Edited version of private advice

Authorisation Number: 1052157529174

Date of advice:

Ruling

Subject: PAYG withholding

Question

Are the identified sole traders (the Workers), engaged by the Principal considered employees under the common law for the purpose of pay as you go (PAYG) withholding under section 12-3 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Background information

The commercial advertising industry works predominantly on a freelance basis. That is, 90% of workers are independent subcontractors who go from shoot to shoot, set to set. Jobs are high volume, quick turnaround where there can be a one-day shoot or a five-day shoot and the cast and crew vary from job to job, subject to availability.

For any single job, the Principal employs a wide range of workers, from senior production managers to production assistants, photography assistants, digital operators, performing artists and models, stylists, camera operators, hair and make-up artists, videographers, set builders and so on.

For a sub-contractor, to work for the Principal as an independent sub-contractor, the sub-contractor must invoice the Principal with a valid ABN, they must also complete a sub-contractor statement confirming that they will carry out all the legal tax obligations, workers compensation insurance and superannuation requirements, as required by law.

The Principal identified the following Workers for the purpose of this PAYG withholding ruling request:

Worker 1 - Production manager/line producer on stills photographic and motion set

•                    The Principal contacts Worker 1 when they have a scheduled photo shoot. The Principal may require pre-production on shoot but more often than not the Principal just require Worker 1 on the shoot day to run the production. The Principal tells Worker 1 the date they require and Worker 1 lets the Principal know whether or not they are available for the shoot, based on their availability. If the Worker 1 is available, the Principal will place a hold on the date and then will let Worker 1 know once the shoot is confirmed. Prior to the shoot day, the Principal will provide Worker 1 with a call sheet that includes the location details and call time for the shoot. The call time, duration of shoot and location always varies. Worker 1 is free to refuse a job or not take a booking if they choose not to and has no obligation to work for the Principal.

•                    Worker 1 oversees the production of the job. When on set, Worker 1 manages the schedule and ensures that the shoot runs on time.

•                    Worker 1 acts as the liaison between the client and the photographer.

•                    Worker 1 does not subcontract or employ others to carry out their work.

•                    The location of the work is on the set of the location of the shoot.

•                    Worker 1 is registered for the Goods and Services Tax (GST) and GST applies to invoices Worker 1 issues to the Principal.

Worker 2 - Hair and Makeup Artist

•                    Worker 2 is engaged by the Principal to do the make-up and hair for the 'Talents' appearing in still or motion shots.

•                    Worker 2 provides their own hair and makeup kit to perform the work they are engaged for. This kit is a business expense to Worker 2 and is not invoiced to or reimbursed by the Principal.

•                    Worker 2 is not required to wear a uniform.

•                    Worker 2 is paid a daily rate based on the hair and makeup artists fees plus overtime.

•                    Worker 2 invoices under their ABN.

•                    The location of Worker's 2 work is on set at the location of the shoot for which the Worker had been engaged.

Worker 3 - Digital Operator

•                    Worker 3 is contacted by the Principal when the Principal has a scheduled photo shoot. The Principal advises the date of the shoot and Worker 3 advises whether or not they are available. If they are available, the Principal will place a hold on the date and then let the Worker 3 know once the shoot has been confirmed. Prior to the day of the shoot, the Principal will provide a call sheet that includes the location details and call time for the shoot. The call time, duration of the shoot and the location always varies.

•                    Worker 3 can refuse a job or booking and has no obligation to work for the Principal.

In addition to the above, the Workers are hired under a written contractual agreement (the Agreement).

Relevantly, the Agreement includes the following provisions:

•                     Services are to be provided on a job-by-job basis. The length and duration of each job will be determined at the time of booking.

•                     The Worker is to provide a price quote for a booking.

•                     The Worker will submit invoices to the Principal in respect of fees.

•                     The Worker must maintain all necessary insurance, including Public Liability Insurance.

•                     The Worker agree that they are acting as independent subcontractors.

•                     The Worker is responsible for all job related expenses in connection with the provision of services.

•                     The Worker will provide all equipment and materials necessary to perform their services.

•                     The Worker indemnifies the Principal from commercial loss resulting of any injury suffered by the Worker or costs associated with rectifying faulty work.

•                     The Workers can sub-contract any services to a third party with the prior written consent of the Principal.

Each of the Workers holds an ABN and each advertises their services commercially. They are free to work for multiple clients, not just the Principal.

The Workers can decline a booking if they wish.

The Principal provides reimbursement for travel if the location of work is more than 20 kms from CBD.

Relevant legislative provisions

Taxation Administration Act 1957 section 12-35 of Schedule 1

Reasons for decision

Summary

Based on the provided information, the Principal does not havePAYG withholding obligations for these Workers. The working arrangement between the Principal and the listed Workers is a contractual agreement principally for the skill and expertise provided by the Workers. Therefore, the relationship between the Principal and the Workers is that of a Principal and independent contractors.

