Edited version of private ruling

Authorisation Number: 1011877586350

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Ruling

Subject: Assessable Income - Payments to Game Supervisors

Question 1

Should game supervisors who are paid for their services for running games be regarded as employees?

Answer

Yes

Question 2

Can game supervisors who are paid for their services for running games be regarded as contractors?

Answer

Yes

Question 3

Can game supervisors who are paid for their services for running games lodge a 'Statement by a Supplier' and treat the income as 'an activity done as a private recreational pursuit or hobby'?

Answer

Yes

This ruling applies for the following period

1 July 2011 to 30 June 2012

Relevant facts

They games are run by a non-profit organisation of a few hundred members.

They have under 10 games per week with a supervisor engaged to conduct the games.

The game supervisors are consulted during the games to settle disputes amongst players as well as to notify the players when it is time to rotate.

The games are always conducted at the Club's premises.

In order to qualify to be a game supervisor the rules and regulations are studied and an examination must be passed. The position of game supervisors is not elected and does not have a limited period of duration. If there is a vacancy the club can contact other clubs in an effort to fill the position. They would not ordinarily advertise to fill the position.

There are normally around X game supervisors in the club and each game supervisor is currently paid a fee dependant on the number of players in attendance.

The game supervisors agree to participate in a roster for supervising the games. The game supervisors inform the club of availability (eg absence on holidays) and a roster is drawn up. The game supervisors would normally supervise the games once or twice per week.

If for some reason the game supervisors cannot attend a rostered session they would contact the club in order for the club to appoint a substitute.

There is no equipment required to be supplied by the game supervisors. Any equipment required is supplied by the club. There is no prize money awarded from the games. The members pay $X to play but there are no prizes.

Some game supervisors have supplied an ABN to the club and others have supplied a 'Statement by a Supplier' indicating that the activity is undertaken as a private recreational pursuit or hobby.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.
Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Issue 1

Whether or not an individual is an employee, contractor of has another relationship to a payer is a question of fact not law and there are various elements to consider when making that determination.

Question 1

Summary

In most instances payments made to the game supervisors for conducting and directing games will be remuneration as a consequence of employment and the game supervisors will be regarded as employees. The term 'employee' is not defined in taxation legislation.

Detailed reasoning

Whether the true nature of an arrangement between a payer and payee is that of employer/employee, principal/independent contractor or another alternative 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: Income tax: Pay As You Go - withholding from payments to employees.

TR 2005/16 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.

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 occur. 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.

You have indicated that the club conducts approximately X sessions per week on a regular basis at the club's premises and game supervisors are engaged on a rostered system to conduct the sessions. This indicates that the game supervisors have little control over where and when the duties are carried out and the manner in which they are conducted.

Does the worker operate on their own account or in the business of the payer?

The second consideration in TR 2005/16 is the issue of whether the worker operates on their own account or as part of the business of the payer. This is sometimes viewed as a consideration of whether the workers would be viewed by a third party as carrying on their own enterprises as independent contractors or operators and whether they could be expected to generate goodwill in their own right.

In Hollis v. Vabu (2001) 207 CLR 21; 200 ATC 4508; (2001) 47 ATR 4559 the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittaker's 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 employer's business, and a person who carries on a trade or business of his own.

On the facts it would be unlikely that an independent third party would view the game supervisors as conducting or carrying on an enterprise in their own right in relation to the activities and tasks undertaken.

Results-based contract

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 an 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 agreed.

Contracts which require the performance of identical services on a repetitive or cyclical basis are more indicative of employer/employee contracts. That is, the same task is performed each time the game supervisors runs a session and the rate of pay only fluctuates depending upon the number of players in attendance.

The implication of this point is that the result is the completion of a contractually agreed action and a contractor would normally get paid on completion of a contractually obligated result irrespective of the time that it took to complete that task. With respect to the variation of payment receivable the work may (in isolation) be considered that of a contractor although the degree of repetition or cyclical nature of the activities is more indicative of that of an employee - such as a sales representative with a retainer and bonuses.

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.

The information provided indicates that the club engages the game supervisors to conduct the sessions on a rostered basis and if the game supervisor is unable to attend, the club is contacted in order for another game supervisor to be appointed. This system indicates that there is no provision for the game supervisors to engage (and pay) someone else to perform the services on their behalf.

Risk and rectification of work performed

The fifth consideration is the issue of risk. Whether the worker is contractually obliged to be liable for the cost - in terms of time or money - for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor. Commonly an independent contractor or entity would solely bare the risk and responsibility of liability for their work if it is not up to an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. This means that an independent contractor will often carry their own insurance and indemnity policies.

