Edited version of administratively binding advice

Authorisation Number: 1012430512268

Superannuation guarantee obligations in respect of the workers aboard fishing vessels

Question 1

Are the workers considered common law employees of the principal as defined in subsection 12(1) of the Superannuation Guarantee Administration Act 1992 (SGAA) for the financial year ended 30 July 2013?

Advice

No, Please refer to 'why we have made this decision'

Question 2

Are the workers employees of the principal by virtue of subsection 12(3) of the SGAA?

Advice

No, Please refer to 'why we have made this decision'

This advice applies for the following period:

1 July 2012 - 30 June 2013

The arrangement commences on:

1 July 2012

Relevant facts and circumstances

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

· The taxpayer operates various licensed fishing boats. These boats are operated by registered skippers and deckhands. The taxpayer has no say in relation to the operations of the boats. The taxpayer simply supplies the vessels and for that they receive a percentage of the catch. The skipper and crew supply their knowledge, expertise and labour.

· The skipper and crew are responsible for the day to day maintenance of the equipment whereas the taxpayer is responsible for any major maintenance and repairs.

Skipper's duties:

· Has the total say as to whether the boat goes to sea due to safety issues like strong winds etc.

· Has total control over where he fishes. A skippers main tool is his marks (disc or computer storage device that has all his points of reference and history of where to fish and where to avoid) which is very closely guarded and not shared with anyone. Whilst the skipper uses our vessel, without his/her marks they could not do any fishing and our company does not supply any marks.

· The skipper has total control over the crew and who he uses as deck hands and they form part of his fishing team. Whilst you may source crew, the skipper has final say on who he takes on board. All duties performed on board the vessel are delegated by the skipper.

· Both the Skipper and deckhands share in a percentage of the catch and are responsible for the same percentage of some expenses (Fuel and packaging).

· Both the skipper and crew are responsible for their own insurance. The company has a policy on each vessel for any accidents or problems and it is specified as - A skipper and 2 crew (not individuals) Workcover will not cover any crew on our vessels.

· Both the skippers and crew must have ABN's to work on our vessels as part of the share fishing agreement.

· Tax invoices are prepared but are done as recipient created tax invoices.

· The skipper and crew are responsible for the processing of the catch which includes catching, cleaning, and preservation, cooking and freezing to required temperatures. If there is a problem with any of the product once unloaded due to their handling then the price is adjusted accordingly and there percentage becomes less. Therefore they are affected by the state of the product they supply.

Deckhand's duties:

· The deckhands form part of the fishing team which is controlled by the skippers.

· As with the skipper the deckhands are paid as a percentage of the catch.

· Deckhands do have an ABN and are paid by tax invoice.

The Agreement states that:

It is agreed as follows:

· The fisherman will participate as a share fisherman on the vessel.

· During the currency of the agreement the vessel will be used for fishing and for no other purpose.

· At any time when weather conditions become a dominant factor in determining whether or not the vessel shall put to sea or if already at sea and a decision has to be made as to whether or not the vessel shall rest with the vessel's master alone.

· The cost of maintaining the vessel in good and seaworthy order and condition will be borne solely by the owner.

· The catch will be sold at the conclusion of each voyage by the vessel owner. The catch shall always remain the property of the applicant. The catch may be sold to any buyer chosen by the owner as long as the price received for the product is at market price being paid for similar product on the date of sale. The fishermen shall receive the proportion of the catch as set out in the Schedule.

· The fishermen shall bear the proportion of operating expenses of the vessel set out in the Schedule whether or not the gross proceeds of sale exceeds the operating expenses. The expression "operating expenses of the vessel" shall include the cost of fuel, packaging, the fisherman also bear the costs of all their personal telephone expenses.

· The fisherman shall be responsible for being part of crew for the vessel in order to fulfil its obligation under section 2 above. The fisherman will also be responsible for any liability arising for transportation (including the skipper) to and from the vessel within Australian territorial waters only.

