Edited version of your private ruling

Authorisation Number: 1012580285665

Ruling

Subject: Status of worker

Question

Will you be required to withhold and pay PAYG tax in respect of people who receive commission payments from you when they sell your products or services?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are a firm and are proposing to engage the services of people who will become your agents (the Agents) to generate leads for your sale of your services and products. This will occur under licence, which will be granted on condition that the appropriate training is undertaken. The training will comprise of a two-day workshop about the sales pitch and how to talk to potential customers.

The goal of the Agents is to induce potential customers to attend certain venues, organised and, if necessary, paid for by the Agents, at which a representative of your company will give a presentation and sell your services and products.

Due to the nature of your services and products, the Agents are prohibited from directly selling them.

The Agents will be paid commission only, based entirely on the number of orders they generate and send to you, that you complete and for which you receive payment. If you are not paid by the customer then the commission is not payable to the Agent.

The Agents will conduct the lead generation in their own time although under your name. The Agents can work as many hours as and when they chose.

The Agent is responsible for the payment of their own expenses, including rent, business cards, office equipment, computer, mobile phone, travel expenses, telecommunications, internet expenses, marketing, local advertising, postage, venue hire and brochures specific to the Agent.

When the Agents undertake advertising, you expect them to come to you for its approval. The advertising must use information and wording from your brochures.

Your image and its consistency is important to you. The Agents must dress appropriately and must have their name on your corporate business card, which they pay for.

Although the Agents cannot give formal advice to potential customers but will be trained in:

(i) identifying customer needs and issues;

(ii) stimulating customer questions; and

(iii) answering very basic questions about product features. The Agents must be skilled and abide by the State legislation professional requirements because they are your agents.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

Taxation Ruling TR 2005/16 provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA 1953.

Paragraph 7 of TR 2005/16 explains 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. It explains no one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

The key indicators are:

1. The control test. For an employee, the payer has the right to direct the way in which the worker performs their work. For a contractor, the worker has freedom in the way the work is done subject to the specific terms in any contract or agreement.

2. The organisation or integration test, about whether the worker operates on their own account or whether the worker operates in the business of the payer. This includes:

(i) the nature of the services rendered by the worker;

(ii) whether they are an integral part of the business activities carried on by the payer;

(iii) whether the worker would be perceived (by a third party) to carry on their own business or enterprise and;

(iv) whether the worker could be expected to generate business goodwill in their own right.

3. The results test, about whether the worker is paid to achieve a contractually specified outcome. Paragraphs 35 of TR 2005/16 states:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.

An independent contractor, such as a house builder, is paid a quoted price for a pre-determined or agreed result, which may include progress payments, and generally uses their own equipment to achieve that result. A worker paid on an hourly basis is generally an employee. A worker paid based on a price per item or activity is also generally an employee, particularly when they are not contributing major assets to the task. Paragraph 39 of TR 2005/16 states:

While the notion of 'payment for a result' is expected in a contract for services, it is not necessarily inconsistent with a contract of service. The High Court in FC of T v. Barrett & Ors found that land salesmen who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors. Likewise, the High Court in Hollis v. Vabu considered that payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in Roy Morgan found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

4. The delegation test, about whether the work can be delegated or subcontracted (with or without the approval or consent of the principal). An employee cannot delegate or subcontract work. Where as an independent contractor can delegate or subcontract work.

5. The risk test. Unlike an independent contractor, an employee generally does not bear legal responsibility and expense for rectification and remedy in the case of unsatisfactory performance.

6. The last test is which party provides tools, equipment and payment of business expenses. Unlike an employee, an independent contractor will generally provide tools, equipment and payment of business expenses.

Paragraph 19 of TR 2005/16 states consideration should be given to these various indicators, bearing in mind that no list of factors is to be regarded as exhaustive and the weight to be given to particular facts will vary according to the circumstances. Where the weighing up of the indicators points one way so as to yield a clear result, the determination should be in accordance with that result.

In the Full Supreme Court of South Australia case of Roy Morgan, the taxpayer operated an Australia-wide business, the primary focus of which was in the field of market research. One of the techniques employed by the company involved the use of interviewers who conducted surveys using face- to-face interviews in a designated area. They were to have car, a telephone and be prepared to travel up to 100 kilometres. They were furnished with questionnaires, were required to conduct the interview by reading the questions precisely as formulated in the questionnaires and recording the responses. The questionnaires were drafted with precision. The integrity of the collection of data would be compromised if there was to be any deviation from them. As well as conducting the interviews required for each assignment, interviewers also invited the respondent to complete a self-completion questionnaire, filled out by the respondent in his or her own time and returned. Most of the information received by the company came from the self-completion surveys rather than from face-to-face interviews. Interviewers only worked at weekends. They could commence interviewing on Saturday at 9.30 am and complete the assignment by late Sunday afternoon. Allocation of assignments was generally arranged on a week by week basis to interviewers willing to accept an assignment for the coming weekend. ID badges and contact telephone numbers were readily supplied so that people interviewed could be reassured that they (and the company) were genuine. Good grooming was essential but no special clothing was required. Personal instruction (briefing) and manuals were provided. Advice, assistance and support was available at all times (weekends included).

