Edited version of your written advice

Authorisation Number: 1012859341492

Date of advice: 19 August 2015

Ruling

Subject: Employer or Contractor

Question 1

Are the contractors, when they engage with you under the 'Contractor Agreement', considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No

Question 2

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

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Company A wishes to enter into a Service and Licence Agreement (SLA) to formalise the arrangement outlined below with a number of Professionals (Ps).

Company A facilitates the provision of services to clients of professionals (Principal Ps) by other Ps during the absence of and at the request of the Principal Ps.

The services are only provided on a temporary basis.

Company A provides a physical facility which incorporates control, communications, operations and administration functions. Such functions are utilised by each P to assist them in providing the l services, in exchange for a fee paid by the P to Company A (Service Fee).

Company A is a service provider to the P, who in turn provides services to clients, on behalf of the Principal Ps or on direct referral from the Principal Ps.

The P does not represent Company A and is not required to wear a uniform or hold themselves out as an agent of Company A.

The P can choose when they work and are free to delegate the provision of services to other Ps without Company A approval.

P will carry the risk of their own business making a profit or loss and will only receive income if they provide the particular type of service.

Company A provides the P with some equipment and tools such as bag and access to the service of the vehicle driven by a Company A employee in return for a service fee paid to Company A.

No allowance is paid to Ps for any other tools and equipment required to provide the services and no reimbursements are made to Ps for the cost of such tools.

Ps are not entitled to claim any expenses incurred by them in the course of providing the services.

Key points of the SLA are:

Company A has no contractual relationship with clients.

Services are provided by and on behalf of the P not on behalf of the Company A.

The P has sole liability for services provided to clients.

Company A grants the P a licence to use Company A's facilities including staff, materials, accounts services business development services, information technology services and motor vehicles for the purposes of providing the l services. Administrative staff employed by Company A is not permitted to assist the P to provide the Services.

The P is to be registered professional.

The P is to have own indemnity insurance.

Client records are to be adequately recorded by the P and returned to Company A. Company A then provides the client records to the Principal P so that the Principal Ps records for the client are brought up to date thereby ensuring continuity in the management. The task of collating and returning the client records to the relevant Principal P is part of the service provided by Company A to the P in exchange for the Service Fee.

The P must complete all necessary forms and provide them to Company A so that Company A can provide the accounts services to the P.

Company A will not in any way control or direct the P regarding the Services. The P is to provide their own professional judgement and discretion at all times regarding their services.

The P must pay to Company A the Service Fee as a percentage of the MP's revenue generated by the recovery of payments in exchange for the use of Company A's facilities and the provision of services by Company A.

The professionals must without deduction immediately deliver to Company A any money received by the business so that the money can be handled accordingly.

As part of the Company A's accounts services to the P, Company A will remit to the P 100% of the billings less the Service Fee.

The P must be registered with a valid ABN and be registered for GST if required by law. Company A will issue recipient created tax invoices to the P for the Service Fee.

Company A prohibits the P from encouraging employees to terminate their employment with Company A interfering with any relationship that Company A has or using or disclosing any confidential information belonging to Company A, to any competitor of Company A. There is no restriction on the P providing services to any other business during or after the term of the SLA.

The P indemnifies Company A from any liabilities arising from Services delivered by the P.

The P is responsible for all expenses such as taxes, superannuation and workers compensation which arise through the operation of the P's business and the engagement of employees by the P.

Company A indemnifies the P against any liability arising from the provision of Company A's administrative service only.

Any party can terminate the SLA, without reason, by providing four weeks written notice.

There is no requirement for Company A to undertake any performance management process prior to terminating the SLA.

The P is not entitled to any employment entitlements such as superannuation, annual leave, personal leave and long service leave, compassionate leave, community service leave or any other form.

The MP can assign any of their rights and obligations under the Agreement to a registered professional with applicable registration for Company A business.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 12-35 of Schedule 1

Reasons for decision

Section 12-35 of Schedule 1 to the 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.

