Edited version of private ruling

Authorisation Number: 1011673932272

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Ruling

Subject: Employee V contractor

Question

Are the workers engaged by Company X to provide interpreting services considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) or section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992)?

Answer: No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Company X is a small company that operates a business providing services to the public at large.

As a supplement to its main business, the company will also provide other services to clients from time to time.

The other services comprise only about 7% of the overall business.

The company has four employees that provide services, as well as administrative tasks, and one employee who is responsible for management of the office.

All other workers are engaged by the company on a case by case following a request from a client.

If none of the company's ongoing employees are capable of providing the required service, then the company selects a contractor from a database of appropriately qualified persons.

There are number of factors which are significant in selecting a person for a particular job, including the persons track record and reputation.

The company offers the job to the most suitable contractor, however there is no obligation for the contractor to accept a particular job.

In the event that a job is not accepted by one contractor, it is simply offered to the next most suitable candidate.

On average, each contractor is engaged by the company to complete a job once every month.

When a job is accepted, the contractor will attend the designated job and provide services.

The company does not, in any way, supervise or dictate the provision of services and does not supply any tools or equipment required for the contractors to complete their work.

Contractors are usually paid a fixed set rate for the completion of tasks, although some contractors do set their own rates, which usually reflect increased demand for their particular services.

Contractors charge the company by way of invoice and approximately 98% of contractors engaged by the company have an ABN.

The company does not reimburse the contractors for any expenses incurred in relation to the assigned work.

Contractors widely advertise their services and they are not required to provide their services to the company exclusively, or even primarily.

Contractors have the right to delegation and there are no restrictions preventing the contractors from delegating assignments to suitably qualified sub-contractors.

The contractors do not use a business card of the company, wear a company uniform, or represent the company in any way.

The company rarely has any face to face interaction with the contractors and, in many cases, has never met the contractors who are engaged on a case by case basis.

Relevant legislative provisions

Taxation Administration Act 1953 Sch1-12-35 and

Superannuation Guarantee Act 1992 Section 12.

Reasons for decision

PAYG withholding

The legislation relating to pay as you go (PAYG) withholding is found in Schedule 1 to the TAA 1953.

Section 12-35 of Schedule 1 to the TAA requires an entity (the withholder) to withhold an amount from a payment of salary, wages, commissions or bonuses it makes to an individual as an employee.

Employee Vs Contractor

The employer-employee relationship is a contractual one often referred to as a 'contract of service' which can be contrasted with a principal/independent contractor relationship typically referred to as a 'contract for services'. That is, an independent contractor generally contracts to achieve a result, whereas an employee contracts to provide labour (to enable the employer to achieve a result).

The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.

A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16: Income Tax Pay As You Go withholding from Payments to Employees at paragraph 7 states:

'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 contract - a clause in a contract that purports to characterise the relationship between the parties as that of principal/independent contractor and not that of employer/employee must be considered with all the other terms of the contract. That is, the parties cannot deem the relationship between themselves to be something that it is not by simply giving it a different label.

Control test - the degree of control which a person who engages another person can exercise over that person is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. A common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that a contract may specify how the contracted services are to be performed does not necessarily imply an employment relationship.

Contract for results - where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for services. Other indicators of a contract for services include where the person is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome, the consideration is for a fixed sum on completion of the specified services which is the result, as opposed to an amount paid by reference to hours worked.

Whether work can be delegated - if a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result.

Risk - where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor also often carries their own insurance and indemnity policies. 

Provision of tools/payment of own 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. Further, the Tax Office considers that 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.

Other - other indicia 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.

Application to your circumstances

In your case, Company X engages workers to provide services following a request from a member of the public. The workers are selected from a database of appropriately qualified people on a case by case basis. Several factors are relevant when selecting an appropriate worker, including track record and reputation in the industry. Once the most suitable candidate has been selected, they are offered the job. However, a person is under no obligation to accept a particular job and, in the event that a job is not accepted by one person, it is simply offered to the next most suitable candidate.

Considering that facts of the arrangement, it is clear that the workers engaged by the company to provide services are contractors, rather than employees. Due to the nature of the work performed and the irregular basis on which workers are engaged, no contract exists between the company and the workers. Each job offer is treated on a case by case basis and, therefore, the determination of the workers as contractors is based on the application of the various other tests outlined in TR 2005/16.

