Edited version of private ruling

Authorisation Number: 1011751730207

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Subject: Employee v contractor

Question 1

Are services provided by a sole trader those of a contract for service? 

Answer: Yes.

Question 2

Can an entity make payments to a sole trader with an Australian Business Number (ABN) upon receipt of an invoice?

Answer: Yes

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You intend to use industry representatives to assess applications and make recommendation to a government department.

The industry representatives are used as they have the required expertise and experience to assess the applications.

You will hold meetings with the industry representatives at your premises to assess the applications.

The industry representatives are expected to read all materials and form an opinion on the project based upon the assessment criteria provided by you.

The industry representatives are paid a set fee for participating and reviewing the applications.

The industry representatives can negotiate the amount of fees to be charged before accepting to provide services to you.

The industry representatives set their own hours to review the applications.

The industry representatives are not remunerated if they fail to provide services as required by you.

The industry representatives are not entitled to paid leave and workers compensation.

The industry representatives are sole traders and have a registered ABN.

You intend to pay industry representatives upon receipt on a tax invoice.

Relevant provisions:

Income Tax Assessment Act 1997 Section 960-100.

Taxation Administration Act 1953 Section Sch1-12-35.

Taxation Administration Act 1953 Section Sch1-12-190.

Reason for decision

Employee v. independent contractor

Under section 12-35 Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) 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).

An 'entity' is defined under section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust and a superannuation fund.

Where section 12-35 Schedule 1 of TAA refers to an employee, the reference is to an employee at common law.

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

There is no one factor that determines whether a person is an employee or an independent contractor. A number of factors must be considered.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship).

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. The contract is a matter for the parties to determine and not the Commissioner of Taxation. The payer and the payee therefore decide whether the payee is an employee or a contractor.

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.

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.

The control test

The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, 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 fact, a high degree of direction and control is not uncommon in contracts for services. The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract otherwise the contractor is free to exercise his or her discretion (subject to any terms implied by law). This is because the contractor is working for himself or herself.

Under a contract of service, on the other hand, the employer has an implied right within the limits imposed by industrial relations laws, to direct and control the work of an employee. This is because the employee is working in the employer's business and the owner of a business has the right (within the confines of applicable law) to manage that business as the owner sees fit.

The High Court stated that what matters is lawful authority to command, so far as there is scope for it.

The more control that is held over the person performing the work, the more likely it is that the person will be an employee.

In this case, there is minimal control of the industry representatives as you provide guidelines and dates to attend meetings. However, the business does not instruct the industry representatives on how they form their opinions, when they read or review the applications and what recommendations they make in relation to the assessing of the applications.

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.

You have engaged the industry representatives and seek their expertise to assist with accessing applications. The industry representatives are engaged to review a set number of applications for a fee as agreed between you and the industry representatives.

Delegation test

The power to delegate was 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 review of the terms of engagement does not indicate the industry representatives can delegate work to others.

Conditions of engagement

Provision of paid leave entitlements, for example, sick leave, long service leave and superannuation, are persuasive indicators of an employment relationship.

It should be noted that there is no standard set of indicators applicable to an employee and a different set applicable to an independent contractor. Most conditions of engagement when viewed individually are equivocal as indicators of the true character of the relationship.

There are no provisions for paid leave or worker compensation entitlements under the terms of engagement.

Hours of work and mode of payment

An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work.

The industry representatives are not required to work a set number of hours to review the applications. The industry representatives can choose the times and dates that they wish to review the applications.

Business risk and expenses

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. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being independent. Typically, a worker who derives piece rate payment and sustains large outgoings would be so exposed.

The higher the proportion of the gross income which the worker is required to expend in deriving that income, and the more substantial the assets which the worker brings to his or her tasks, the more likely it is that the contract is for services.

The industry representatives are not paid if they fail to attend meetings or fail to review the applications as per your guidelines.

Place of performance

Workers under a contract of service will generally perform the tasks on the payer's premises using the payer's assets and equipment. A contractor, on the other hand, generally provides all their own assets and equipment.

The industry representatives may be required to attend your premises for scheduled meetings. However, all other work is performed at the industry representative's office or business premises. 

Integration

The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate that the worker is an integral part of the business.

From information supplied it is clear that the industry representatives are engaged for a short term contract to only assess a number of applications required. Although the industry representatives may be subject to various guidelines, you have engaged the industry representatives to provide specialised knowledge and independent advice to assess the applications. There appears to be no requirement that when the industry representatives are carrying out their duties they are representing you as would be the case in employment contracts.

Conclusion

When all the above points are considered as a whole, the industry representatives should be regarded as being engaged under a contract for service that is independent contractors rather than employees. Therefore, you can make payments to the industry representatives where they provide an invoice and quote their ABN.

Note: Where an entity does not provide an ABN, you need to ensure you meet any pay as you go withholding requirements under section 12-190 of the TAA 1953.

Further information on pay as you go withholding obligations and other taxation matters can be accessed through the ATO website at www.ato.gov.au.