Edited version of private ruling

Authorisation Number: 1011713734841

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Ruling

Subject: Pay As You Go Withholding

Question 1

Is the government body required to withhold tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from payments it makes to a member of a panel?

Answer

No. The government body is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from payments it makes to a member of the panel.

Question 2

Is the government body required to withhold tax under section 12-45 of Schedule 1 to the TAA from payments it makes to a member of the panel?

Answer

No. The government body is not required to withhold tax under section 12-45 of Schedule 1 to the TAA from payments it makes to a member of the panel.

This ruling applies for the following period

1 July 2010 to 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The Applicant is a government body which has established a disciplinary panel to adjudicate on alleged contraventions of certain rules.

The panel is a peer review independent body, not established by statute or by regulation.

The panel members are appointed by the government body. In terms of the basis of selection, individuals with the required expertise are invited to express their interest in becoming a panel member.

Membership on the panel is not the main occupation for the individuals. No staff members of the government body are appointed to the panel.

The panel members exercise powers delegated to them by members of the government body under a Commonwealth Act.

The Contract for the Provision of Services by a panel member is made between the government body and the individual member.

The panel members cannot delegate his or her tasks to another person.

A panel member is paid an annual fee, a daily sitting fee, travel and expenses entitlements. Ad hoc payments are made to panel members at the completion of work attended to on a monthly basis, as invoiced.

A panel member is not provided with any leave entitlements.

Panel members do not meet on a regular basis. The panel members provide their services on an ad hoc basis.

Panel members conduct proceedings from the offices of the government body but are also required to carry out the panel work at locations other than at the offices of the government body in order to properly carry out their functions and obligations.

Panel members use the assets of government body when they attend the offices of the government body on the panel business. Otherwise they are required to use other equipment or assets, including their own, to perform the panel work.

The government body does not play any role in the consideration of a particular matter apart from making an appropriate delegation to a panel member and providing legal and administrative support to the panel member.

The government body does not specify the number of days or the length of time for a panel to determine a matter.

The decisions of the sitting panel are the decisions of the government body and notices issued are done so in the name of the panel.

The government body bears the risk and responsibility of an incorrect determination of the panel.

The scheme that is the subject of this Private Ruling also incorporates information from the documents provided with the application for the Private Ruling and in response to a request for additional information.

Relevant legislative provisions

Taxation Administration Act 1953

Section Sch1-12-35

Section Sch1-12-45

Paragraph Sch1-12-45(1)(b)

Paragraph Sch1-12-45(1)(d)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Detailed reasoning

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) 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 entity or another entity).

The term 'employee' is not defined in the TAA and therefore takes its ordinary meaning.

Who is an 'employee' within the ordinary meaning of that expression?

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service.

Such a relationship is typically contrasted with the independent contractor/principal relationship that, at law, is referred to as a contract for service. 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 his or her own account) while an employee works in the service of the employer that is in the employer's business.

Whether a payee is considered to be engaged as an employee or as an independent contractor for taxation purposes is a question of fact that is looked at on a case by case basis. 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.

Factors in deciding the relationship

The first consideration must be the terms of the contract. At all times, the underlying consideration is whether the worker is working:

· in the service of another, as an employee, or

· on their own behalf, as an independent contractor.

Taxation Ruling TR 2005/16 provides guidance to the types of factors to be considered in each case. The features discussed below, have traditionally been regarded by the courts as indicators to assist in determining the true nature of the contract.

Control test

Paragraph 26 of TR 2005/16 explains:

The classic '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. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it.

However, while control is important, it is not the sole indicator of whether or not a relationship is one of employment. The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship.

In the present case, the panel has been established as an independent body.

The government body does not play any role in the determination of the particular matter apart from making the appropriate delegation to a panel member and providing legal and administrative support to the panel member.

The government body does not specify the number of days or the length of time for a panel member determine a particular matter.

Results Test

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 (but may be) dependent on the completion of specified services.

The panel members are contracted to make decisions on the course of action to be taken where a breach of certain rules occur. The panel members are paid an annual fee and a payment of a daily sitting fee which is paid on an ad hoc basis at the completion of work attended to on a monthly basis, as invoiced.

Delegation Test

The power to delegate is considered to be an important factor in deciding whether a person is an employee or an independent contractor. An unlimited power to delegate work is an important indication that the service provider is an independent contractor.

