Edited version of your private ruling

Authorisation Number: 1012113047871

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Ruling

Subject: Status of worker

Questions and Answers:

For the purpose of your withholding obligations, is there a tax free threshold for employees of non profit charities that is higher than the threshold for the employees of ordinary employers?

Answer: No

Is the ATO in agreement that the remuneration of 'volunteer fundraisers' (as defined by you) as 'honorariums' is acceptable in the context of you not withholding PAYG and superannuation?

Answer: No

Is the ATO in agreement that the remuneration of 'volunteer members of the committee' (as defined by you) as 'honorariums' is acceptable in the context of you not withholding PAYG and superannuation?

Answer: No

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 June 2010

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.

You are a not for profit public company and charitable research institute endorsed by the Tax Office as an income tax exempt charity with deductible gift recipient status and also hold a state charitable collection license.

Your fundraising activities involve collections of donations at stalls in shopping centres via free community sites that are allocated to local community groups. It follows some shopping centres have the expectation that your representatives collecting donations are volunteers. If a representative is not a volunteer, the shopping centre may charge you exorbitant lease fees, which could consume 50%-70% of donations collected, which would be unacceptable to you, the public and various government authorities.

Your donation collectors average $200-$500 per day, for which they personally receive 25%. Your donation collectors are mainly university students, whom you recruit through university advertising or even part of scholarship schemes.

You also have and trade as a committee team which is an independent institutional review; in part to meet the review needs of you, the parent entity; and more so, to service the ethical review needs of the sector.

The official guidelines state the minimum membership is eight. As far as possible: there should be equal numbers of men and women; and at least one third of the members should be from outside the institution. This minimum membership is a chairperson, with suitable experience, whose other responsibilities will not impair the capacity to carry out its obligations under the official guidelines; at least two lay people, one man and one woman, who have no affiliation with the institution and do not currently engage in related work; at least one person with knowledge of, and current experience in, the related work; at least one person who performs a particular role in a community; at least one professional, where possible one who is not engaged to advise the institution; and at least two people with current relevant experience that is relevant to proposals to be considered at the meetings they attend. These two members may be selected, according to need, from an established pool of inducted members with relevant expertise.

The official guidelines also state members should be appointed to a committee using open and transparent processes. Institutions should consider reviewing appointments to the committee at least every three years. Members should be appointed as individuals for their knowledge, qualities and experience, and not as representatives of any organization, group or opinion. Members should be provided with a formal notice of appointment.

The guidelines also cover conflicts of interest and states the review body should adopt measures to manage such conflicts. An ethical review body should require its members, and also any experts whose advice it seeks, to disclose any actual or potential conflict of interest in research to be reviewed, including any: personal involvement or participation in the research; financial or other interest or affiliation; or involvement in competing research.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-35

Taxation Administration Act 1953 Schedule 1 Section 15-10 

Taxation Administration Act 1953 Schedule 1 Section 15-25

Income Tax Rates Act 1986 Subdivision C Section 13

Superannuation Guarantee Act 1992 Section 12

Reasons for decision

Summary

The Australian taxation legislation does not provide a different tax-free threshold for withholdings rates used by non profit organisations. However, the Australian taxation legislation does provide some fringe benefits tax concessions to organisations in the non-profit sector. You may refer to the Tax Office publication Tax basics for non-profit organisations (NAT 7966-06.2011) for more information.

Your donation collectors and committee members are not volunteers because a genuine volunteer does not work under a contractual obligation for remuneration.

Your donation collectors are employees for withholding and superannuation purposes because they work under a contractual obligation for a set rate of remuneration or commission. Numerous court cases have held workers paid by a commission or on a piece basis (who do not bring significant capital assets to the work) are employees.

Your committee members are also employees for withholding and superannuation purposes because they work under a contractual obligation for remuneration based on an hourly rate.

However, due to the 'organisation/integration test', it may be acceptable a committee member, who ordinarily conducts a business and provides their ordinary business occupation to your committee, be paid as an independent contractor if the committee member insists their business be invoiced for their services.

