parties have comprehensively committed the terms of their relationship to a written contract, and the contract has not been varied, challenged as a sham or subject to legal or equitable relief, then it is the legal rights and obligations in that contract alone that are relevant in this analysis.

Where a comprehensively written contract exists, the nature of the relationship between the parties is to be solely determined by the legal rights and obligations as expressed in the contract,

TR 2022/D3 outlines that a 'totality of the relationship' approach involving the familiar multifactorial indicia, as outlined in the now withdrawn Taxation Ruling 2005/16, remains relevant, but only for the purpose of assessing the contractual rights and obligations of the parties.

The tests to be applied in determining if a relationship is one of employment is as follows:

Control

An employer is usually able to control how, where and/or when its employee performs their work. The importance of control in this context lies not in its actual exercise, but rather in the contractual right of the employer to exercise such control.

As provided in Personnel Contracting, where the main operating activity of the business is the supply of labour or a service of some kind, often a critical element of the business is the need to retain control over that labour or the workers providing the service.

A term in a contract that purports to confer a right to control must be interpreted in the context of the broader contract and the services being provided. As held in ZG Operations Pty Ltd v Jamsek & Ords [2022] HCA 2 (ZG Operations), a contract may afford an employer a different kind of control, such as control over how long a casual worker can work, or the clause may allow 'reasonable direction' as distinguished from a true right to control a worker.

Application to the facts: Control

In this case, teachers engaged by the organisation exercise a high degree of control over the manner in which they provide the tutoring services. They exercise their discretion as to the method of providing the tutoring services to an appropriate standard, including the selection and use of appropriate learning strategies. They use their own skill and experience to prepare and provide all necessary teaching materials, and the organisation relies on their professional experience and qualifications to do so. They liaise directly with the relevant child's school and parents regarding the relevant child's progress and goals. Whilst teachers are expected to perform their duties at the relevant child's school and during school hours, they are otherwise free to determine the hours that they work.

The organisation does not provide any specific programs or direct teachers in what they must teach. The organisation has limited control over any of the engaged teachers. The engaged teachers are free to exercise their skills as a teacher within the boundaries set by the organisation.

Integration

A significant factor in establishing the nature of the contractual relationship at common law is to determine whether the Worker's services are an integral part of the Employer's business (under a contract of service as an employee) or providing services as an individual carrying on his or her own business (under a contract for services as an independent contractor). This is otherwise known as the 'business' or 'integration' test.

In a contract of service, a worker is employed as an integral part of the business and under a contract for services, although a worker may do work for a business, the work is simply an accessory to the business and not integral. (Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans 1952 1 TLR 101).

The 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 skill 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.

Activities or requirements of the Worker which may indicate his/her integration into the business include: - the hours spent working for the Principal during the term of the contract are equivalent to those of a full-time employee

•         the work is normally performed at the premises of the Principal

•         the work is performed using a substantial amount of the Principal's assets and equipment

•         inability to perform other work which gives rise to a conflict of interest

•         the individual's performance is monitored - the requirement to comply with the Principal's policies, guidelines or directions

•         the requirement to maintain dress standards, use uniforms or display signage

•         attending meetings on behalf of the Principal or representing the Principal's business

•         receiving training by the Principal.

Application to the facts: 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 Principles business, but the work is not integrated into the business rather is an accessory to it.

In this case the teachers are employed by the Principal to use their skills to tutor children that the Principal cannot do. This is a service provided by the Worker to students who are associated with the organisation.

Results

Where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services. The production of a given result is considered to be a mark of independent contractor status (World Book (Australia) Pty Ltd v. FC of T 92 ATC4327). In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the result for which the parties have bargained.

Conversely, under a contract of service, payment is not necessarily dependent on, and referable to, the completion of the specified services.

The meaning of 'production of a given result' as referred to in World Book (Australia) Pty Ltd v FC of T refers to the Workers freedom to employ their own means (such as third-party labour, plant and equipment) to achieve the contractually specified outcome (Paragraph 43 of Superannuation Guarantee Ruling SGR 2005/1 Superannuation Guarantee: who is an employee? (SGR 2005/1)). Results contracts describe traditional principal/independent contractor arrangements where a specific identifiable task is performed. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to the hours worked.