A panel member cannot delegate his or her tasks to another person.

Risk Test

Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he or she is 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 often carries their own insurance and indemnity policies.

In the present case, the government body bears the risk and responsibility of an incorrect determination of the panel.

Other indicators

In addition to the above, other indicators of the nature of the contractual relationship have been variously stated. Those 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 and the provision of other benefits prescribed under an award for employees.

The government body does not have the exclusive services of a panel member. A panel member provides his or her services on an ad hoc basis.

Panel member are not provided with any leave entitlements. They are, however, provided with travel and expenses entitlements.

Panel members, when not attending the offices of the government body on panel business, are required to use their own equipment or assets to carry out their functions and obligations as a panel member.

Conclusion

Having regard to the above factors and the circumstances of the present case, it is considered that, on balance, the panel members are not employees of the government body.

Therefore, the government body is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from payments it makes to a panel member.

Question 2

Detailed reasoning

Section 12-45 of Schedule 1 to the TAA imposes an obligation on the paying entity to withhold an amount from salary, wages, commission, bonuses or allowances it pays to individuals in certain capacities. The two instances which may have relevance to the present case are payments made to:

(b) a person who holds, or performs the duties of, an appointment, office or position under the Constitution or an Australian law; or

(d) a person who is otherwise in the service of the Commonwealth, a State or a Territory.

Taxation Ruling TR 2002/21 provides guidance on the application of paragraphs 12-45(1)(b) and (d) of Schedule 1 to the TAA.

Appointment, office or position under the Constitution or an Australian law (paragraph 12-45(1)(b))

Paragraph 14 of TR 2002/21 states that:

An individual is considered to be appointed or engaged under an Act where you can identify either:

· the particular office, position or appointment; or

· the constitution of the relevant body (such as a panel, board committee or tribunal) to which the individual has been appointed,

in the relevant legislation or statutory instrument.

Paragraph 15 of TR 2002/21 goes on to provide that the office, position or appointment must exist regardless of the individual who occupies the office and the office must have identifiable duties, functions, responsibilities or powers which attach to the office itself, rather than the individual who occupies the office.

Paragraph 99 of TR 2002/21 provides guidance in relation to ad hoc committees. It states that:

Where a statutory instrument provides for a body, for example, a government advisory committee, to advise the Minister on a specific matter, but is silent on the constitution of the committee such that the number of positions on the committee may vary from time to time, and appointments are to be on an ad hoc basis, the individual members of the committee are not the holders of an office, position or appointment under an Act. The constitution of the advisory committee is not revealed in the Act. The Act does not contain any specific duties or functions similar to those of a public office holder that the advisory committee can exercise. Its functions are merely advisory to assist the Minister in his or her duties as a public office holder. Payments of salary, wages, commissions, bonuses or allowances to members of such committees would not be within paragraph 12-45(1)(b) of Schedule 1 to the TAA.

In the present case, the panel is not established by statute. Panel members are not appointed to positions established or created under the Constitution or a statutory instrument. The duties and functions of a panel member are not covered by a statute but rather, are covered by a contract between the government body and the individual panel member. As such, these duties are considered to be attached to the individual panel member. Additionally, panel members perform their services for the government body on an ad hoc basis.

Accordingly, it is considered that panel members are not office holders for the purpose of paragraph 12-45(1)(b) of Schedule 1 to the TAA.

Persons who are otherwise in the service of the Commonwealth, a State or a Territory (paragraph 12-45(1)(d))

TR 2002/21 states that paragraph 12-45(1)(d) in Schedule 1 to the TAA is confined to common law office holders.

Paragraph 19 of TR 2002/21 states that:

A common law office holder would come within paragraph 12-45(1)(d) in Schedule 1 to the TAA where the office has the characteristics mentioned in paragraph 15 of this Ruling and is not an office under the Constitution or an Australian law. That is, there needs to be an existence independent of the office, and the duties or functions should be attached to the office rather than to the individual. The relationship created with the office holder should be with the Crown itself and not with the person who brought the office into existence by the exercise of a general law or a statutory power.

In the present case, it is not considered that the conditions mentioned in paragraph 15 of TR 2002/21 are satisfied.

Conclusion

Accordingly, payments made to a panel member are considered to fall outside the scope of section 12-45 of Schedule 1 to the TAA.