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Ruling

Subject: Withholding obligations

Question

Is there an obligation to withhold tax from scholarship payments made to scholarship recipients?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

An Australian Government initiative provides an employment-based pathway into employment.

To be eligible for the employment program the participants are expected to complete all elements of training.

The employer must also enter into a contract of employment with each participant, which provides the participant with access to employment conditions consistent with others in similar employment. Once participants start working, they will be paid a wage commensurate to others doing similar work.

The employer has drawn up an agreement which specifies:

The employer intends implementing the program through providing assistance to suitably qualified applicants in the term of a scholarship and training.

The value of the scholarship was determined by the employer and is payable fortnightly for two years.

The scholarship recipient will:

· provide evidence to the employer of their enrolment in the course.

· complete the course to a satisfactory standard,

· undertake training during the scholarship period, and in particular:

a. attend the training diligently at times and for periods determined by the employer.

b. agree that he or she will be under the supervision and observation.

c. adhere, to all applicable policies and any directions given to them by any staff member of the employer.

As soon as practically possible, the scholarship recipient shall obtain limited authority to be employed by the employer or others

If the employer offers the scholarship recipient employment during the scholarship period the scholarship recipient will accept that offer of employment.

The scholarship recipient will be responsible for the payment of any tax he/she may attract as a result of receiving the scholarship.

Provided that the scholarship recipient complies, to the reasonable satisfaction of the employer, the employer shall;

(a) pay the scholarship recipient the scholarship; and

(b) provide training to the scholarship recipient under the supervision of the employer's staff.

At the end of the scholarship period, the employer is not obliged to offer the scholarship recipient any further employment but may do so entirely at its discretion depending upon the requirements of the employer.

The participants currently placed with the employer are not employed by the employer but are placed as trainees who are supervised by another employee. The participants are advised that they are not employees of the employer.

Relevant legislative provisions

Taxation Administration Act 1953 subsection 12-1(1) of Schedule 1

Taxation Administration Act 1953 subsection 12-35 of Schedule 1

Income Tax Assessment Act 1997 section 51-10

Income Tax Assessment Act 1997 section 51-35

Reasons for decision

Subsection 12-1(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) contains a general exemption from withholding if the payment is exempt income of the entity receiving the payment.

Under section 51-10 of the Income Tax Assessment Act 1997 (ITAA 1997), certain education and training payments are exempt income subject to the limitations contained in section 51-35 of the ITAA 1997. Under paragraph 51-35(b), payments are not exempt where the payment is a Commonwealth education or training payment. Subsection 52-145(1) gives the meaning of a Commonwealth education or training payment as one made to a participant in a Commonwealth labour market program and subsection 52-145(2) describes a Commonwealth labour market program as a program under which:

· unemployed persons are given training in skills to improve their employment prospects; or

· unemployed persons are assisted in obtaining employment or to become self-employed; or

· employed persons are given training in skills and other assistance to aid them in continuing to be employed by their current employer or in obtaining other employment.

Accordingly the payments made under the program will not be exempt income in the hands of the recipients under section 51-10 of the ITAA 1997 because paragraph 51-35(b) operates to deny the exemption.

Under section 12-35 of Schedule 1 to the TAA, an entity must withhold from amounts of salary, wages, commission, bonuses or allowances paid to an individual as an employee of that or another entity. There must be an employee relationship in existence and the payment must go to an individual as an employee.

In order to determine whether withholding is required from the scholarship payments under section 12-35 of Schedule 1 to the TAA, it is therefore necessary to determine whether the payments are a salary, wage, commission, bonus or allowance paid to an employee as a consequence of employment.

The term "employee" is not defined in the TAA. 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. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

Taxation Ruling TR 2005/16 is the Commissioner's view on Pay As You Go - withholding from payments to employees. It provides that several indicators need to be considered when determining if a person is an employee. These indicators include:

· control, where a common law employee is told not only what work is to be done but how and where it is to be done.

· results contracts, where a worker is contracted to achieve a result,

· delegation, whether the work can be delegated or subcontracted,

· risk, where the worker bears little or no risk of the costs arising out of their work and,

· provision of tools and equipment, where the supply of the tools may be the workers responsibility.

Other indicators that suggest an employer/employee relationship include the right to suspend or dismiss the person engaged, the right to exclusive services of the person and the provision of leave provisions.

The Australian Government program has been designed as an employment-based pathway into employment. The program's guidelines consistently refer to employment as the vehicle that the program relies upon to deliver the outcome desired. For example:

the program has been designed as an employment-based pathway into employment,

This pathway will include employment…,

…and employment-based training…,

…allows for an unqualified person to undertake the duties of a worker for a limited period of time.

Once participants start working, they will be paid a wage commensurate to beginning workers.

In the Australian Government program participants are referred to as being employed during the duration of the course. The participant's duties and responsibilities and the employer's obligations as detailed in the Australian Government program guidelines describe the attributes normally associated with an employer/employee relationship.

The employer's agreement determines the employer will pay the scholarship and provide training to the recipient provided the recipient fulfil certain obligations. These obligations include:

· accepting direction as to what work is to be done,

· completing the training course on time,

· accepting the place of work,

· agreeing to being under supervision,

· adhering to all department policies and any direction given by other employer's employees,

· obtaining clearance from and complying with other National and State Acts

If the scholarship recipient is convicted of an offence relevant to the performance of his or her obligations under this agreement or is in breach of a National or State Act this agreement may be terminated at any time without prior notice.

This agreement meets the employer/employee indicators of TR 2005/16.

TR 2005/16 also considers the terms and the circumstances of the formation of a agreement/contract:

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.

22. As Gray J stated in Re Porter: re Transport Workers Union of Australia: (Porter case)

Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of 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. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

However, such a clause may be used to overcome any ambiguity as to the true nature of the relationship.

23. For example, an employer may seek to change the status of an employee to that of independent contractor by both parties signing a contract of engagement that includes a clause to the effect that the worker is an independent contractor rather than an employee. That clause is ineffective if it is inconsistent with the apparent true nature of the relationship inferred from the contract as a whole. If the terms of the subsisting relationship are not changed, it is likely that the worker's status would remain that of an employee.

The example at paragraph 23 provides that a clause within a contract is ineffective if it is inconsistent with the apparent true nature of the relationship inferred from the contract as a whole. The employer's agreement for the participants has all the attributes of an employee/employer relationship except for the inclusion of the clause that denies that relationship.

The agreement describes the duties and responsibilities and obligations of the participant and the employer. Those responsibilities and obligations reflect the employee and employer relationship indicators as provided by TR 2005/16.

The scholarship agreement specifically concludes that there is no implied relationship between the participants and the employer. However, but for that one clause, the agreement implies that the true nature of the relationship is one of employer/employee. The comments of Gray J in the Porter case indicate that the characterisation of a contract by its parties is not conclusive therefore the clause that states that no relationship exists does not exclude that relationship.

An employee/employer relationship exists between the employer and the participants therefore a withholding obligation exists under section 12-35 of Schedule 1 to the TAA.