Edited version of private ruling

Ruling

Subject: Entrepreneurs tax offset

Question 1

Are you entitled to the entrepreneurs tax offset under Subdivision 61-J of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

1 July 2006 to 30 June 2007

1 July 2007 to 30 June 2008

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You are a tradesperson's assistant, not an apprentice.

You are paid superannuation and are covered for workers compensation. You are paid weekly or fortnightly based on an hourly rate. You are required to complete the work yourself and can not send someone else to do it.

You are in receipt of personal services income, but PAYG is not taken out of your payments. You do not receive any leave entitlements, overtime rates or sickness benefits.

You have an ABN.

You are considered an employee for super guarantee purposes.

You have four years of substantial tax bills to pay and the entrepreneurs' tax offset would be very beneficial to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 61-J and

Income Tax Assessment Act 1997 Subsection 995-1(1).

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

Summary

You are not entitled to the entrepreneurs' tax offset as it is considered that you were not carrying on a business as an independent contractor during the period 1 July 2006 to 30 June2010.

Detailed reasoning

The entrepreneurs tax offset under Subdivision 61-J of the ITAA 1997 provides a tax offset on your income tax liability related to the business income of a small business entity with aggregated turnover of less than $75,000. In order to be eligible for the entrepreneurs tax offset you must be in receipt of business income in that year.

The term 'business' is defined in subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include an occupation as an employee.

In deciding whether a business is being carried on, regard should be had to the following indicators outlined in Taxation Ruling TR 97/11 which deals with whether a taxpayer is carrying on a primary production business:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business or to commence in the future

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Every case must be decided on its own particular facts. In essence, whether a business is being carried on will depend upon whether the indicators, as a whole, provide the activities with a commercial flavour: Ferguson v. Federal Commissioner of Taxation (1979) 37 FLR 310; 79 ATC 4261; (1979) 9 ATR 873 (Ferguson's case).

In your case, it may also be relevant to distinguish your relationship with your payer as a contract for service rather than a contract of service.

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

Whether the true nature of an arrangement between a payer and payee is that of employer/employee or principal/independent contractor is a determination which must be made by reference to the various indicators developed by the Courts. These indicators have been collated in Taxation Ruling TR 2005/16. TR 2005/16 item 7 provides: 

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

The ATO website (www.ato.gov.au) has various tools to assist in determining a taxpayers status as either an employee or a contractor. The ABN entitlement decision tool and the building and construction industry - employee/contractor decision tool both highlight the following:

Apprentices, trades assistants and labourers are required to work under the direction, control and supervision of their employer to learn their trade. By their very nature, they are considered employees for Commonwealth taxation and superannuation purposes.

In your case you are a trades assistant and get paid based on an hourly rate. You are paid superannuation and are covered for workers compensation. While you do have an ABN, Taxation Ruling TR 2005/16 notes at paragraph 56:

The fact that an individual has an ABN does not prevent that individual from also being engaged as an employee in another role or position. Someone who carries on a business or trade in their own right other than as an employee might also at certain times perform work for another as an employee.

Conclusion

Having an ABN does not preclude you from being an employee. Your occupation as a trades assistant and other factors indicate that in this position you are not carrying on business as an independent contractor.

You are therefore not entitled to claim the entrepreneurs tax offset.