· The contract of share fishing shall be deemed to have been commenced from the time the crew member steps on board the vessel to commence fishing operations.

· The agreement may be terminated upon not less than 7 days notice by a party to each of the parties, or forthwith by any party in the event of a breach of any of the terms of this agreement.

· Nothing in this agreement shall be construed to grant or convey to the Fishermen any interest of any kind in the vessel.

· The Skipper and Crew shall be personally responsible for payment of income tax in respect of the remuneration derived hereunder and are not entitled to Workers Compensation, or Superannuation benefits under the Superannuation Guarantee Charge Act from the owner.

Warranties

The fisherman warrants the following:

· He will supply his Australian Business Number (ABN) and tax file number before receipt of any payment related to the fishing excursion.

· He will complete a Declaration regarding his GST status and confirming his obligations to the tax office as a "Supplier".

· At all times (if required) the fisherman will be licensed with the relevant authority for the position held on the vessel, and before commencement of the fishing excursion will complete the necessary forms required in accordance with the vessel owner's insurance policy.

· Whilst the vessel is at sea the fisherman shall be responsible for carrying out all minor maintenance of the vessel's machinery and fishing equipment such labour so supplied being free of charge to the owner. However, the costs of all machinery and fishing equipment whether the parts be repaired or replaced shall be at the cost of the owner absolutely. Such maintenance shall include but not limited to oil changes, refrigeration gas refills, filter replacements, hydraulic hose repairs, o-ring replacements, general ship housekeeping and day to day maintenance, and minor hydraulic system repairs. Such aforesaid minor maintenance does not include instances where third party trade-persons board the vessel to carry out maintenance or repairs and in such instances the whole of these costs rests with the vessel's owner. The fisherman will also be obligated to attend to net repairs as required.

· The possession and use of illegal drugs on boat the vessel shall be strictly prohibited.

· The fisherman shall not conduct fishing operations whilst under the influence of alcohol or drugs and the owner is absolved from responsibility for any injury suffered as a consequence.

· All crew members are to be aware and abide by correct and proper safety procedures while onboard the vessel and any physical fights between crew members will result in immediate termination of the share fishing contract.

· Theft by a crew member of any fish product, gear or personal possessions by a crew member while on board the vessel will lead to the instant termination of their contract.

· The fisherman shall at all times be aware and abide by the terms and conditions set down in the fishing permit and comply with state and federal fishing and transport regulations.

· The fisherman absolves the owner for liability for loss of personal effects taken on board the vessel by the fishermen and the fishermen agree all such items are taken onboard the vessel at their own risk.

· The fisherman shall be responsible for all personal phone calls made on the work phone.

· The fisherman shall be responsible for the full cost of food stores, cigarettes etc purchased for the vessel.

The vessel owner warrants the following:

· It will arrange any stores or provisions required for crew sustenance though the crew will bear the cost of this expenditure as per Clause X of this agreement. The owner will not pay for luxury items as listed but not limited to: cigarettes, toiletries, specialised food and confectionery.

· It will perform following clerical/administrative duties to supply the share fisherman with a calculation of the share fishing payment from each unload and if agreed to by the share fishermen the calculation will be deemed to be final, and the Owner will make payment to a nominated bank account of the share fisherman

· The owner will supply accident cover for each vessel which includes one skipper and 2 or 3 deckhands. The fisherman is not covered under a work cover agreement.

The Schedule to the Share Fishing Agreement states that the proportion of the catch payable to the Vessel is X% and the proportion of operating expenses is X%.

§ The principal's licence permits them to catch all trawl species. The main species caught would be x,y and z.

§ All trawl species are governed by a licence for each vessel. There are presently no quota restrictions in place for the seafood. Along with the licence each vessel must have sufficient fishing units to enable it to fish each night. The licence and units are purchased by the vessel owners.

§ The fishing equipment, namely the vessel and the fishing licence are supplied by the company.

