Edited version of your private ruling

Authorisation Number: 1012509680028

Ruling

Subject: Contractor or employee

Question 1

Is the Rulee an employee or contractor?

Answer

The Rulee is considered a contractor.

This ruling applies for the following periods:

1 July 2013 to 30 June 2014

Relevant Legislative Provisions

Tax Administration Act 1953 Section 12-35 of Schedule 1

ATO view documents

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees

Other references (non ATO view)

Hollis v. Vabu (2001) 207 CLR 21

Queensland Stations Pty Ltd v. FC of T (1945) 70 CLR 539; (1945) 19 ALJ 253; (1945) 8 ATD 30; [1945] ALR 273

Relevant facts and circumstances

The Rulee conducts a training consultancy business as an individual/sole trader.

The Rulee's has an ABN

The Rulee has worked as a trainer for one client for 12 days in 1 year.

The training the Rulee provides to this one client accounts for X% of the Rulee's work. The income earned from work undertaken for the one client is less than X% of the Rulee's yearly income.

The Rulee does not have a written contract concerning the work carried out.

The Rulee is paid for the work done based on the quotation provided.

The Rulee has public liability insurance to ensure that in the unlikely event of an accident, the participants are covered up to an insured amount of 10 million dollars.

The Rulee is responsible for providing all assets that are used to facilitate the training such as a laptop, pointer, projector, pens and materials.

The Rulee is an independent trainer and trains participants in his/her own style and interpretation of the training subject matter.

The Rulee is responsible for all activities during the training.

The Rulee uses flash cards and ice-breaker items, etc.

The Rulee does not receive any benefits or payments from the one client, such as annual leave, sick leave, long service leave, or any other benefits under an award for employees.

Reasons for decision

Summary

The Rulee is an independent contractor, rather than an employee.

Detailed reasoning

Section 12-35 of the Schedule 1 to the Tax Administration Act 1953 (TAA 1953) provides that:

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 term 'employee' is not defined in the TAA 1953, therefore it has its ordinary meaning. In most cases, it will be self-evident whether an employer/employee or principal/independent contractor relationship exists. However, it is sometimes difficult to discern the true character of the relationship from the facts of the case as the intentions of the parties may be unclear or ambiguous, such as where the terms of the contract are disputed by the parties or are otherwise in apparent conflict. Because of these difficulties, the ordinary meaning of employee has been the subject of a significant amount of judicial consideration.

These cases have discussed a number of factors that may be applied in determining whether an individual is a common law employee.

As the employer-employee relationship is a contractual one it is often referred to as a 'contract of service' which can be contrasted with a principal/independent contractor relationship typically referred to as a 'contract for services'. That is, an independent contractor generally contracts to achieve a result, whereas an employee contracts to provide labour (to enable the employer to achieve a result).

The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.

A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered. 

Taxation Ruling TR 2005/16 Income tax Pay As You Go - withholding from payments to employees at paragraph 7 states:

'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. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.'

TR 2005/16 discusses the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

· Control test

· Contract for results

· Delegation

· Risk

· Provision of tools/payment of own expenses

· Other - other indicia suggesting an employer-employee relationship include:

· - the right to suspend or dismiss the person engaged;

· - the right to the exclusive services of the person engaged;

· - provision of benefits such as annual, sick and long service leave;

· - provision of other benefits prescribed under an award for employees; or

· - a requirement that a worker wear a company uniform.

Application of the key indicators to your circumstances

Control test

TR 2005/16 states that the degree of control which a person who engages another person can exercise over that person is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. A common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that a contract may specify how the contracted services are to be performed does not necessarily imply an employment relationship.

Paragraph 28 of TR 2005/16 explains further that providing direction is not uncommon in supply contracts. It states:

… a high degree of direction and control is not uncommon in contracts for services.( See Queensland Stations Pty Ltd v. FC of T (1945) 70 CLR 539; (1945) 19 ALJ 253; (1945) 8 ATD 30; [1945] ALR 273 )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.

The one client has minor control over the Rulee, but not enough to characterise the relationship as one of employment. The Rulee situation differs from the facts in Hollis v. Vabu (2001) 207 CLR 21 where in that case the bicycle couriers had little control over the manner in which they conducted their work.

While one client directs the Rulee when to work, it is considered that this is a necessary requirement of a contractual relationship involved the supply of training services. In most other areas the Rulee is free to conduct the training in any manner deemed appropriate and receives no direction from the one client.

Contract for results

TR 2005/16 states 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 services. Other indicators of a contract for services include where the person is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome, the consideration is for a fixed sum on completion of the specified services which is the result, as opposed to an amount paid by reference to hours worked. 

The Rulee has absolute discretion on how to conduct training and is permitted to interpret and present the material in a manner deemed appropriate by the Rulee.

The Rulee provides all equipment needed to facilitate the training and this equipment is owned by the Rulee.

The Rulee provides a quotation for all work undertaken and it is on this basis that payment is made. The quotations provided are based on an hourly rate which is set using industry norms, however the Rulee is paid based on the quotation and not by reference to an hourly rate. The Rulee receives no commissions for the work undertaken.

Delegation

TR 2005/16 states that if a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result.

The Rulee is engaged to perform the training and is unable to delegate the responsibility to a third-party. Due to the nature of the service being provided by the Rulee, being training services, it is understandable that the Rulee is unable to delegate these services to another.

Risk

TR 2005/16 states that the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are 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 also often carries their own insurance and indemnity policies. 

The Rulee has public insurance policy for the participants in its training courses. The Rulee is not paid if a client is not satisfied with the training provided. The Rulee will conduct a training session again free of charge for a client who is not satisfied with the training performed. These facts suggest that the Rulee bears all the commercial risk and responsibility. In addition the Rulee is responsible for any injury sustained by participants in the course of providing training which is also indicative of the Rulee being a contractor rather than an employee.

Provision of tools/payment of own expenses

TR 2005/16 states that 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. Further, the Tax Office considers that an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including for the use of their own assets such as a car.

The Rulee is responsible for the assets that are used such as laptop, pointer, projector, pens, flash cards and ice-breaker items. The Rulee is not reimbursed for materials used in a training course. These facts point towards the Rulee being a contractor rather than an employee.

Other factors we considered

In addition to the above factors we also considered:

· The Rulee does not receive any benefits/payments - such as annual leave, sick leave, long service leave, or any other benefits under an award for employees.

Conclusion

While some factors in isolation may be considered those of a common law employee the overall impression when considering all the criteria as outlines in TR 2005/16, are indicative of the Rulee being a contractor.