Edited version of private advice

Authorisation Number: 1012648779951

Ruling

Subject: PAYG Withholding obligations

Question

Is there an obligation on the entity to withhold from payments made to a worker under section 12-35 of Schedule 1 of the Taxation Administration Act 1953?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

The entity offered a position to an individual.

A payment schedule was offered, which included superannuation, insurance and long service leave, and the individual concerned accepted the position and commenced work.

The worker worked under an employment contract which both parties agreed he would work under those conditions. At some point the worker demanded that he work as an independent contractor and pay their own tax, GST and superannuation. This arrangement was reluctantly accepted by the society. The entity outsourced their obligations to withhold PAYG and superannuation to another entity. The position was funded by a grant which stated the worker be paid as an employee.

Employment Contract

The employment contract stated:

• You are employed by the entity on a full time basis

• A set number of hours of duty per week was stipulated

• The contract position is funded by a grant and your employment and payroll is hosted and administered by another entity

• Your employment is subject to you maintaining a level of performance satisfactory to the entity

• The other entity will make superannuation contributions on your behalf into a fund of your choice provided it is a 'complying' fund or into the fund designated by that entity in accordance with legislative requirements

• You will accrue annual leave, pro rata, for each completed year of service. Annual leave must be taken within the period of your contract

• You will accrue sick leave (on a weekly basis)

• You are entitled to paid long service leave upon completion of a set number of years continuous service with the entity.

• You are able to use up to a set number of weeks of sick leave each year as carer's leave

• You are entitled to bereavement leave; and

• You must notify the entity of your intention to undertake other paid work during the period of this contract. The entity reserves the right to determine if a conflict of interest exists and to grant approval for external employment.

The employment contract also stated:

Organisational responsibilities

The entity may provide the worker with training and assistance where necessary.

The other entity will:

• Manage the employment process and payroll requirements in partnership with the entity

• Collect information and manage the requirements of PAYG Taxation, Work cover and Superannuation

• Maintain copies of job statement, contract and other associated employee paperwork in a safe manner.

A duty statement was provided to the worker.

Termination of employment

The entity is able to terminate employment of the employee, prior to a date specified by the entity by giving a certain period's notice in writing or payment in lieu at the discretion of the entity if:

• The employee substantially fails to meet any performance outcomes or carry out their duties; or

• The cessation of the main funding contract between the entity and their funding body.

The entity retains the right to summarily dismiss you (without notice) if you:

• Commit any serious or persistent break of the terms of this agreement

• Commit any serious misconduct

• Are grossly negligent in the performance of your duties; or

• Engage in any conduct that caused loss or damage to the society's reputation standing or public image.

You may terminate your employment by giving the entity a certain period's notice.

If you fail to give the required period of notice the entity may authorise the second entity to deduct, from monies owing to you upon termination, an amount equivalent to the salary you would have earned during the remainder of the notice period.

Redundancy

An employee who is made redundant must be told as soon as reasonably practical, and is entitled to receive an amount of paid leave during the notice period to attend job interviews.

During the period the worker was paid for, and went on annual leave and was paid for a number of day of accrued annual leave which was not taken before the end of the contract. The worker also used sick leave days during their tenure.

Throughout the terms of the contract, on receiving a tax invoice, the entity paid the worker a gross amount (GST inclusive) on a regular basis. This amount included superannuation and tax.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Summary

Based on the information you have provided the Commissioner considers that there was an obligation on the entity to withhold from payments made to the worker as an employee of the entity under PAYG legislation.

Detailed reasoning

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that you must withhold an amount from a payment of 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 of 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 considers 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.

• Which party provides tools, equipment and payment of business expenses?

Control

The 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 relationship. 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 the worker was engaged by the entity. The worker was remunerated for their labour by hours worked. The worker worked under a duty statement which was drafted well before they were engaged. According to the employment contract they were required to work for a set number of hours per week. The worker also had supervisory responsibility for other employees. The worker is restricted in the way they do their work by the duties outlined in the worker's Duty Statement and the employment contract.

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 payers business but the work is not integrated into the business rather is an accessory to it.

In this case the worker was engaged to perform in the business of the entity. They do not carry on a business of their own. The tasks performed by the worker were integral to the business of the entity.

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 worker was paid for hours worked and not for a specific result. The employment contract stated a set number of hours to be worked in the period. They were engaged for the period of the contract and not on the completion of a project or projects. The payee was paid for services provided (their labour) on an hourly basis and not for a specific result. According to the duty statement the worker was given primary responsibilities to be completed by a certain date. The vast majority of these responsibilities are not able to be qualified as to whether they have been completed.

Delegation

The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contractor. 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 for 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.

In this case there does not appear to be any scope for the worker to be able to delegate their tasks as they worked under an employment agreement with the entity.

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 the 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.

In this case the entity did not take out insurance for the worker as they stated they had their own, but it was since discovered that they didn't have any insurance. The second entity took out insurance on their behalf.

Provision of 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 as 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 for the use of their own assets such as a car.

In this case the entity provided the worker with an office including a computer with internet access and a vehicle for work use.

Other indicators of an employer/employee relationship are:

• After a period of time the worker presented the entity with an employment contract which was adopted by both parties

• The employment contract stated if an employee who is made redundant must be told as soon as practical and is entitled to take paid leave during the notice period to attend job interviews

• The worker was paid for, and took, annual leave

• the worker was paid for a number of days of accrued annual leave which was not taken during the term of the contract

• The worker took sick leave during their tenure

• Items such as gross full time salary, superannuation and long service leave are specifically mentioned in the employment contract

• The employment contract also stated the second entity would manage the requirements of PAYG Taxation, Workcover and Superannuation

• The employment contract also allowed for termination of employment

Conclusion

The facts surrounding how the worker was initially engaged are unclear, however after a period of time they agreed to work under an employment contract.

After assessing the facts against the indicators in TR 2005/16, it is considered that the worker was an employee and not an independent contractor for the period they were engaged by the entity. As a result the entity is obliged, as the employer, to withhold from payments made to the worker under section 12-35 of Schedule 1 of the TAA.