Consequently it is necessary to determine whether the payments made to the MPs are salary, wages, commission, bonuses or allowance paid as an employee

Employee Vs Independent contractor

The distinction between employment and contract is the difference between a contract of service indicating an employee/employer relationship and a contract for service indicating a contractor/principal relationship.

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).

The relationship between the independent contractor and the principal is referred to as a contract for services. 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 on his or her own account); an employee works in the service of the employer, that is, in the employer's business.

However, it is necessary to examine all the terms of the contract and to determine whether, on balance, the person is acting as an employee of another or is acting on his or her own behalf.

Whether the true nature of an arrangement between a payer and payee is that of employer/employee or principal/independent contractor is a determination which must be made by reference to the various indicators developed by the Courts. These indicators have been collated in Taxation Ruling TR 2005/16.

TR 2005/16 paragraph 7 provides:

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. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.

The ruling has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law:

• Conditions of Engagement

• Control

• Does the worker operate on their own account or in the business of the payer?

• Results test

• Delegation

• Risk and rectification of work performed

• Provision of tools and equipment and payment of business expenses

• Other

These will be discussed separately below.

Conditions of Engagement

The terms and conditions of the contract whether express or implied, in the light of the circumstances surrounding the making of the contract, whether verbal or written, will always be of considerable importance to the proper characterisation of the relationship between the parties.

Some Conditions of Engagement are closely associated with employment and may, therefore, be persuasive indicators. For example:

• provision of benefits such as annual, sick, and long service leave;

• provision of other benefits prescribed under an award for employees;

• payer prescribed times and location for the performance of work;

• remuneration in the form of a salary or wage;

• the worker uses assets and materials provided by the payer or is reimbursed, or paid a compensatory allowance, for expenses incurred in respect of use of own assets and materials; and

• payer discretion (within the constraints of industrial relations laws) in respect of task allocation and termination of engagement.

However, this list is not exhaustive and it must be emphasised that there is not a standard set of conditions applicable to an employee and another (different) set applicable to an independent contractor.

All the facts of each case must be examined to determine whether it is an employment or contractor relationship. Most conditions, when viewed individually, will be equivocal as indicators of the true character of the contract.

In your case a Service and Licence Agreement is ready to be formalised soon.

Company A prescribes the times when Ps will be required to provide their services.

The P's have a valid ABN and be registered for GST if required by the law. They must also own their own indemnity insurance.

The Company A will be provided a service fee for all the services they provide the Ps and billings remittance.

The P is responsible for all expenses such as taxes, superannuation and workers compensation which arise through the operation of the P's business and the engagement of employees by the P.

Upon consideration of the available facts and evidence, the provided terms of the agreement are more indicative of the existence of a principal/contractor relationship rather than an employer/employee relationship.

Control

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.

In the case, Zuijs v. Wirth Brothers Pty Ltd (1955) 93 CLR 561 the High Court said: 'What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.'

In the case, Humberstone v Northern Timber Mills (1949) 79 CLR 389, Dixon J stated: 'The essence of a contract of service is the supply of the work and skill of a man.'

In the present case, there is no direct control exercised by Company A on the P's. The activities carried out by the P's are not supervised. The work is completed during the specified after hours but the Ps can choose whether to provide the services at any given time. They are also free to delegate the provision of services to other Ps.

The Ps are responsible for all expenses such as taxes, superannuation and workers compensation which arise through the operation of the Ps business.

From this and other particular information supplied, there is no control exercised over the Ps to perform the work.

Does the worker operate on their own account or in the business of the payer?

Another significant factor in establishing the nature of a contractual relationship at common law is the issue of whether the worker operates on their own account or as part of the business of the payer. This is sometimes viewed as a consideration of whether the workers would be viewed by a third party as carrying on their own enterprises as independent contractors or operators and whether they could be expected to generate goodwill in their own right.

In Hollis v Vabu, the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210;

…the distinction between an employee and independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own.

In Montreal v. Montreal Locomotive Works (1927) 1 DLR 161 at 169 Lord Wright said:

it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.

Similarly, in Stevenson, Jordan and Harrison Ltd v. MacDonald and Evans (1952) 1 TLR 101 at 111 Denning LJ said:

... under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.

