Edited version of your private ruling

Authorisation Number: 1012526659838

Ruling

Subject: Pay As You Go Withholding

Question 1

Are the persons you engage on a per job basis considered to be your employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

Question 2

Are you required to withhold Pay As You Go (PAYG) withholding tax for remittance on behalf of these persons?

Answer

No.

This ruling applies for the following periods

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You are a company.

You engage people to complete particular jobs.

When you have a job that needs to be done you contact a person you have used previously to see if they are able to do the job. There is no obligation for the person to accept the job. If they refuse the job, you contact another person.

The people engaged:

· provide their own tools and equipment

· are free to delegate or sub-contract the work to others and bear the cost of this

· can employ their own staff to assist them in carrying out the job

· are not supervised by you when performing the work

· are not paid on an hourly rate

· invoice you after the job is completed

· can perform services for other entities

· are free to advertise their services

· must have their own personal professional liability insurance policy

· accept risks associated with rectifying any faulty, defective of negligently performed services, and

· are not required to wear your uniform.

To date there has been no formal written contract arrangement between you and these people.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-35

Reasons for decision

Summary

The people engaged on a per job basis are considered to be independent contractors. You are not required to withhold and remit PAYG withholding tax from payments made to them.

Detailed reasoning

Employee or contractor

Section 12-35 of Schedule 1 to the TAA provides that you must withhold an amount from salary, wages, commission, bonuses or allowances you pay to an individual as an employee.

A determination of whether an individual under a specific arrangement is an employee must be made by a consideration of the total factual circumstances in light of all the indicators determining the status of that individual. It is the totality of the relationship that needs to be considered.

Taxation Ruling TR 2005/16 discusses the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

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 is paid to achieve the contractually specified outcome

· the delegation test: whether the work can be delegated or subcontracted (with or without the approval or consent of the principal)

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

· which party provides tools, equipment and payment of business expenses.

Control

A test for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. The importance of control lays not so much in its actual exercise as in the right of the employer to exercise it.

A high degree of discretion or latitude in the manner in which a task is performed does not, of itself, indicate a contract for services.

Further, although it is not uncommon for a contract to specify how the contracted services are to be performed, this does not necessarily imply an employment service. A high degree of direction and control is not uncommon in contracts of service. In contractual arrangements, any control or direction must be expressed in terms of the contract only otherwise the contractor is free to exercise their own discretion, because they work for themselves.

In this case, there is no effective right of control over any of the people engaged. Where and when the job is carried out is dependent upon the job to be performed. How the actual duties are to be carried out is performed at the discretion of the person.

Organisation or integration

In an employment relationship, tasks are performed at the request of the employer and the employee is said to be working in the business of the employer. An independent contractor carries on a trade or business of their own. An independent contractor enters into a contract to perform specific tasks and has a high level of discretion and flexibility about how the work is to be performed, even if the contract contains precise terms about methods of performance.

An employee works in the business of the employer and the work performed may be said to be integral to that business. An independent contractor works for the payer's business but the work is not integrated into the business rather it is an accessory to it.

In your case, the people have specific skills which they carry on in their own right. When approached they are able to refuse the offered job and can accept the same type of work from other entities.

Results

Where the substance of a contract is for the production of a given result, there is a strong indication that the contract is one for services.

'The production of a given result' means 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. Satisfactory completion of the specified services is the 'result' for which the parties have bargained.

The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

In this case, the engaged people are not paid on an hourly basis. Payment does not occur until after the job is completed and person has submitted an invoice to you.

Delegation

The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contactor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee.

Whereas if an individual has unfettered power to delegate the work to others (with or without approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. The contractor is free to arrange tor their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker.

A common law employee may frequently 'delegate' tasks to other employees, particularly where the employee is performing a supervisory or managerial role. However, this 'delegation' exercised by an employee is fundamentally different to the delegation exercised by a contractor outlined above. When an employee asks a colleague to take an additional shift or responsibility, the employee is not responsible for paying that replacement worker, rather the workers have merely organised a substitution or shared the work load. This is not delegation consistent with that exercised by a contractor.

Engaged people are able to delegate the job to a subcontractor or employ others to do the job. The person bears the cost of this and is responsible for the job performed by the others.

Risk

An employee bears little or no risk of the costs arising out of injury or defect in carrying out their work. An independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor is usually expected to take out their own insurance and indemnity policies.

Whether the worker is contractually obliged to accept liability for the cost, in terms of time or money, for the rectification of faulty or defective work is a relevant consideration in determining if that worker should be regarded as an employee or independent contractor.

Commonly, an independent contractor or entity would solely bear the risk and responsibility of liability for their work if it does not meet an agreed standard and would be required to either rectify this defective work in their own time or at their own expense.

An employee, on the other hand, would bear no such responsibility and liability for any defective work of the employee, either to a third party or otherwise, would fall to the employer in terms of the burden of cost or time for rectification.

The risk for any job undertaken is borne solely by the engaged person. They are required to rectify any defective services at their own cost.

Provision of own tools and equipment and payment of business expenses

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.

However, the provision of necessary tools and equipment is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor.

There are situations where very little or no tools of trade or plant and equipment are necessary to perform the work. This fact by itself will not lead to the conclusion that the individual engaged is an employee. The weight or emphasis given to this indicator (as with all the other indicators) depends on the particular circumstances and the context and nature of the contractual work.

Further, an employee, unlike an independent contractor, is often reimbursed (or receives an allowance) for expenses incurred in the course of employment, including the use of their own assets such as a car.

The engaged people are skilled in this industry. They supply and use all their own tools.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the engaged people are independent contractors and not employees.

PAYG withholding tax

As the engaged people are considered to be independent contractors you are not required to withhold and remit PAYG withholding tax in respect of payments made to them.