An employee on the other hand would bare no such responsibility and the liability for any defective work of the employee, either to a third party or otherwise, would fall on the employer in terms of the burden of cost or time for rectification.

In the duties performed by the game supervisors this criteria would have little application. The club would be responsible for public safety on the premises occupied for the games.

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 and pays their own business expenses. It has been held in a variety of cases that 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.

There are no tools or equipment required to be supplied by the game supervisors for the games. All necessary equipment is provided by the club.

Conclusion

When we examine the nature of the arrangement with consideration of each of the points provided in TR 2005/16 we advise that except in very limited circumstances, the game supervisors are acting as employees of the club as discussed in the detailed reasoning in response to question 2 (see below).

This means that where a game supervisor is engaged to conduct and direct games he or she is being engaged as an employee. A Tax File Number (TFN) Declaration (NAT 3092) would need to be signed by the game supervisor and then a copy of this document would need to be submitted to the ATO.

As an employment relationship has been established amounts may need to be withheld (having regard to the earnings from the club and personal circumstances as outlined in the Declaration) and remitted to the ATO under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) at the prescribed rates provided each year in our tax withholding tables.

Question 2

Summary

Game supervisors could be considered to be contractors if they are conducting an enterprise which encompasses the conduct of games and they are participating in the activity in furtherance of that enterprise. The issue of who is entitled to register for an ABN is addressed in the Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

Detailed reasoning

TR 2005/16 states at paragraph 9 that a person who holds an Australian Business Number (ABN) may, depending on the circumstances, still be an employee for the purposes of section 12-35 of Schedule 1 to the TAA.

Game supervisors who hold an ABN and are conducting an enterprise, may be doing so for activities other than conducting and directing games. Holding an ABN does not automatically endow all services performed with the status of 'contract' income. For the abovementioned reasons, it is very likely that the payments received for conducting games is done as an employee, and not carried out as an enterprise (or part thereof). The following example is adapted from an example included in the publication Volunteers and Tax - Nat 4612 (in that instance the difference between reimbursements and allowances is being demonstrated).

Example:

Robert is an electrical contractor by trade. On a rostered basis he is paid for mowing the lawns at a non-profit childcare centre which his children attend.

Robert also carries out the electrical maintenance at the same childcare centre.

For the purposes of mowing the lawn he is carrying out the service at the childcare premises using their equipment and performing the service without risk and rectification responsibility and would not be expected to provide his own insurance and indemnity policies. He is being paid as a casual employee and subject to withholding as an employee dependent upon the amount of payment received and the information provided in his TFN declaration.

The payment which he receives for carrying out electrical maintenance is part of his enterprise and if he did not present the childcare centre with an ABN he would be subject to 'No ABN withholding'.

Ultimately, in the common law context, each contract or arrangement entered into by an individual must be examined in order to determine whether, on balance, the individual is engaged as an employee or independent contractor. It is therefore possible but unlikely that the activities carried out by the game supervisors could be considered to be conducted in the furtherance of the enterprise for which they have registered an ABN.

Question 3

Summary

For club directors a 'Statement by a Supplier' may (generally, but not exclusively) be provided:

· where the supplier of services is not carrying on an enterprise within Australia, or

· where the supplier of services is conducting an enterprise which could encompass the services provided to the club but does not quote an ABN because the services are provided for a private recreational pursuit or hobby and not as a normal part of that enterprise.

Detailed reasoning

Where a person's game supervisor activities are conducted as a private recreational pursuit or hobby rather than for income-producing benefits those activities are not assessable income. However consideration must again be given to the circumstances surrounding the game supervisor and the activity in which they are engaged.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business…? addresses the question about whether someone is carrying on a business (or a hobby) and some of the criteria addressed are relevant to considering whether a game supervisors can be considered to have engaged in the role as a voluntary service to the non-profit club.

Issues such as:

· whether the activity has a commercial purpose

· whether there was an intention to derive income from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same and carried on in a similar manner to that of others considered to be employees

· the permanency of the activity

· the motive or intention behind attaining suitable qualifications in order to be able to conduct the activities

· whether the activity is better described as a hobby

Applying the above principles it may be possible in very limited circumstances for a game supervisor to be able to conscientiously claim that they are engaged in the activity as an act of goodwill and not for financial gain.

For example, if the game supervisor:

· is not motivated to derive revenue

· is motivated by personal pleasure

· there is limited repetition from the activity (that is they participate on an irregular basis)

· they do not rely on the payment for the service as a regular source of income

it may be possible that the activities are those of a volunteer and it is not necessary to have Pay as You Go Withholding deducted from payments.