In your case, the P is to provide their own professional judgement and discretion and at all times regarding services.

Their role is not integrated into Company A but is only of an accessory.

These points would suggest that an independent third party is unlikely to view the P as being an employee of the company or being integrated into the business, concern or enterprise of the company.

This is indicative of the Ps not being employees of the company.

Results test

Under a results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker 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.

TR 2005/16 paragraph 37 provides:

In contracts to produce a result, payment is often made for a negotiated contract price, as opposed to an hourly rate. For example, in Stevens v. Brodribb, payment was determined by reference to the volume of timber delivered, and in Queensland Stations where it was a fixed sum per head of cattle delivered.

TR 2005/16 paragraph 38 further provides:

Having regard to the true essence of the contract, the manner in which the payment is structured will not of itself exclude genuine result based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times.

In this case, the Ps are engaged to perform specific services in return for receiving a fee. The professionals must without deduction, immediately deliver to Company A any money received by the business so that the money can be handled accordingly.

As part of the Company A's accounts services to the P, Company A will remit to the P 100% of the billings less the Service Fee.

These points are clearly indicative of this arrangement not constituting an employment relationship.

Delegation

If a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result.

In this case, the Company A's will not control or direct P's regarding their services. Ps can assign any of their rights and obligations under the Agreement to a registered professional and they exercise their own professional judgement and discretion regarding the services.

All these facts point to an independent contractor relationship.

Risk and rectification of work performed

Whether the worker is contractually obliged to be liable 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 bare the risk and responsibility of liability for their work if it is not up to an agreed standard and would be required to either rectify this defective work in their own time or at their own expense. This means that an independent contractor will often carry their own insurance and indemnity policies.

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 on the employer in terms of the burden of cost or time for rectification.

In your case, the P will bear the sole liability for the provision of services. P will hold their own indemnity insurance and the P will indemnify Company A with respect of any claims damages or loss as a result of the P providing services.

P will carry the risk of their own business making a profit or loss and will only receive income if they provide the particular type of service which can be bulk billed

Accordingly, with respect to the risk test, the Ps would be considered to be independent contractors.

Provision of tools and equipment and payment of business expenses

Another consideration of relevance is whether the worker provides their own tools and equipment and pays their own business expenses. It has been held in a variety of cases that 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.

There are situations where, having regard to the custom and practise of the work, or the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact alone will not lead to the conclusion that the individual engaged is as an employee. The weight or emphasis given to this - or any other indicator - depends on the particular circumstances, the context and the nature of the contractual work.

Unlike an independent contractor, an employee 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.

Company A provides the P with some equipment and tools such as a bag and access to the service of the vehicle driven by a Company A employee in return for a service fee paid to Company A.

No allowance is paid to Ps for any other tools and equipment required to provide the services and no reimbursements are made to Ps for the cost of such tools.

Ps are not entitled to claim any expenses incurred by them in the course of providing the services.

With respect to the provision of tools and equipment test, the Ps are considered to be independent contractors.

Other

Other indicators suggesting an employer-employee relationship include:

• the right to suspend or dismiss the person engaged;

• the right to the exclusive services of the person engaged;

• provision of benefits such as annual, sick and long service leave;

• provision of other benefits prescribed under an award for employees; or

• a requirement that a worker wear a company uniform.

In your case, either party is entitled to terminate the SLA without reason by providing a four weeks written notice. There is no requirement for Company A to undertake any performance management process prior to terminating the SLA.

The P is not entitled to any employment entitlements such as superannuation, annual leave, personal leave and long service leave, compassionate leave, community service leave or any other form. They are not required to wear a uniform.

These points are indicative of this arrangement constituting a principal/contractor relationship.

Conclusion

With consideration of all the facts presented in this case and with reference to the indicators provided in Taxation Ruling TR 2005/16, it is clear that the Ps are engaged by the company as independent contractors and not as employees of the company. Consequently, you are not required to withhold Pay As You Go ('PAYG') withholding tax for remittance on behalf of the Ps.