Having regard to the true essence of the contract, the manner in which payment is structured will not of itself exclude genuine result-based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times (Paragraph 45 of SGR 2005/1).

While the notion of payment for result is expected with a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in Hollis v Vabu considered that the payment to the bicycle couriers per delivery, rather than per time period engaged was a natural means to remunerate employees whose sole purpose is to perform deliveries.

Therefore, the contractual relationship as a whole must still be considered to determine the true character of the relationship between the parties.

Application to the facts: Results

A copy of the contract was provided with the application. In this case, engaged teachers are paid on an hourly basis once a month. Teachers will be paid provided they have performed the tutoring service at the appropriate standard, submitted a SLP and all their Tutor Reports for the relevant school term for each student and provided and appropriate tax invoice. If additional tutoring for the student is required beyond the minimum hours outlined in the contract because the tutoring services have not met the appropriate standard the teachers will not be paid further fees for the further tutoring, they perform to achieve the required standard.

Delegation

An unlimited power to delegate work is an important indication that the Worker is an independent contractor. Delegation is generally implied in a contract for services where the emphasis is on a result. However, delegation clauses are considered in the context of the contract as a whole to determine if they are consistent with the apparent essence of the contract or if they are merely self-serving statements.

Delegation is not simply the act of substituting one employee for another, shifting a task from one employee to another or the ability to swap shifts or request a fellow employee to perform some duties. It is the ability to subcontract or employ others to perform the work, or to assist the contractor in their business to perform the work contracted for.

The power to delegate or subcontract (in the sense of the capacity to engage others do the work) is a significant factor in deciding whether the 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.

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 an independent contractor. 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 workload. This is not delegation consistent with that exercised by an independent contractor (Refer SGR 2005/1, paragraphs 48-50).

A capacity to delegate work indicates the Worker is an independent contractor. If the contract does not expressly require the Worker to personally perform the services, an independent contractor has the capacity to delegate or subcontract all (or some) of the work to others. This is because the emphasis in the contract is on the production of a particular result. The contractor is therefore responsible for remunerating the replacement, Worker.

Application to the facts: Delegation

Teachers are able to engage subcontractors to carry out the tutoring sessions with the organisations written consent.

Risk

Where the Worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee.

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

The higher the proportion of the gross income of the Worker which is required to be expended in deriving that income, and the more substantial the assets which the Worker brings to the tasks, the more likely that the contract is for services, or that the contract is with an independent contractor. The issue of risk concerns the matter where the Worker bears little or no risk of the costs arising out of remedying a defect in carrying out the work (SGR 2005/1, paragraph 51).

Application to the facts: Risk

All teachers must agree to indemnify the organisation against liability for all loss, damage or injury to persons or property caused for contributed to by them in the course of performing the services. The organisation has the right to terminate the arrangement if it considers that a teacher's performance of the tutoring services is unsatisfactory or at the reasonable request of a school or parent/guardian (among other reasons).

Tools and equipment

A Worker who has been integrated as an employee into the business is more likely to be provided with the tools and equipment required for their work and be reimbursed for business expenses by the employer. This includes being given a reimbursement or allowance for the use of the Worker's own assets such as a car.

In comparison, 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 will seek separate payment for such expenses from the principal.

The question of scale with respect to the cost of tools and equipment is important. Where a Worker uses a substantial item or piece of equipment for which they are wholly responsible to conduct their work, the mechanical aspect of the contract outweighs the personal.

Equipment that is not specialised or used only for completing the contracted services, such as a mobile phone, are less likely to be considered significant.

Application to the facts: Tools and equipment

Teachers are responsible for any expenses incurred in the provision of the services as well as payments of GST in relation to the provision of services. Teachers must also prepare and provide all necessary teaching materials.

Conclusion

After comparing the facts of your case against the generally considered indicators of; control, organisation or integration, results, delegation, risk, and provision of tools and equipment, it is considered that your engaged teachers are generally not employees of the organisation, therefore there is no obligation to withhold from payments made to them under section 12-35 of Schedule 1 to the TAA.

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