§ The cost of the fishing equipment is approximately $X. The skipper and deckhands supply their knowledge of where to fish. This is known as their marks and this knowledge is stored by them on computer memory devices and carried around with them to each contract of work they undertake.

§ The proportion of the catch as per the fishing agreement is by negotiation with the vessel owner by way of a meeting and discussion of outcomes.

§ The skippers and deckhands can negotiate a higher or lower proportion. The better the skipper or deckhand (at their trade), the better the negotiating power they have.

§ Replacement crews are the responsibility of the workers. Whilst there is nothing in the current agreement that states that the workers can delegate their work, this is not the case. The skipper can select what deckhands(s) accompany him on a trip and have the unfettered discretion to invite anyone to work on the vessel for a trip, whether a deckhand or even another skipper with vast knowledge.

§ The principal does not require any forms from the workers for insurance purposes.

§ Payment summaries are not issued to the workers as they are not remunerated under the PAYG system.

§ In order to assist the workers to fulfil their taxation obligations the company provides them with a printout of their remuneration paid under the share fishing agreement.

You provided copies of a recipient created tax invoice and two completed share fishing agreements. Included in these documents was a requirement for the workers to provide their Australian Business Number (ABN).

§ The workers sign share-fishing agreements with the principal;

§ The workers are responsible for providing their own food, sleeping equipment and wet weather gear;

§ The skipper does not lease the boat from the principal;

§ Each trip is for approximately one month;

§ There is an OH&S manual on board - the skipper is required to show new deckhands the manual and all the safety equipment and the deckhand must sign a form stating that this has occurred.

The principal also supplied a copy of a voluntary withholding agreement which states that the Agreement

'covers share fishing payments made to the payee in respect of labour supplied on one of the payers fishing vessels. It is agreed by both parties that payments made under the arrangement are subject to a voluntary agreement under Section 12-55 of Schedule 1, Part 2-5 of the Taxation Administration Act 1953…The payer is entitled to a full (100%) input tax credit with respect to the services supplied by you for share fishing. Therefore you as the payee cannot charge GST on this service and similarly therefore you are not required to supply us a tax invoice.'

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 12(1)

Superannuation Guarantee Administration Act 1992 subsection 12(3).

Reasons for decision

Upon considering all the available information we are satisfied that the facts and evidence support the proposition that the workers do not come within the ordinary meaning of 'employee' nor the expanded definition of 'employee' used for the purposes of the SGAA.

Question 1

The SGAA states that an employer must provide the prescribed minimum level of superannuation support for its eligible employees or they are liable to the Superannuation Guarantee Charge (SGC). The term 'employee' is defined in section 12 of the SGAA. It includes common law employees but also extends to include certain other categories of workers including persons who are engaged under a contract that is wholly or principally for their labour. This employment relationship is often referred to as a 'contract of service'. This relationship is distinguished in SGR 2005/1 Superannuation Guarantee: Who is an employee? (SGR 2005/1) from a 'contract for service' which is typically a contractor and principal type of relationship that does not attract any SGC liability.

Therefore, it is necessary to consider not only whether there is a common law relationship of employer/employee between the parties, but also, if the common law test is not met or is inconclusive, whether the extended definition of 'employee' in subsection 12(3) of the SGAA applies.

Common law employee

The courts have developed a method for determining whether a person is an ordinary (common law) 'employee'. Their approach is to look at a wide range of factors. For example, if the employer provides the place of work, this might indicate an employment relationship, while the absence of holiday pay might suggest the opposite. The courts' decisions tend to be taken on balance, after considering all the relevant factors.

The common law meaning of the term 'employee' was stated by the High Court in Stevens v. Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. It is clear from that case that there is no single objective test which will give the answer:

…it is the totality of the relationship between the parties which must be considered...the question is one of degree for which there is no exclusive measure.

It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is working in the service of another (as an employee) or is working on his or her own behalf (as an independent contractor).

A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. 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 it is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Subsequent conduct of the parties may demonstrate the relationship has a character contrary to the terms of the contract.

