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Ruling

Subject: Employee status of General Practitioners for PAYG Withholding and Superannuation Guarantee purposes

Issue 1

Question 1

Whether the General Practitioners (GPs) of X Clinic Pty Ltd (the Clinic) are employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

Issue 2

Question 1

Whether the GPs of the Clinic are employees for the purposes of section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

No.

This ruling applies for the following periods:

1 July 2010 to 30 June 2012

The scheme commences on:

1 February 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The GPs attached with the Clinic are sole practitioners. They have their own Australian Business Number (ABN) and are registered for Goods and Services Tax (GST).

The GPs are contracted by the Clinic to provide General Practitioner (GP) services.

The GP services are invoiced to patients via their own provider number but through the Clinic's computer system.

The GPs are paid once a fortnight via recipient created tax invoice. They are paid 60% of the total billing plus GST. The Clinic retains 40% of the billing to cover the costs of reception staff, consulting rooms, procedure rooms and medical equipment.

The GPs also provide their own medical equipment.

The tax agent has provided ATO a sample contract entered into between one GP of the Clinic and the Clinic.

The contract is titled "Independent Contractor Agreement - Medical Practitioner" (the Contract).

The GP in the contract is mentioned as the "Contractor".

The Contract states that the agreement relationship between the Clinic and the Contractor does not create a relationship of employment or agency between the Clinic and the Contractor or between the Clinic and any employees of the Contractor; and that despite any other provision of this Agreement will not be construed as a relationship of

(a) employer and employee;

(b) master and servant; or

(c) principal and agent

The Contractor is required to maintain current policies of insurance to cover the Contractor for all liability which the Contractor might incur through providing the GP services.

The Contractor is also required to indemnify and keep indentified the Clinic in respect of all claims, demands, actions, proceedings, costs, losses, expenses and damages whatsoever which are made or brought against the Clinic or incurred or suffered by the Clinic which arises either directly or indirectly out of the provision of the GP services, whether or not the Contractor has failed to perform its obligations under the Agreement.

The Contractor's fee is paid upon receipt of the invoice and is paid in accordance to the prescribed rate..

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1

Superannuation Guarantee (Administration) Act 1992 section 12

Reasons for decision

Issue 1

Question 1

Summary

The GPs of the Clinic are not employees for the purposes of section 12-35 of Schedule 1 to the TAA.

Detailed reasoning

An employee is required, under section 12-35 of Schedule 1 to the TAA, to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

The TAA does not define the term "employee" for the purposes of section 12-35 and therefore it takes its ordinary meaning: paragraph 6 of Taxation Ruling TR 2005/16 - Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16).

Broadly, whether a person is an employee of another person or an entity is a question of fact to be determined by examining the terms and circumstances of the contractual arrangement between the parties. This, in turn, involves the examination of a range of common law indicators as expressed in relevant case law. Of these indicators, there is no one indicator of itself that is determinative of that relationship. The totality of the relationship between the parties must be considered.

Paragraph 17 of the TR 2005/16 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).

Terms and circumstances of the formation of the contract

While it is important to consider all the terms and conditions of the contract between the parties to determine the nature of contractual relationship, the true substance of the relationship, i.e., the underlying reality of the relationship must be considered. Labelling a relationship as employee while the underlying reality is independent contractor does not change the relationship to an employee. In Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 at 184, Gray J stated:

A Court will always look at all the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it

However, such a clause may be used to overcome any ambiguity as to the true nature of the relationship: Australian Mutual Provident Society v Chaplin and Anor (1978) 18 ALR 385 at 389-390.

In the present case, the contract is titled, "Independent Contractor Agreement - Medical Practitioner". The GPs are cited as the Contractors. The Contract states that the agreement between the parties does not create a relationship of employment or agency between the parties. It further emphasises that despite any other provision of the agreement, the agreement will not be construed as a relationship of employer and employee, master and servant or principal and agent.

Despite such clear characterisation of the relationship between the parties, we still need to look at the terms and conditions of the agreement to determine the true essence of the relationship. This is where we look at the key indicators that the courts have looked at whether an individual is an employee or independent contractor at common law.

Control

Paragraph 26 of the TR 2005/16 states:

The classic 'test' for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done.

However, in paragraph 28 of the TR 2005/16:

The mere fact that a contract may specify in details 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 their discretion (subject to any terms implied by law). This is because the contractor is working for themselves.

In the present case, the GPs enter into Contract with the Clinic to provide services of GP in the capacity of sole practitioner. In providing this service, the GPs are bound by certain terms and conditions specified in the Contract. For example, the Contract states that the Contractor must attend to Patients promptly and exercise all reasonable care and skill in any treatment given and prescribed; devote the whole of the time and attention to the Clinic's practice during the service provision time, and comply with all reasonable directions of the Clinic. During the service provision time, the Contractors are not allowed to engage in any other business, practice or profession without the written consent of the Clinic.

The Contract imposes condition on the Contractor that they must provide the services during the Service Provision Time, which is negotiated between the parties at Schedule 1 of the Contract.

The Contract further elaborates the policies and procedures that the Contractors are required to comply. These include the Clinic's policies, procedural manuals; anti-discrimination, sexual harassment and work place health and safety procedures; laws, ethics and customs appertaining to the practice of medicine including the Australian Medical Association's Code of Ethics and so on. Again, the Contractors are required to conform to the same standard of professional conduct as may normally be expected from persons performing similar services. The Contractor's are also required to ensure they hold all appropriate licences, registrations, approvals and qualifications to adequately perform the services. They are also required to undertake continuing professional development (CPD) and a copy to that effect is provided to the Clinic.

