Edited version of private ruling

Authorisation Number: 1011721688105

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Ruling

Subject: Pay As You Go (PAYG) withholding - overseas distributors

Question 1

Is the Company required by section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to withhold tax from the commission it pays to its overseas distributors?

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

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Company is a foreign controlled company incorporated in Australia. The Company carries on a business of selling therapeutic products.

The Company engages distributors to sell its products through the internet. The distributors may be individuals or corporations. The Company currently has distributors working in various countries.

The overseas distributors are required to comply with the Company's rules and regulations. The rules and regulations require the distributors to always honestly and truthfully represent the quality, value and performance of the Company's products to potential customers and to reflect the Company's integrity through words, actions and conduct. The rules and regulations do not contain detailed instructions as to the manner in which the distributors are to perform their work.

The Company does not control where or when the overseas distributors work.

The Company pays the overseas distributors commission based on a percentage of the volume of products they purchase each month.

The Company does not require the overseas distributors to personally perform their work.

The overseas distributors are responsible for any losses incurred by their customers due to negligence in performing their work.

The overseas distributors are required to provide their own place of work.

The overseas distributors are required to provide their own equipment and other items they need to perform their work.

The overseas distributors are required to purchase the products they intend to sell.

The overseas distributors are required to pay the expenses they incur in performing their work. The distributors are not reimbursed by the Company for these expenses. The distributors do not receive an allowance from the Company to cover these expenses.

The Company does not provide the overseas distributors with benefits such as annual, sick and long service leave or superannuation.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-35.

Reasons for decision

Summary

The Company is not required by section 12-35 of Schedule 1 to the TAA to withhold tax from the commission it pays to its overseas distributors.

Detailed reasoning

Division 12 of Schedule 1 to the TAA relates to the payments from which tax must be withheld.

The only provision in Division 12 that may require the Company to withhold tax from the commission it pays to its overseas distributors is section 12-35.

Section 12-35 provides that an entity must withhold tax from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

A company is an entity for the purposes of Schedule 1 to the TAA. Refer to section 3AA of the TAA and sections 995-1 and 960-100 of the Income Tax Assessment Act 1997.

Paragraph 23 of Superannuation Guarantee Ruling SGR 2009/2 provides that a commission is a payment made on the basis of the volume of sales achieved or other similar criteria.

Taxation Ruling TR 2005/16 provides guidelines for determining whether an individual is engaged as an employee or an independent contractor for the purposes of section 12-35 of Schedule 1 to the TAA. It provides as follows:

· It is necessary to consider the totality of the relationship between the parties to determine whether on balance an individual is engaged as an employee or a contractor. All the circumstances surrounding the formation of the contract and all the terms and conditions of the contract are relevant.

· The following factors indicate that an individual is engaged as an employee:

o The individual obtains the work as a result of a job vacancy advertisement or through a placement agency.

o The payer has the right to exercise a high degree of control over the individual. The payer is able to tell the individual not only what work is to be done but also how and where the work is to be done.

o The individual operates within the payer's business.

o The individual is paid on the basis of the time they work.

o The individual does not have the power to delegate or subcontract the work. The individual is required to personally perform the work.

o The individual is responsible for meeting costs arising out of defects in the work or injury sustained in performing the work.

o The individual is provided with a place of work and equipment etc.

o The individual is not required to meet the expenses they incur in performing the work. They are reimbursed or paid an allowance for the expenses.

o The individual is provided with benefits such as annual, sick and long service leave etc.

· The following factors indicate that an individual is engaged as a contractor:

o The individual obtains the work as a result of advertising their services to the public in the ordinary course of carrying on a business or as a result of a successful tender application.

o The payer does not have the right to exercise a high degree of control over the individual.

o The individual operates in their own business.

o The individual is paid on the basis of the work they perform.

o The individual has the power to delegate or subcontract the work.

o The individual is responsible for meeting costs arising out of defects in the work or injury sustained in performing the work.

o The individual is not provided with a place of work or equipment etc.

o The individual is required to meet the expenses they incur in performing the work.

o The individual is not provided with benefits such as annual, sick and long service leave etc.

· It is necessary to weigh up the factors to determine whether on balance the individual is engaged as an employee or a contractor. The weight to be given to each factor varies depending upon the circumstances of the individual's case.

Application to your circumstances

The Company is a company and hence is an entity for the purposes of section 12-35 of Schedule 1 to the TAA.

The amount of commission the overseas distributors are paid is based on the volume of products they purchase. The volume of products the distributors purchase is determined by the volume of products they have sold and / or intend to sell. Hence, the commission constitutes commission for the purposes of section 12-35 of Schedule 1 to the TAA.

The overseas distributors are individuals or corporations.

The following factors indicate that the overseas distributors that are individuals are engaged as contractors:

· The rules and regulations that apply to the distributors indicate that the Company is not able to tell them how, where or when they are required to perform their work. Hence, the Company does not have the right to exercise a high degree of control over the distributors.

· The distributors have a high degree of independence in relation to the performance of their work. Hence, the distributors operate in their own business.

· The amount of commission the distributors are paid is based on the volume of products they purchase. The volume of products the distributors purchase is determined by the volume of products they have sold and / or intend to sell. Hence, the distributors are paid on the basis of the work they perform.

· The distributors are not required to personally perform their work. Hence, the distributors have the power to delegate or subcontract their work.

· The distributors are responsible for any losses incurred by their customers due to negligence in performing their work.

· The distributors are required to provide their own place of work as well as the equipment and other items they need to perform their work.

· The distributors are required to purchase the products they intend to sell and to pay the expenses they incur in performing their work. The distributors are not reimbursed by the Company for these expenses. The distributors do not receive an allowance from the Company to cover these expenses.

· The distributors are not provided with benefits such as annual, sick and long service leave or superannuation.

The fact that the distributors obtain their work by completing an application form is of no relevance in determining whether they are engaged as employees or contractors.

Hence, it is considered that the overseas distributors are engaged as contractors rather than employees.

Therefore, the Company is not required by section 12-35 of Schedule 1 to the TAA to withhold tax from the commission it pays to its overseas distributors.