The main factors that are used by courts to determine this question are explained in appendix A. The application of the factors to this particular arrangement is discussed below.

Share fishing arrangements

A share fisherman carries on with another, or others, a business of fishing operations. A genuine or true share fishing arrangement is a joint venture business and is usually evidenced by a written contract which specifies the rights and obligations of the parties. It is usual for a contract to provide that the parties shall share the gross proceeds of the sale of fish and that they each bear a proportion of the operating expenses of the vessel whether or not the gross proceeds exceed operating expenses. Where an agreement of this nature is entered into and the parties observe the terms of the agreement, they are each in the business of fishing operations.

A person participating in a true share fishing arrangement is considered an independent contractor and any provision for superannuation is their responsibility.

The fact that a crew member's remuneration is based on a percentage of the value of a catch is not, in itself, conclusive evidence of a true share fishing arrangement. Where the facts do not support the inference of a true share fishing arrangement, it will be necessary to determine if the individual crew member is engaged as an employee. If the crew member is found, on objective assessment, to be an employee of the person or persons responsible for and in control of the fishing enterprise, that person or persons will be required to provide superannuation support.

Through consultation with the fishery bodies, it is our understanding that the following facts are common for such operations:

§ The parties involved in the fishing operations are the vessel owner/skipper and fishermen/crew.

§ The vessel owner/skipper arranges the basic provisions and essential supplies, and takes the cost of these from the fishermen/crew's remuneration.

§ The vessel owner/skipper coordinates the fishermen/crew

§ Upon return to the shore, the catch is sold to buyers, with the proceeds then being divided according to agreement.

In your case

The principal operates a trawl fishing operation in Australia.

The principal engages the workers and each worker signs a share fishing agreement (Agreement) which states that rate of remuneration will be determined by the principal after subtracting the proportion of the catch payable to the vessel and the worker's share of the operating expenses. The Agreement states that the contract of share fishing shall be deemed to have been commenced from the time the crew member steps on board the vessel to commence fishing operations and the agreement may be terminated upon not less than a specified number of days notice by a party to each of the other parties or forthwith by any party in the event of a breach of any of the terms of this agreement.

The Agreement does not expressly state that the workers are independent contractors. However, there is an implied assumption that the workers are independent contractors, based on the existence of the share fishing arrangement, the requirement for the workers to have an ABN and the provision of a printout of their remuneration paid under the share fishing agreement that is provided to the workers by the principal. Consequently it is considered that the intention of the parties was to operate as independent contractors.

Nevertheless an analysis of the whole relationship is required to determine the workers' status. If the majority of factors indicate an employer/employee relationship, then the workers will be considered employees, regardless of the terminology used in the agreements. As Gray J stated in Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 at 184:

…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.

In a contractor/principal relationship, it would not be expected that the contractor would need to be told in great detail how to do their work and be given a large list of duties to be undertaken. It would also not be usual for an independent contractor to be expected to help other independent contractors to fulfil their responsibilities. Supervision of other workers is a responsibility that is usually found in an employment relationship.

The principal has contended that they have no capacity to exercise control over the workers as they are not in the same geographical location as the workers when they are out at sea. The skipper independently determines whether he goes to a particular location, subject to license constraints. However, control is determined by the right of a person to exercise it, that is, who has the ultimate authority to control. The High Court in Zujis v. Wirth Brothers Proprietary Ltd (1955) 93 CLR 561 stated:

What matters is lawful authority to command as far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.

The principal has control over the selling of the catch and calculating the amount payable to each worker. The Agreement provides that the catch will be sold at the conclusion of each voyage by the vessel owner. The catch shall always remain the property of the principal. The catch may be sold to any buyer chosen by the owner as long as the price received for the product is at market price being paid for similar product on the date of sale. The fishermen shall receive the proportion of the catch as set out in the Agreement. The principal agrees to supply the share fisherman with a calculation of the share fishing payment from each unload. The condition that the catch must be sold at market value means that control test on this point is inconclusive.