While these requirements impose certain control on the Contractors, they are mostly general guidelines of their conduct and do not actually control how the Contractors would provide the GP services to their patients. Within these general guidelines, the Contractors are free to choose how many patients they would see and the treatment they would prescribe. The Contractors are not paid by the Clinic. They invoice the patients directly and are paid once a fortnight via recipient created tax invoice. They invoice the patients via their own provider number. These are indications that the GPs are not employees of the Clinic rather independent contractors providing GP services through the Clinic.

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

In Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210, Windeyer J stated:

… 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.

In the present case, the GPs are conducting their own trade of GP via the Clinic. The manner of the GPs invoicing the patients through their own provider number is one indication that they are running their own business. The Clinic is providing the GPs the premises, the reception staff, the consulting rooms and procedure rooms as well as the computer system and some medical equipment. The GPs are providing some of the medical equipment too. They have come up with the agreement that the GPs would keep 60% of the total billing for their GP services and the Clinic would keep 40% of the total billing for providing the facilities to provide the GP services. Therefore, the GPs are not employees of the Clinic, rather carrying on their own trade.

Results contracts

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 service: paragraph 35 of TR 2005/16. The TR 2005/16 cites the case World Book (Australia) Pty Ltd v FC of T, 92 ATC 4327, where Sheller JA held that:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.

In the present case, the result for which the parties entered into the contract is to provide quality GP services.

Further, in case of contract for service, payment is often made for a negotiated contract price, as opposed to an hourly rate.

In the present case, the GP and the Clinic have agreed that 60% of the billing plus GST would be kept by the GP and 40% of the billing plus the GST would be kept by the Clinic.

Whether the work can be delegated or subcontracted

The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contractor: paragraph 41 of TR 2005/16. If an individual has unlimited power to delegate the work to others, it is a strong indication that the person is engaged as an independent contractor: paragraph 2005/16.

In the present case, it is the professional qualification and specific skill of the GP concerned that the Clinic enters into Contract for GP services. In this situation, it is highly unlikely that the Contractor would delegate the work to another GP with whom no such contract has been entered into by the Clinic. Therefore, even though, the Contractor is not able to delegate the work, it does not make the GP an employee of the Clinic as it is the very nature of the specific skill and qualification required for the service that stops the GP to delegate the work to another.

Risk

Paragraph 44 of TR 2005/16 states:

Where the worker bears little or no risk of 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 work. An independent contractor often carries their own insurance and indemnity policies.

In the present case, the GP is required to maintain his/her own insurance policies to cover him/her for all liability which the GP might incur through providing the GP services.

The GP is also required to indemnify and keep indemnified the Clinic in respect of all claims, costs, damages etc made against the Clinic or incurred by the Clinic which arise either directly or indirectly out of the provision of the GP services.

These indicate quite clearly that the GP is not an employee rather independent contractor.

Provision of tools and equipment and payment of business 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: paragraph 45 of TR 2005/16.

However, provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. It will depend on the particular circumstances and the context and nature of the contractual work: paragraphs 48-49 of TR 2005/16.

Again, an employee, unlike an independent contractor, is often reimbursed (or receive an allowance) for expenses incurred in the course of employment, for the use of their own asset: paragraph 50 of TR 2005/16.

In the present case, according to the agreement between the GP and the Clinic, the Clinic is required to provide the premises, reception staff, medical procedure room and some equipment. However, the Clinic keeps 40% of the total billing for providing these services and equipments. The GPs also provide some of the equipments, but they are not reimbursed by the Clinic for the expenses incurred for providing their equipments. Therefore, the arrangement does not present an employer employee relationship, rather indicates a contractual relationship between the two.

Conclusion

From analysing the above indicators and looking at the Contract in its entirety, it is concluded that the GPs are not an employee of the Clinic but are independent contractors entered into contract with the Clinic for providing GP services.

Issue 2

Question 1

Summary

The GPs of the Clinic are not employees for the purposes of section 12 of the SGAA.

Detailed reasoning

Subsection 12(1) of the SGAA states:

Subject to this section, in this Act, employee and employer have their ordinary meaning. However, for the purposes of this Act, subsections (2) to (11):

(a) expand the meaning of those terms; and

(b) make particular provision to avoid doubt as to the status of certain persons.

Superannuation Guarantee Ruling SGR 2005/1 (SGR) explains when an individual is considered to be an 'employee' under section 12 of the SGAA. The expressions 'employee' and 'employer' in the SGAA have both their ordinary meaning and extended meaning. Subsections 12(2) to 12(11) provide the extended meaning for the term 'employee'.

The SGR discusses the various indicators the courts have considered in establishing the common law meaning of the term "employee" These indicators are same as those discussed in the previous section in relation to TR 2005/16, namely

§ control

§ does the worker operate on his or her own account or in the business of the payer

§ 'results' contracts

§ whether the work can be delegated or subcontracted

§ risk

§ provision of tools and equipment and payment of business expenses

As it has been concluded in the previous section that the GPs are not employees, rather independent contractors who entered into contract with the Clinic for providing GP services, the same conclusion applies to the GPs for SGAA purposes too.

The extended meaning under subsection 12(2) to subsection 12(11) does not apply to the GPs.

Therefore, for section 12 of the SGAA purposes, the GPs are not employees of the Clinic.