Detailed reasoning

Under section 12-35 of Schedule 1 to the TAA, an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee. The term 'employee' is not defined in the TAA, and therefore takes it ordinary common law meaning. If payment is made to an individual but not in the capacity of an employee, withholding is not required under section 12-35 of the TAA.

The term 'employee' is not defined in income tax legislation. Therefore, it has its ordinary meaning. Guidance is provided to assist in determining whether an arrangement constitutes an employment arrangement in draft Taxation Ruling TR 2022/D3 Income Tax: Pay As You Go Withholding- who is an employee? (TR 2022/D3).

To ascertain whether the three Workers engaged in the above listed positions would be employees under common law, we must analyse their roles in connection with their signed independent contractor agreements alongside the common law criteria for determining whether a worker is an employee or a contractor.

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.

Each worker is a sole trader operating an independent business. On the day of a scheduled booking the Principal provides each worker with a call sheet detailing the location and call time for the shoot. The Workers were not directed how to do their jobs. The Workers could work with other clients if required and were also free to refuse a job or not take a booking if they chose to, indicating a high degree of independence in the relationship between the Principal and the Workers.

The facts provided indicate that the Workers had a high degree of control in the way they performed their work, supporting the Workers were independent contractors.

Integration of the workers

Workers supplying their own skillset is the core notion of whether the Workers are working within the business or are doing work for the business as an accessory to the business and not integral to it (Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans 1952 1 TLR 101).

In this instance, all of the Workers are sole traders that commercially advertise their businesses and skills and work for other clients than the Principal. The Workers are required to pay for and provide their own equipment and materials and are responsible for all job-related expenses. The Workers are able to accept or decline work at will.

Therefore, we consider that the Workers are not integrated to the Principal's business in the same way an employee would be and that the Workers are working as independent contractors.

Result

The signed Agreements show that the Workers were paid by the Principal agreed fee upon the completion of agreed services. The number of hours to be worked was specified at the time the Worker was booked by the Principal to perform the agreed services.

Upon the completion of the agreed services, the Workers invoiced the Principal for these services.

Conversely, the Workers are paid a daily rate for the duration of their engagement. A contractor typically does not receive payment from a principal until they have completed the work for which they were engaged. Based on the facts provided, it is considered that the Workers are, therefore, paid for their labour and not to achieve a result.

Consequently, the facts and evidence indicate that the Workers are paid for their labour and not to achieve a result, supporting an employee relationship.

Delegation/ The right to subcontract

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.

A substitution is not considered a delegation. For example, if an employee asks a colleague to take on 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.

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.

Clause of the signed Agreements provides that the Workers were able to sub-contract any service to a third party with the prior written consent of the Principal.

Accordingly, based on the above, we consider that the delegation test is indicative the Workers are working as independent contractors and not as employees of the Principal.

The terms of engagement

The Workers were contracted within the Principal's business as independent businesses, in their own right, trading under the Worker's trading names, using their own ABN.

The Workers carried out their work on a job-by-job basis and worker the agreed days or hours specified in the Agreement at the time of the booking. The Workers were free to work with other clients, indicating a high degree of independence in the relationship between the Principal and the Worker.

The signed Agreements do not provide for employees' benefits prescribed under an award, such as annual, sick or long service leave. These Workers worked under their ABN and business names and it was expected that the Workers would have their own arrangement covering these benefits.

Accordingly, the terms of engagement are indicative that the Workers are working as independent contractors and not as employees of the Principal.

Risk

Employers are generally liable for costs arising out of injury or defects in carrying out the agreed work by their employees, whereas a principal will not be liable for costs arising out of injury or defects 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 themselves.

Clause of the Agreements states that the Workers must indemnify and keep the Principal 'indemnified against any claim whatsoever against the Principal. It indicates that the Workers carry complete risk of costs arising out of injury or defect in carrying out their work under their own business arrangements. This is why the Workers are required to hold their own public liability, professional indemnity and workers compensation insurance policies. This clause limits the Principal's exposure to a commercial loss resulting of any injury the Worker may have sustained, or for any liability associated with a cost of rectifying faulty work.

Accordingly, based on the facts and evidence relevant to the risk test, it is considered that the working relationship between the Workers and Principal resembles that of an independent contractor.

After the evaluation of the above common law tests, we consider that the working arrangements between the Principal and the Workers were contractual arrangements principally for the skill and expertise provided by the Workers.

Consequently, the Workers are considered independent contractors

Conclusion

In conclusion we consider that the working arrangements between the Principal and the listed Workers were contractual agreements principally for the skill and expertise provided by the Workers. Consequently, the Workers are not considered common law employees of the Principal for the purposes of section 12-35 of Schedule 1 to the TAA.

Based on these findings, the Principal has no PAYG withholding obligations in respect of these Workers.

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