Edited version of private ruling

Authorisation Number: 1011753847214

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Employee v contractor and subleasing arrangement

Question 1

Does the arrangement you have with the operators of your business constitute an employee/employer relationship?

Answer: No.

Question 2

Does the arrangement you have with the operators of your business constitute a subleasing arrangement between two separate parties, the sublessee being in their own, independent business?

Answer: Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are the owner of a business.

You applied for a private ruling regarding the arrangement whereby separate operators trade alongside one another within your business premises.

Under the arrangement you charge and collect a portion of each operator's revenue, a flat monthly fee, or a combination of both (depending on what is negotiated up-front) in exchange for the use of space and non-removable equipment.

The operator becomes a lessee (or sublessee if there is an original lease in place) and is considered independent of any other business entity within that or any other premises they may choose to operate from.

In your private ruling application you provided specific information about how the individual operators functioned within the scope of your business.

Regarding the supply of tools and equipment and the control of work practices, the operator usually:

· Provides their own cash register to collect monies direct from customers;

· Provides their own work-related tools and supplies;

· Provides their own professional products;

· Books all of their own appointments, being free to accept and refuse work as he or she sees fit;

· May contract others to assist in their business;

· May operate their own business from more than one premises including their home;

· Sets their own hours;

· Fully controls the quality of their work and how it is performed;

· Has their own set of keys to the building;

· Comes and goes as they see fit.

Further to this, the operator collects money from their customers direct and pays a periodic rental to the landlord on the space rented.

You likened your circumstances to those presented in a previous ruling based on the following additional facts:

Each of the operators will:

· trade as either a sole trader, partnership, company or trust;

· be registered with an Australian business number (ABN) and Goods and services tax (GST) if required;

· complete and lodge Business activity statements (BAS) if required;

· be responsible for their own superannuation contributions;

· make claims for deductions for business expenses;

· freely advertise, market and manage their own business within more than one premises as required;

· pay all income, fringe benefits, and any other tax commitments payable by the business and themselves;

· make all Pay as you go (PAYG) instalments (if applicable);

· comply with all regulations set by the Australian securities and investment commission (ASIC) if applicable;

· comply with all applicable local, state and federal government licenses, being (and not limited to):

- registration for business names, companies and trade marks;

- registration requirements for their specific industry;

- all health and safety guidelines;

- all other federal, state or local regulatory bodies in relation to their business activities or certification requirements;

- all government (landlord) insurance requirements and regulations, such as public liability, workers compensation, etc.

In your private ruling application, you asked the Commissioner to determine whether the operators or (sub)lessees of your premises were employees or independent contractors and whether the scheme in question constituted a (sub)leasing arrangement.

Relevant legislative provisions

Taxation Administration Act 1953 Sch1-12-35.

Reasons for decision

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:

1. 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.

2. 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.

3. 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.

4.  Whether work can be delegated - if a person is contractually required tpersonally 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.

5.  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. 

6. 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.

7. 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 you have not provided, nor referred to, any written contracts which outline the terms and conditions of your arrangement with the individual operators who work from your business premises. As such, the first test can not be considered and the determination of these operators as either employees or contractors will be based on the application of the remaining tests outlined in TR 2005/16.

The first of these tests is the control test. In your case, you have advised that the operators are able to set their own working hours, book and choose their own appointments and can come and go from the rented area at their leisure as they have their own key. They have full control of the quality of their work and how it is conducted, and they are free to advertise or market their work in any way they choose. They are also able to choose to conduct their business in any other premises without restriction. This demonstrates that the operators have a high degree of control and discretion over when they work, where they do it and how it is conducted. These entitlements are indicative of their status as independent contractors rather than employees.

With respect to the contract for results test, the operators receive payment direct from their clients based on services performed and are not paid by you directly. They account for their income and expenses independently of the property owner or the tenant and are solely responsible for meeting their own taxation and other governmental obligations and regulations. The operators have their own cash registers, draws and computers to collect money from their customers. They also provide their own supplies and products used in the business. The operators pay a periodic payment as rental to the landlord. No payment is made from the sublease holder to the sublessees. Thus we can say that the operators are not actually working in the business of the lessor. The operators are engaged in their own business and pay a periodic rental to the lessor. They are not considered to be employees under this test.

Regarding the delegation and risks tests, you have advised that the operators have the right to employ third party labour and means to carry out their work and that they are personally responsible for remedying any defects in their work. They are also completely responsible for their own insurance requirements, such as public liability, and to be properly registered with any government agency as required. As such the operators hold the commercial risk of their business venture exclusively similar to a sole trader carrying on their own business.

One the matter of tools and equipment, the portion of the premises that is subleased to the operators comes with only the non-removable equipment. The operators must provide their own cash register, cash draw or computer to account for their cash flow and income, supplies, utensils and all other professional products. This means that the operators supply a large portion of the assets required to conduct their business other than those that are attached to the portion of the property they are subleasing. This is similar to a sole trader carrying on their own business.

On examination of the above factors in the context of the whole arrangement it is clear that the individual operators are independent businesses who happen to be subleasing a portion of a property to conduct their business. The contract between the premises owner/tenant to the operators is exclusively for the subleasing of a portion of a business premises and does not provide any other entitlements. The operators use their own ABN and are subject to their own taxation obligations without restriction. The fact that they do not actually own the premises they work from does not alter the conclusion that these individual operators are independent business operators and not employees of the lease-holder.