Detailed reasoning

Relevant legislation

Section 12-35 in Subdivision 12-B of the Taxation Administration Act 1953 (TAA 1953) provides 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).

The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires employers are required 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.

Amount to be withheld

Section 15-10 of the TAA 1953 provides the amount that Subdivision 12-B requires to be withheld from a payment is to be worked out under the withholding schedules made under section 15-25.

Section 15-25 of the TAA 1953 provides, for the purposes of collecting income tax and the other liabilities, the Commissioner may make one or more withholding schedules specifying the amounts, formulas and procedures to be used for working out the amount required to be withheld by an entity, which only applies if a notice of it is published in the Gazette.

The withholding schedules are also published in the Income Tax Rates Act 1986 (ITRA). Subdivision C of the ITRA lists the withholding schedules for resident taxpayers, resident beneficiaries and resident trust estates. Subdivision D of the ITRA lists the withholding schedules for non-resident taxpayers, non-resident beneficiaries and non-resident trust estates. Part III of the ITRA lists the rates of income tax payable upon incomes of companies, prescribed unit trusts, superannuation funds and certain other trusts. The ITRA, particularly Subdivision C, does not provide a different tax-free threshold for withholdings rates used by non profit organisations.

However, the Australian taxation legislation does provide some fringe benefits tax concessions to organisations in the non-profit sector. You may refer to the Tax Office publication Tax basics for non-profit organisations (NAT 7966-06.2011) for more information.

Volunteer versus employee

The difference between a volunteer and employee is described in the Tax Office publication Volunteers and tax (NAT 4612-04.2008), which states:

Meaning of volunteer

There is no legal definition of 'volunteer' for tax purposes. The dictionary defines a volunteer as someone who enters into any service of their own free will, or who offers to perform a service or undertaking.

Meaning of employee

Generally, an individual is considered to be an employee if they:

are paid for time worked

receive paid leave (for example, sick, annual or recreation, or long service leave)

are not responsible for providing the materials or equipment required to do their job

must perform the duties of their position

agree to provide their personal services

work hours that are set by an agreement or award

are recognised as part and parcel of the payer's 'business'

do not take commercial risks and cannot make a profit or loss from the work performed.

A genuine volunteer does not work under a contractual obligation for remuneration and would not be an employee or an independent contractor. You should always consider the facts and circumstances of each individual when determining whether they are a volunteer, employee or independent contractor.

The term 'employee' is not defined in the TAA 1953. For the purposes of (income tax) withholding under section 12-35 of the TAA 1953, the word 'employee' has its ordinary meaning at common law. 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.

Section 12 of the SGAA states the term 'employee' has its ordinary common law meaning but also includes a number of extended definitions. The extended definition in subsection 12(3) of the SGAA states if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

In explaining subsection 12(3) of the SGAA, paragraph 11 of Superannuation Guarantee Ruling SGR 2005/1 states where the terms of the contract indicate that:

the individual is remunerated (either wholly or principally) for their personal labour and skills;

the individual must perform the contractual work personally (there is no right of delegation); and

the individual is not paid to achieve a result,

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection.

Paragraph 67 of SGR 2005/1 states 'labour' includes mental and artistic effort as well as physical toil.

This explanation in paragraph 11 of SGR 2005/1 incorporates the key indicators expressed in the relevant case law used to determine whether a person is an employee, such as not having the right of delegation, payment on an hourly or commission basis versus payment for a result and the general master-servant relationship.

Employee versus independent contractor

Whether a person is engaged as an employee or an independent contractor is discussed in SGR 2005/1 and Taxation Ruling TR 2005/16. The rulings list features which have been regarded by the courts as key tests of whether an individual is an employee or independent contractor that have been regarded by the courts at common law. These tests 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 (or whether they work on an hourly or piece rate).