In making its decision, the Full Supreme Court adopted the same reasoning as set out in the Victorian Court of Appeals case of Roy Morgan Research Centre Pty Ltd v Commr of State Revenue (Vic) 97 ATC 5070; (1997) 37 ATR 528, where their Honours' said (at ATC 5078; ATR 538):

In my (sic) opinion, on no sensible view of the evidence could it be said that the interviewers were conducting such a business on their own account, as distinct from participating in the business of the appellant. In truth they were engaged by the appellant to conduct interviews on behalf of the appellant in a manner and form strictly controlled by the instructions given to them by the appellant. Accordingly they were told to represent themselves to respondents as engaged in a 'Morgan' research programme to give credibility to their task. If the function was not performed in accordance with the instructions given the sanction was that no further assignment would be made available. Close conformity with instructions was essential to the appellant in order that it could comply with its own obligations to its customers to provide accurate survey results.

In these circumstances interviewers were engaged in the service of the appellant as distinct from being independent contractors. Although it is true, as I (sic) have said, that no single test is decisive of the relationship between the engagor and the engagee, in a case like the present the degree of control exercised by the appellant over its interviewers, both as to the nature and manner of their task, is a very significant criterion pointing towards the relationship of employer/employee.

In the High Court of Australia case of Federal Commissioner of Taxation v. Barrett (1973) 129 CLR 395; (1973) 47 ALJR 616; (1973) 2 ALR 65; (1973) 4 ATR 122; (1973) 73 ATC 4147 (Barrett), where it was decided land salesmen, who were remunerated by commission only, were employees, some concluding remarks were as follows:

There do, however, appear to me to be a number of circumstances which point to the conclusion that these salesmen are employees. They are…representatives of the firm…Salesmen are…required to pay over to the respondents all moneys received by them from buyers…All salesmen are required to abide by the code of ethics of the Institute of which the employers are members and by the rules of the Multiple Listing Bureau and these obligations are insisted upon. For every sale effected by a salesman he is required to complete and submit a questionnaire to the respondents, the purpose of which is to provide them with a quite detailed knowledge of the circumstances of the sale which has been negotiated and of the facts leading up to its conclusion, so that they may ensure that salesmen are acting as they would wish them to; for instance, the respondents insist that salesmen should always visit the land with an intending buyer before a sale is concluded. Control of newspaper advertising and the supervision of the form of contracts which the salesmen induce buyers to execute is undertaken by the respondents.

In mentioning the foregoing matters I am not to be taken as discounting the weight of those other relevant circumstances to which the Chairman has drawn attention in the course of his decision; but it is these particular aspects, viewed in the context of the facts as a whole, which lead me to conclude that these land salesmen are employees of the respondent.

They are otherwise free from supervision in their primary task of effecting land sales, a task calling for highly individual qualities and a willingness to work at odd hours when the community at large is not at work. This lack of supervision is in large measure accounted for by the nature of their work and their careful selection and resultant skill and responsibility, coupled with the fact that payment by commission itself provides adequate incentive so as to safeguard the interests of the respondents. Even without reference to their rostered duties and the other tasks to which they may from time to time be directed by the respondents I would conclude from the foregoing that, whichever of the acknowledged tests of an employer-employee relationship may be applied, the conclusion must be that such a relationship does exist in the present case.

In your case, our view is your circumstances are similar to those found in the cases of Roy Morgan and Barrett, where it was found the existence of an employer-employee relationship. Similar to those cases, you would exercise a large degree of control over the Agents, in that their work duties would require close conformity with your instructions, use of your product descriptions and corporate image.

Thus, for the most part, the Agent would generally be perceived as working in your organisation rather than in their own business, particularly as they would be required to use your business card and they would not be generating any goodwill in their own right.

Crucially, the Agents will not be working for a result. This is because:

(i) they will receive a commission principally for the labour and

(ii) unusually, any 'result' from their work cannot be correlated with their commission earned. For example, on an occasion, an Agent's work may result in 100 people attending a presentation and you making 10 sales; and, on another occasion, an Agent's work may result in 100 people attending a presentation and you making 20 sales. Therefore, as the Agent is only engaged in lead generation and unable to sell your legal services and products, the commission earned by the Agent is not a direct result of their work but, instead, a direct result of your sales work.

Also, the Agents cannot delegate or sub-contract the work and would be expected to not bear risk.

In conclusion, in weighing up the six indicators, five from six weigh heavily in favour of an employer-employee relationship, namely, the control, organisation, results, delegation and risk tests. Consequently you would be required to withhold and pay PAYG in respect of payments you make to the Agents.