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Ruling

Subject: employee or contractor

Question

Does your tender contract for the cleaning of your council's buildings and amenities give you PAYG withholding and superannuation obligations in relation to the contractor's employees or the contractor?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

Year ended 30 June 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 arrangement that is the subject of the private ruling is described below. This description is based on the contract documents submitted. These documents form part of and are to be read with this description.

Some conditions of the contract include: (a) you are able to direct the cleaning workers; (b) the contractor is paid on hourly basis; (c) the contractor is liable for defective work and the remedy costs, where you may defer payment or appoint another contractor; (d) the contractor must have insurance for their workers and public liability and professional indemnity; (e) the contractor must supply all personal and equipment necessary for the work; (f) the contractor may subcontract their obligations upon receiving your approval.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35

Superannuation Guarantee (Administration) Act 1992 Section 12

Reasons for decision

Section 12-35 of the Taxation Administration Act 1953 (TAA 1953) states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

However, an exception applies to labour hire arrangements. Section 12-60 of the TAA 1953 provides an entity that carries on the business of arranging for persons to perform work directly for clients is liable to withhold an amount from payments it makes to an individual in the course of the enterprise.

Similarly, the Superannuation Guarantee (Administration) Act 1992 (SGAA) requires employers to make superannuation contributions into a complying superannuation fund or Retirement Savings Account for the benefit of their eligible employees in accordance with minimum prescribed levels.

However, where an individual performs work for another party through an entity, such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA. This is because the company or trust (not the individual) has entered into an agreement rather than the individual (paragraph 13 Superannuation Guarantee Ruling SGR 2005/1).

Whether a person is engaged as an employee or an independent contractor is outlined in Taxation Ruling TR 2005/16. The ruling lists features which have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor that have been regarded by the courts at common law. These indicators include:

The control test, the degree of control which the payer can exercise over the payee.

The organisation or integration test, whether the worker operates on their own account or in the business of the payer.

The results test, whether the worker is free to employ their own means and paid to achieve the contractually specified outcome.

The risk test, whether the worker bears the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

The delegation test, whether the work can be delegated or subcontracted (with or without the approval or consent of the principal).

Which party provides tools, equipment and payment of business expenses.

In your case, the provisions of your contract make the tenderer you seek an independent contractor and also a labour hire firm.

They are an independent contractor because they fail the integration test (as they are an independent labour hire firm) and fulfil the risk, delegation and tools/equipment/expenses tests. They also partially meet the control and results tests as that they have some independence from your supervision in performing their tasks and because, although being paid on an hourly basis, they may not be paid if they provide defective services and do not achieve the contracted result.

They are also a labour hire firm because they arrange for persons to perform work for you. As they are a labour hire firm, they cannot be an employee because an employee must be an individual.

In summary, the tenderer will provide persons to perform work for you. There will be no employer-employee relationship between you and the individual workers. Therefore, you will have no withholding, superannuation or other employee related obligations under the relevant taxation legislations.