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 brief, an independent contractor is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor meets the following requirements:

is paid for results achieved

provides all or most of the necessary materials and equipment to complete the work

is free to delegate work to other entities

has freedom in the way the work is done

provides services to the general public and other businesses

is free to accept or refuse work

is in a position to make a profit or loss.

The notion of 'payment for a result' is expected in a contract for services with an independent contractor. However, there are occasions were it is not necessarily inconsistent with a contract of employment. For example, the High Court in Federal Commissioner of Taxation v. Barrett & Ors (1973) 4 ATR 122; (1973); 73 ATC 4147(Barrett & Ors) found that land salesmen engaged by a firm of land agents to find purchasers for land who were remunerated by commission only were employees. Likewise, the High Court in Hollis v. Vabu Pty Ltd (2001) 2001 ATC 4508; (2001) 47 ATR 559 considered that payment to bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Similarly, the Full Court of the Supreme Court of South Australia in Commissioner of State Taxation v. Roy Morgan Research Centre Pty Ltd (2004) 57 ATR 148; (2004) 2004 ATC 4933 (Roy Morgan) found that interviewers who were only paid on the completion of each assignment, and not on an hourly basis, were employees.

Ad hoc committees

Taxation Ruling TR 2002/21 deals with the operation of section 12-45 in Schedule 1 to the TAA, that is, with withholding obligations in relation individuals who are government office holders. Although most of the content of TR 2002/21 is not relevant to your circumstances, paragraphs146 to 148 of TR 2002/21 discuss ad hoc advisory committees.

TR 2002/21 states the PAYG withholding treatment of payments made to ad hoc advisory committee members will be dependent upon the contract of engagement between the payer and payee, that is, whether it is a contract of service (employee) or a contract for service (independent contractor).

Paragraph 148 states where there is a contract of service (as in the case of an employee), withholding will be required under section 12-35 in Schedule 1 to the TAA. Where there is a contract for service (such as in the case of an independent contractor), withholding will only be required where the individual has entered into a voluntary agreement with the payer (section 12-55 in Schedule 1 to the TAA); where the individual receives a payment under a labour hire arrangement or payment specified by regulations (section 12-60 in Schedule 1 to the TAA); or where the individual is considered to be supplying their services in the course or furtherance of an enterprise and fails to quote an Australian Business Number (section 12-190 in Schedule 1 to the TAA).

Application of law in your case

In your case, your donation collectors are employees because, similar to the cases in Barrett & Ors, Hollis v. Vabu and Roy Morgan, they work on a commission basis. Your donation collectors are not volunteers because a genuine volunteer does not work under a contractual obligation for remuneration. Your donation collectors do work under a contractual obligation for a set rate of remuneration.

Your committee members are also employees because they work under a contractual obligation for remuneration based on an hourly rate. Your committee members are not volunteers because a genuine volunteer does not work under a contractual obligation for remuneration.

Of the six tests used to distinguish between an employee and independent contractor, in your case, the last four tests fall into the ambit of an employer-employee relationship, including the results test, because your committee members get paid on an hourly basis and form part of a team or panel which, as a whole, completes the outcome. As for the control test, your committee members may retrain some degree of control, due to their salient role of independent reviewers. However, you also retain some control because your committee also provides external services, for which you control the time and place of that service. As for the organisation test, it may be possible some of your committee members would be viewed (by a third party) as operating on their own account; for example, a lawyer who ordinary conducts a legal business. However, for the outside employees on your committee, they would fall within the ambit of employees, given they do not ordinarily carry on a business in respect to their occupation or field of speciality. In other words, a third party would view them as employees of your organisation.

To conclude, when weighing up the six tests, the balance weighs heavily towards your committee members being employees rather than independent contractors. However, for committee members, who ordinarily conduct a business and provide their ordinary business occupation to your committee, it may be acceptable they be paid as an independent contractor only if the committee member insists their business be invoiced for their services. Otherwise, they are employees, given the balance weighs heavily towards your committee members being employees rather than independent contractors.