With respect to the control test, you have advised that the company exercises no control over the provision of services. Workers are engaged on a contract for results basis and payment is made by way of an invoice supplied to the company by the worker upon completion of the set task. With regards to risk and delegation, workers are free to delegate work and engage any other person to assist in the completion of work, where required, without the company's knowledge or approval. The company does not provide any of the tools or equipment required for the contractors to carry out their work and contractors are not required to wear a company uniform or represent the company in any way. In fact, the company has never met or had any face to face interactions with most of the contractors that are engaged. The work of the contractors is infrequent and is dependent on the service required and the demand for work. As such, there is no such provision for annual leave, sick leave or long service leave.

All of these factors point conclusively to the fact that the persons engaged by the company are contractors and not employees.

As the contractors are not considered to be employees, there is no obligation to withhold tax in accordance with section 12-35 of Schedule 1 of the TAA 1953.

Extended definition of "employee" for superannuation purposes

For superannuation purposes the definition of an employee is expanded beyond its ordinary meaning.

Section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) states:

Subject to this section, in this Act, ``employee'' and ``employer'' have their ordinary meaning. However, for the purposes of this Act, subsections (2) to (11):

expand the meaning of those terms; and

make particular provision to avoid doubt as to the status of certain persons.

12(2) [Members of board of directors, etc]  

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate.

12(3) [Persons under contract]  

If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

Under this section, if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract for the purposes of the SGAA 1992.

However, in the case of Neale (Deputy Commissioner of Taxation) v Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 (Neale's Case), the High Court held that, in order for a contract to be a contract wholly or principally for the labour of a specific person, it is necessary that the contract require the person to whom the payment was made to perform the work personally and that if the contract was left open for the person to engage someone else to perform it, it was not a payment to which the relevant legislation applied.

12(4) [Members of Parliament]  

A member of the Parliament of the Commonwealth is an employee of the Commonwealth.

12(5) [Members of State Parliaments]  

A member of the Parliament of a State is an employee of the State.

12(6) [Members of ACT Legislative Assembly]  

A member of the Legislative Assembly for the Australian Capital Territory is an employee of the Australian Capital Territory. 

12(7)  

A member of the Legislative Assembly of the Northern Territory is an employee of the Northern Territory.

12(8)   

The following are employees for the purposes of this Act:

a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills is an employee of the person liable to make the payment;

a person who is paid to provide services in connection with an activity referred to in paragraph (a) is an employee of the person liable to make the payment;

a person who is paid to perform services in, or in connection with, the making of any film, tape or disc or of any television or radio broadcast is an employee of the person liable to make the payment.

12(9)   

A person who:

holds, or performs the duties of, an appointment, office or position under the Constitution or under a law of the Commonwealth, of a State or of a Territory; or

is otherwise in the service of the Commonwealth, of a State or of a Territory (including service as a member of the Defence Force or as a member of a police force);

is an employee of the Commonwealth, the State or the Territory, as the case requires. However, this rule does not apply to a person in the capacity of the holder of an office as a member of a local government council.

12(9A) [Members of local council]  

Subject to subsection (10), a person who holds office as a member of a local government council is not an employee of the council.

12(10) [Members of eligible local governing body]  

A person covered by paragraph 12-45(1)(e) in Schedule 1 to the TAA (about members of local governing bodies subject to PAYG withholding) is an employee of the body mentioned in that paragraph.

12(11) Work of domestic or private nature]  

A person who is paid to do work wholly or principally of a domestic or private nature for not more than 30 hours per week is not regarded as an employee in relation to that work.

Application to your circumstances

In your case, the workers you engage to provide services do not meet the expanded meaning of the term "employee" under paragraphs 12(1)(a) or 12(1)(b) of the SGAA 1992, nor do they meet the common law definition of an employee as previously stated. Although the workers are persons under contract, they do not satisfy condition subsection 12(3) of the SGAA 1992 as they have the right of delegation and are not required by the company to perform the work personally.

As the workers do not meet any of the criteria to be considered employees in accordance with the expanded definition, you are under no obligation to provide superannuation guarantee support for these workers.