Edited version of private advice

Authorisation Number: 1012651587790

Ruling

Subject: PAYG Withholding obligations

Question

Is the entity obliged to withhold from payments made to experts under section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA)? 

Answer

No

This ruling applies for the following periods

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 2014

Relevant facts

The entity uses experts in their field to assist the entity in its role.

The experts are remunerated by the entity for providing their expertise.

Experts are expected to read all materials and form an opinion on a project based upon the assessment criteria as per the entity funding guidelines.

The assessment meeting is held, usually in the entity's offices, the expert can attend in person, via phone or video conference.

The entity's management and experts discuss the applications and make recommendations on whether an application is successful or not.

Experts are not remunerated if they fail to provide service as required by the entity.

Experts are paid a set amount per day or a lesser amount per half day for providing their expert opinion.

If experts are registered, they will be paid more per day.

The experts perform the required tasks when it is suitable to them.

The experts are sole traders who have an ABN.

Experts will be paid by the entity upon receipt on a tax invoice.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 960-100.

Taxation Administration Act 1953 section 12-35 to Schedule 1

Taxation Administration Act 1953 section 12-190 to Schedule 1

Reasons for decision

Detailed Reasoning

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

An 'entity' is defined under section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust, a superannuation fund and an approved deposit fund.

Where section 12-35 of schedule 1 of the TAA refers to an employee, the reference is to an employee at common law.

Who is an 'employee' within the ordinary meaning of that expression?

There is no one factor that determines whether a person is an employee or an independent contractor. A number of factors must be considered.

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship).

Such a relationship is typically contrasted with the independent contractor/principal relationship that, at law, is referred to as a contract for service. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result).

An independent contractor works in his or her own business (or his or her own account) while an employee works in the service of the employer that is in the employer's business.

Whether a payee is considered to be engaged as an employee or as an independent contractor for taxation purposes is a question of fact that is looked at on a case by case basis.

Factors in deciding the relationship

The first consideration must be the terms of the contract. At all times, the underlying consideration is whether the worker is working:

• in the service of another, as an employee, or

• on their own behalf, as an independent contractor.

Taxation Ruling TR 2005/16 provides guidance on the types of factors to be considered in each case. These features which are discussed below have traditionally been regarded by the courts as indicators to assist in determining the true nature of the contract.

The control test

The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment.

The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. In fact, a high degree of direction and control is not uncommon in contracts for services. 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 his or her discretion (subject to any terms implied by law). This is because the contractor is working for himself or herself.

Under a contract of service, on the other hand, the employer has an implied right within the limits imposed by industrial relations laws, to direct and control the work of an employee. This is because the employee is working in the employer's business and the owner of a business has the right (within the confines of applicable law) to manage that business as the owner sees fit.

The High Court stated that what matters is lawful authority to command, so far as there is scope for it.

The more control that is held over the person performing the work, the more likely it is that the person will be an employee.

In this case, there is minimal control of the experts as the entity provides guidelines and dates to attend meetings. However, the entity does not instruct the experts on how they perform their tasks,

Results test

In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. Conversely, under a contract of service, payment is not necessarily (but may be) dependent on the completion of specified services.

The entity engaged the experts and seeks their expertise in this industry to assist the entity. The experts are engaged to review a set number of tasks for a fee as agreed between the entity and the expert.

Delegation test

The power to delegate was considered to be an important factor in deciding whether a person is an employee or an independent contractor. An unlimited power to delegate work is an important indication that the service provider is an independent contractor.

The experts are engaged as sole traders and a review of the terms of engagement does not indicate they can delegate work to others as they are personally selected because of their experience in the industry.

Conditions of engagement

Provision of paid leave entitlements, for example, sick leave, long service leave and superannuation are persuasive indicators of an employment relationship.

It should be noted that there is no standard set of indicators applicable to an employee and a different set applicable to an independent contractor. Most conditions of engagement when viewed individually are equivalent as indicators of the true character of the relationship.

There are no provisions for paid leave or worker compensation entitlements under the terms of engagement.

Hours of work and mode of payment

An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work.

The experts are not required to work a set number of hours to perform the required tasks. The experts can choose the times and dates that they wish to perform the tasks.

Business risk and expenses
Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being independent. Typically, a worker who derives piece rate payment and sustains large outgoings would be so exposed.

The higher the proportion of the gross income which the worker is required to expend in deriving that income, and the more substantial the assets which the worker brings to his or her tasks, the more likely it is that the contract is for services.

The experts are not paid if they don't perform the required tasks.

Place of performance
Workers under a contract of service will generally perform the tasks on the payer's premises using the payer's assets and equipment. A contractor, on the other hand, generally provides all their own assets and equipment.

The experts perform the required tasks away from the entity's premises and are required to make themselves available to attend scheduled meetings relating to specific tasks, however they can attend in person via phone or video conferencing.

Integration

The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate that the worker is an integral part of the business.

From information the entity has supplied it is clear that the experts are engaged for specific tasks. Although the experts may be subject to various guidelines, the entity has engaged experts to provide specialised knowledge and independent advice. There appears to be no requirement which dictates when the experts carry out their duties.

Conclusion

When the above factors are considered, the experts are considered to be engaged under a contract for service which makes them independent contractors rather than employees. As the experts are not considered employees there is no obligation on the entity to withhold from payments made under PAYG withholding legislation.

Note: A payer who makes a payment to an entity for a supply that the entity has made, or proposes to make, to the payer in the course of an enterprise carried on in Australia must withhold an amount if none of the exceptions apply under section 12-190 of Sch 1 to the TAA. Generally the exceptions are:

• where the ABN is correctly quoted

• the payer has no reason to believe the ABN is incorrectly quoted

• no need to quote an ABN

• investments; and

• private or domestic arrangements.