The workers have rights that must be considered when completing the catch sale which ultimately leads to the final remuneration calculation. The proportion of the catch going to the workers (as per the fishing agreement) has been negotiation with the vessel owner by way of a meeting and discussion of outcomes. The workers may potentially negotiate a higher or lower proportion depending upon their bargaining position.

The principal maintains that the skipper has total control in regards to:

· whether the boat goes to sea due to safety issues

· where he fishes.

· the composition of the crew and the duties of the deckhands (a deckhand is part of the fishing team which is controlled by the skippers.

We consider the decision of McCabe M in Brinkley v Federal Commissioner of Taxation [2002] AATA 218 (Brinkley) is relevant to this case. In this decision, the skipper was considered to be an employee of the vessel's owner, as the owner retained the power to exercise control over the workers, despite the skipper being given a great deal of autonomy over the operations on the fishing vessel. McCabe M also found that the workers were not operating their own businesses and were an integral part of the owners business and subject to their direction.

The principal has stated that the workers are not subject to their direction while out at sea as the job description of the skipper shows that they are responsible while the vessel is out at sea.

This is very similar to the decision in Brinkley as the workers are integral to the principal's business, further indicating the working relationships are similar to that in Brinkley.

However, the decision in Brinkley can be distinguished on the basis that the applicant retained the power to retain and dismiss the deckhands. Whilst it appears that in the current matter, the decision to retain and dismiss deckhands is a decision made by the skippers, rather than by the principal.

Therefore, an overall analysis of the factors indicates that the issue of control is inconclusive, particularly given the level of control exercised by the skipper.

A requirement to produce a given result can be indicative of an independent contractor status. The term 'production of a given result' is defined in SGR 2005/1 as:

the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome.

The Principal has stated the workers are paid to produce a specific result, being to obtain a catch. Simply being engaged to obtain a catch is not conclusive on its own. Each worker is primarily engaged to provide their labour, skills and expertise. The complete 'result' of a fishing trip cannot be achieved by one worker alone. It takes all of the workers to produce the catch and it also requires the capital and expenditure of the principal. In this case it is noted that remuneration is not linked to the effort exerted or hours involved. If there is no catch there is no pay. In that regard, from the worker's perspective, they must produce a result. This situation is different from arrangements where the fishing team are not exposed to risk of a loss or do not share in the costs of a trip.

Whether the worker would be viewed by a third party as carrying on their own business is also a relevant consideration. This involves an assessment of whether the worker's activities are perceived as part of the business of the principal and whether they could be expected to generate goodwill in their own right. The principal has advised that the public's view would be that the workers are independent contractors as they do not exclusively enter into share fishing agreements with the principal. They are free to enter into share fishing agreements with any vessel owner.

The evidence provided indicates the workers are an integral part of the principal's business. In General Aviation Maintenance Pty Ltd v FC of T 2012 ATC 10-235 (General Aviation), the tandem master was found to be an integral part of the applicant's business as they were in the business of providing tandem parachute jumps, and would not have a business without the tandem master's services. This is similar to this situation where the principal is in the business of trawl fishing, and without the workers, they would not be able to catch any goods to sell.

The principal has also argued that the workers are dependent upon each other with regard to maximising their remuneration as it is linked to the size and quality of the catch. The fact that the workers must rely upon each other to produce the best possible catch does not indicate they are independent contractors. Independent contractors are not generally reliant upon each other to ensure their own remuneration. That type of arrangement is more consistent with employees.

There is nothing in the current agreement that states that the workers can delegate their work. However, the skipper has the unfettered discretion to invite anyone to work on the vessel, whether a deckhand or even another experienced skipper. Paragraph 50 of SGR 2005/1 differentiates between 'delegation' and 'substitution'. When a worker asks another to complete their contract and that worker is not responsible for paying the replacement worker, they have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor. True delegation is where a worker employs someone else to complete all or part of the result they are contracted for and are responsible for remunerating them. Changes in the members of the fishing team will not result in a change to the principal's share of the catch proceeds. Any change in the composition of the fishing team must be paid from the fishing team's fixed share. Hence we consider that this particular arrangement is more indicative of independent contractors rather than an employee/employer relationship.

