Edited version of private ruling

Authorisation Number: 1011867336286

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: Income Tax: Employment Status

Question 1

Are the professional specialists and the community representatives, who are members of the Independent Hearing and Assessment Panel of council employees?

Answer

No

Question 2

Are the professional specialists and the community representatives, who are members of the Independent Hearing and Assessment Panel of council contractors?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The council established Independent Hearing and Assessment Panel (the panel), in accordance with subsection 355(c) of the Local Government Act 1993, which states the following:

A function of a council may … be exercised … partly or jointly by the council and another person or persons …

The panel is responsible for providing an independent forum, for objectors and applicants, on certain types of development applications.

Council then considers the panel's recommendations prior to final determination of the development application. These recommendations are not binding on council.

Purpose & Role

The purpose of the panel is to:

(a). provide the opportunity for objectors and applicants to present their cases to an independent body that has specialist knowledge regarding matters relevant to the evaluation of development applications.

(b). assess and make recommendations on major, controversial and nominated development applications and those with unresolved objections.

(c). make recommendations to council on planning policy issues.

(d). provide increased transparency and accountability for the development assessment process.

Representation on the panel

The panel comprises three independent specialists drawn from the professional disciplines of law, urban design, town planning, architecture, social planning or environment, together with a local community representative.

One of the independent specialists is the chairperson.

The independent specialists are rotated, with each member probably attending six/seven meetings per year.

All panel members shall be appointed for the one year trial period. Should council determine to continue with the panel members and alternative members shall be eligible to serve for consecutive terms up to two years with an option for a third year.

The council has several alternative appointees to cater for quorum requirements.

The community representatives are rotated on the panel on the basis that developments for consideration on a particular evening are not located within the same local government ward as the appointee.

If a nominated panel member is not available for a hearing an alternative will be selected by the Director of X Services. A reference to a member of the panel includes a reference to the member's appointed alternate.

If a vacancy occurs in the membership of the panel, the general manager may appoint a person to fill the vacant position and such person shall hold office for the remainder of the predecessor's term of appointment.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1, section 12-35.

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.

Reason for decision

Summary

The professional specialists and the community representative, who are members of the panel of the council are considered as contractors for income tax purposes.

Detailed reasoning

The term employee is not defined in the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997), therefore reference must be made to the common law meaning of the term.

Taxation Ruling TR 2005/16 (TR 2005/16) discusses who is an employee within the ordinary meaning of that expression.

Paragraph 17 states:

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).

The Ruling explains that a well established body of case law exists on the topic.

Paragraphs 20 and 21 of TR 2005/16 states:

20. In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties, whether express or implied, in light of the circumstances surrounding the making of the contract.

21. Contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole - that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of the relationship is one of employment the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor.

Where there is a written contract in place, the express and implied terms of the contract will provide evidence of the intention of the parties at the time of its formation. Conduct after formation of the contract is only relevant where it can be shown to amount to a modification of the original contract.

The key issues to be considered in determining whether an individual is an employee or independent contractor are considered below.

Control

The first issue for consideration is that of control. A common law employee is usually told by their employer what work needs to be done and how and when it is to be done. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but more whether they have the right to exercise it.

Although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment relationship. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements any control or direction must be expressed in terms of the contract only, so that outside the contractor is free to exercise their own discretion because they work for themselves.

In this case the facts indicate that the members of the panel independently carry out the site inspection and provide a report to the council The panel members do not have a control by the council when performing their site inspection. Therefore, it is considered the panel members are independent contractors.

Operating on own account

The second consideration offered in TR 2005/16 is the issue of whether the worker operates on their own account. As per paragraph 32 of TR 2005/16:

In Hollis v Vabu, the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittakers Building Supply Co (1963) 109 CLR 210;

the distinction between an employee and independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employers business, and a person who carries on a trade or business of his own.

TR 2005/16 provides that where the substance of a contract is to achieve a specified result, there is a strong indication that the contract is one for services.

On the other hand, an employee, under a contract of service is generally paid according to an hourly rate, such as an award rate.

The panel has to provide a report to the council after their inspection of a site. The panel meet each week at a specified time. One panel member may be called six to seven meetings per year.

This demonstrates that the panel operates on their own account.

Payment for result

The third consideration relevant is a focus on whether the substance of a contract for work is to achieve a specified result. If this is the case there is a strong but not conclusive indication that the contract is one for services, and not employment.

Under results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the result for which the parties have bargained.

Each specialist member of the panel will be entitled to receive remuneration for attending the meeting and transacting the business of the panel, as determined by the General Manager.

Currently, a payment of over $X00 per hour (inclusive of GST) will be made for each hour of the meeting (including site inspections) plus a further sum (inclusive of GST) per meeting as an allowance for travel. The Chairperson also receives a loading of over $Y00 per meeting (inclusive of GST) to cover the additional duties of that role (including preparation of the Minutes). The community representative will receive a payment of over $Z00 per meeting (inclusive of GST).

It is considered that the remuneration is paid to the panel member to completing a particular task, such as a review of a development application referred to the council independently assess the applications under section 79C of the Environmental Planning and Assessment Act 1979 (NSW); and make recommendations, with supporting reasons, for final determination by the council.

Delegation of work

The fourth consideration relevant is determining whether the work can be delegated or subcontracted. If the worker is contractually required to personally perform the work, this is an indication that the person is an employee whereas if an individual has unlimited power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. In the later circumstances a key point is that the contractor is the party responsible for remunerating the replacement worker.

In this case, the agreement does not give the member the right to pay another person to attend the panel meeting instead of him or her.

Commercial risk

The fifth consideration is the issue of risk. Where a worker bears little or no risk for 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 the work. This means that an independent contractor will often carry their own insurance and indemnity policies.

The facts states that the panel is advisory and the advice is not binding on council, no defects can occur in the panel member's activities.

Provision of tools and equipment and payment of business expenses

The sixth consideration of relevance is whether the worker provides their own tools and equipment. It has been held in a variety of cases that the provision of assets, equipment and tools by an individual is an indicator that the individual is an independent contractor.

There are situations where, having regard to the custom and practise of the work, or the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact alone will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this or any other indicator depends on the particular circumstances, the context and the nature of the contractual work.

The facts indicate that the council provides vehicles to perform the site inspections. The members do not provide any equipment tools of trade, plant or vehicles to perform the work.

This indicator is inconclusive in that the council provides the tools and equipment for the performance of the services indicates, an employer employee relationship. However, the nature of the work and the frequency of the panel meetings weighs towards independent contractors.

Integration or organisation test

The seventh consideration is in an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payers business but the work is not integrated into the business rather is an accessory to it.

In this case the panel comprises three independent specialists and a community representative. The specialist must not live in the area of the council.

It is considered that the panel have a high level of discretion and flexibility in performing the tasks specified by the council. The panel can provide service to outside the council also. It is considered the panel members do not work for the council and the task performed are not integral to the council as the facts indicate that the council is not bound by the panel's decision.

Leave entitlement and other benefits

Further, an employee is generally entitled to annual leave, long service leave, sick leave and other benefits, whereas an independent contractor is not.

In this case, the panel members attend the meeting and inspection whenever, they are called for it. Other than that they are not entitled for any leave or superannuation support. This is more indicative of the panel members being independent contractors.

Conclusion

Out of the seven indicators discussed above, five indicate that the panel members are independent contactors and the other two are inconclusive.

On balance, it is considered that the panel members are independent contactors for income tax purposes.