Edited version of private advice

Authorisation Number: 1012631877126

Ruling

Subject: obligation to make PAYG withholding from payments to contractors

Question

Does the Company have an obligation to withhold under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) in relation to payments made to individuals engaged as contractors to provide cleaning services?

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commenced on

1 July 2013

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• The private ruling application

• The attachments attached to the private ruling application described as Annexure "A".

The Company operates a business in which it agrees to provide comprehensive cleaning related services to clients at residential and commercial premises.

The company charges a fixed monthly fee to its clients for its services. The amount of the fee is based on a number of factors including:

(a) The scope and nature of any consulting provided by the Company as to the client's cleaning needs; and

(b) The volume of physical cleaning required to be undertaken.

The Company employs individuals to undertake cleans for the clients. The Company also engages independent contractors to undertake cleans for the clients.

The independent contractors engaged by the Company comprise a mixture of individuals, partnerships and companies.

The Company seeks out prospective independent contractors through word of mouth and advertisements in newspapers.

The criteria used by the Company when selecting a suitable contractor include:

(a) whether the contractor has a good reputation and track record;

(b) whether the contractor has specific skills required for the job;

(c) whether the contractor is available to do the job;

(d) whether the contractor has available staff

(e) whether the contractor is considered to be able to complete the work in the timeframe required and to the quality expected by the client; and

(f) whether the contractor's fees are considered to be reasonable.

Prior to the engagement of a contractor, a senior manager has a meeting with the prospective contractor in which:

(a) the Company and the contractor negotiate the price to be charged by the contractor; and

(b) the Company explains the expectation of the quality of the services to be performed by the contractor.

The Company and the contractor then enter into a formal written contract.

The relevant terms and circumstances of the engagement of the contractor by the Company are as follows:

(a) Upon agreement the Company is liable to pay the contractor in accordance with the contract;

(b) The Company pays the contractor an agreed lump sum per clean. This amount is paid whether the contractor takes longer or less time to finish the clean;

(c) The contractors' fees are paid on a regular basis provided an invoice has been received and verified by the Company. For administrative convenience, payments to contractors are usually made each fortnight if an invoice has been received in that fortnight:

(d) If a clean is not completed in accordance with requirements of the contract between the Company and the contractor, which is usually brought to the attention of the Company by client dissatisfaction, the contractor must return to complete the clean at no extra charge to the Company;

(e) Contractors are entitled to sub-contract a clean and this is done from time to time. Permission to sub-contract is not required from the Company as the contractor is ultimately responsible for the clean and the contractor will not receive payment if the task is not completed in accordance with the agreement. The contractor is responsible for paying any sub-contractor who completes work for them;

(f) Contractors are free to decline to undertake any cleans. There is no requirement for the contractor to give a notice of termination should they wish to not undertake cleans in the future;

(g) The Company does not provide any uniforms or identification badges indicating that the contractors have an association with the Company;

(h) All contractors must provide an ABN to the Company before payment is made by the Company to them;

(i) Following the initial introduction by the Company, the contractor and the client will negotiate between themselves any adjustments to the time at which the cleans are to be conducted.

(j) Contractors are to hold relevant public liability and worker's compensation insurance policies to be given to the business prior to any work being undertaken by the contractor. Copies of renewed or updated policies are to be provided by the contractor as required;

(k) The contractors supply all their own materials and equipment, that is, cleaning products, cleaning equipment and own mode of transport with no reimbursement or allowance paid by the Company for any expenses.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1

Taxation Administration Act 1953 Section 12-35

Taxation Administration Act 1953 Section 12-190

Reasons for decision

Do PAYG amounts need to be withheld from the payments?

Section 12-35 of Schedule 1 to the Taxation 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).

For the provision to apply, there must be an employee, a payment of salary, wages, commission, bonuses or allowances to an employee as a consequence of his/her employment. The term 'employee' is not defined in the TAA 1953 and therefore takes its ordinary meaning. In most cases it will be self-evident whether an employer/employee or principal/independent contractor relationship exists. The Commissioner has set out his views on this matter in Taxation Ruling TR 2005/16.

Based on the information that you have provided we agree with your argument applying the factors in TR 2005/16 and conclusion that the individuals you engage under the contract conditions would be considered to be contractors and not employees. Therefore as they are not employees, there is no requirement to withhold under section 12-35 of Schedule 1 to the TAA 1953.

Note: The ruling is based on the facts that you have provided and is only valid for that set of facts. The contractors have to be engaged and actually complete the work as per the terms set out in the contract for the ruling to have application.

You have stated that all contractors must provide an ABN on their invoices to the Company before payment is made by the Company to them. If there was no ABN quoted you would have an obligation to withhold under the recipient does not quote ABN rules. Subsection 12-190(2) of Schedule 1 to the TAA 1953 provides:

'The payer need not withhold an amount under this section if, when the payment is made:

(a) the other entity has given the payer an invoice that relates to the supply and quotes the other entity's ABN; or

(b) the payer has some other document relating to the supply on which the other entity's ABN is quoted.'