An independent contractor is exposed to commercial risk in the same way as any other business operator. An employee on the other hand, wouldn't be exposed to such risks. In this case, the principal has advised that the workers only provide their personal items (i.e. wet weather gear) and not any of the fishing equipment. The principal is responsible for major maintenance and repairs whereas the fishing team look after the routine maintenance tasks.

The Agreement states that all the parties share both income and expenditure. The fishing team may incur a loss if revenue does not exceed expenses. The business risk is shared by all the parties to the agreement. The principal stated that in the past there has been a loss incurred by the skipper and deckhands but in recent times this has not occurred. It appears that the workers are exposed to business risks similar to that of an independent contractor. They are not guaranteed a return for their service. The fishing team may be personally liable for up to the specified percentage of the operating expenses of a trip if their percentage share of the revenue is not sufficient to cover costs.

In Brinkley, McCabe M said the fishing arrangement fell short of a partnership. His Honour found that it was significant that there was not a sharing of both profits and losses. The skipper took his share (20%) from the gross and did not bear the costs. He did not get paid if he had an unsuccessful trip but he was not liable for costs associated with the trip. McCabe said that the absence of an agreement to share losses was a relevant factor in determining that an employer/employee relationship existed in that case.

The provision of tools test has limited usefulness in share fishing arrangements. The vessels, licences and equipment involve a large capital outlay. The licences are subject to strict legislative control, including catch limit quotas. There is little scope for an employee or contractor to provide their own tools and equipment. Although the workers are provided with tools and equipment that is consistent with an employee/employer relationship they are also exposed to a level of commercial risk that is higher than would be expected to be borne by an employee.

In conclusion we consider that in all the circumstances of this particular case the share fishing agreement is not consistent with the workers being classified as employees under the common law rules. We are now required to consider the expanded definition under subsection 12(3) of the SGAA.

Question 2

To determine whether the contract is wholly or principally for the labour of the person, we examine the terms of the contract, in light of the subsequent conduct of the parties. We consider whether:

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

In this context, the word 'principally' assumes its commonly understood meaning, that is chiefly or mainly, and labour includes mental and artistic effort as well as physical toil. A contract may be partly for labour and partly for something else, such as the supply of goods, materials or hire of plant or machinery. Subsection 12(3) of the SGAA only applies if the contract is wholly or principally for labour.

§ the individual must perform the contractual work personally (there is no right to delegate); and

Delegation is generally implied in a contract for services where the emphasis is on the result rather than the person. However, delegation clauses are considered in the context of the contract as a whole, to determine if they are consistent with the apparent essence of the contract or are merely self-serving statements.

§ the individual is not paid to achieve a result.

The meaning of the phrase 'producing a result' means the performance of a service by one party for another where the first mentioned party is free to employ his/her own means to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

In your case

The members of the fishing team were contracted to provide their labour and skills. However, the basis of their remuneration was to provide a result, the catch. The consideration they received under the contract was determined by the profit made on a catch. It was possible for the fishing team to be personally liable for costs associated with a loss. There was no guarantee of payment for the labour and skills provided. This was the case even though the likelihood of suffering a loss may have been remote considering past performances.

A skipper could not delegate their responsibilities. However, the turnover of deckhands was under the skipper's control, not the principal. The proportion of remuneration did not alter in line with changes to the composition of the fishing team.

Accordingly, as the workers do not satisfy all three components of the expanded definition under subsection 12(3) of the SGAA, they are not included in the expanded definition of employee as set out in subsection 12(3) of the SGAA.

Conclusion - overall

Upon considering all the available information we are satisfied that the facts and evidence confirm that the workers are not eligible employees for the purposes of the SGAA.