Edited version of your written advice

Authorisation Number: 1013086821231

Date of advice: 14 September 2016

Ruling

Subject: Fringe benefits tax and the provision of caretaker services

Question 1

Are Persons A & B, who provide caretaker services at Complex A employees as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

The scheme commences on:

1 April 2014

Relevant facts and circumstances

Entity A advertised for caretakers at their premises Complex A and selected as caretakers a married couple Persons A and B.

Entity A entered into an Agreement (which was provided), jointly with Person A and B in which Entity A would provide Persons A and B the use of a residence including subsidised water and electricity to residence.

In return Persons A and B agreed to act as caretakers of the Complex which included performing a range of services within the Complex for Entity A.

The only thing Persons A and B received from Entity A was the use of the residence and access to a small amount of land surrounding the residence.

The rest of the Complex was used by Entity A in their business.

Relevant legislative provisions

FBTAA subsection 136(1)

FBTAA section 137

Schedule 1 to the TAA section 12-35

Reasons for decision

Summary

Person A and B are not employees as defined under subsection 136(1) of the FBTAA.

The ability to use of the residence and surrounding land is not in lieu of a payment of salary or wages for services rendered, or for the provision of labour.

The services are a payment in lieu of rent for the use of Entity A's property.

Detailed reasoning

For a fringe benefit to arise a benefit has to be provided in respect of an employee's employment.

An employee is defined in subsection 136(1) of the FBTAA and that definition includes a current employee. Which is also is defined in the same subsection as 'a person who receives, or is entitled to receive, salary or wages'.

Salary or wages is defined in subsection 136(1). The effect of the definition of salary or wages is that if a person received a cash payment that would be subject to one of five pay as you go (withholding) provisions in Schedule 1 to the Taxation Administration Act 1953 (TAA) then they would be entitled to receive salary or wages. The provisions being:

• Section 12-35 a payment to an employee

• Section 12-40 a payment to a company director

• Section 12-45 a payment to an office holder

• Section 12-115 a Commonwealth education or training payment; or

• Section 12-120 a Compensation, sickness or accident payment

In addition section 137 of the FBTAA looks at whether a person is an employee or employer in situations where a person it not receiving a cash payment. Therefore the fact that Persons A and B do not receive cash payments under the Agreement does not preclude them from being employees.

However before we apply section 137 of the FBTAA we have to determine whether or not Person A and/or B are 'employees' and in this case the only withholding provision that would be relevant is section 12-35 being a payment to an employee.

How to determine whether a payment is 'a payment to an employee' is examined in Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees and paragraphs 6 to 8 state:

The term 'employee' is not defined in the TAA 1953. For the purposes of withholding under section 12-35 the word 'employee' has its ordinary meaning.

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.

An arrangement between parties that is structured in a way that does not give rise to a payment for services rendered but rather a payment for something entirely different, such as a lease or a bailment, does not give rise to an employer/employee relationship for the purposes of the TAA 1953.

As stated in paragraph 7 above to determine whether a person is an employee requires us to examine the contract that was entered into.

Contractual features that have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor are discussed in TR 2005/16 and include:

• the control test (paragraphs 26 to 31)

• whether the worker operates on their own account or in the business of the payer (paragraphs 32 to 34)

• whether the contract is a 'results' contract (paragraphs 35 to 40)

• whether the individual has power to delegate or subcontract (paragraphs 41 to 43)

• whether the worker bears any monetary risk in carrying out the required work (paragraph 44)

• whether the worker is provided with tools or receives reimbursement of business expenses (paragraphs 45 to 49); and

• other indicators (paragraphs 51 and 52 )

The control test

Paragraph 26 of TR 20015/16 states:

The classic '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. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. As stated by Dixon J in Humberstone v. Northern Timber Mills:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's orders and directions

Paragraph 28 then states:

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 their discretion (subject to any terms implied by law). This is because the contractor is working for themselves

Under the Agreement Persons A and B are given a list of what they must do.

However they are free to decide between themselves who actually provides the services outlined in the Agreement.

Whether the worker operates on their own account or in the business of the payer

Paragraph 32 of TR 2005/16 states:

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.

This distinction is also referred to as the integration or organisation test

In this case the 'payer' is Entity A who is using Persons A and B to help maintain one of their assets.

Given the Agreement entered into it would be difficult to say that Persons A and B are running their own 'caretaking' business.

'Results' contract

This test is looking at whether the contract is to provide a specified result and paragraph 36 of TR 2005/16 states:

The phrase '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 Agreement is to provide ongoing services to Entity A.

Whether the work can be delegated or subcontracted

Paragraphs 41 and 42 of TR 20015/16 state:

The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) 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.

If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. Under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). Unless the contract expressly requires the service provider personally to perform the contracted services, 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.

As mentioned in examining the control test the Agreement is between two people and Entity A and between them Persons A and B decide who provides the services specified in the Agreement.

Monetary risk

Paragraph 44 of TR 2005/16 states:

Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor often carries their own insurance and indemnity policies.

Under the agreement Persons A and B agreed to bear the risk and responsibility for the services they perform. This includes claims in respect of injury resulting from the performance of their services.

Whether the worker is provided with tools or receives reimbursement of business expenses

Paragraph 45 of TR 2005/16 states:

It had been held 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

Under the Agreement Entity A agrees to provide all the tools and equipment needed to perform the caretaking role.

Other indicators

Paragraphs 51 and 52 TR 2005/16 state:

In addition to the above, other indicators of the nature of the contractual relationship have been variously stated and have been added to from time to time. Those 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 and the provision of other benefits prescribed under an award for employees. However, the fact that a contract does not contain provisions for annual and sick leave will not, in itself, be an indicator of a principal/independent contractor relationship.

The requirement that a worker wear a company uniform is an indicator of an employment relationship existing between the contracting parties. In Hollis v. Vabu, the fact that the couriers were presented to the public and to those using the courier service as emanations of Vabu (the couriers were wearing uniforms bearing Vabu's logo) was an important factor supporting the majority's decision that the bicycle couriers were employees.

Under the Agreement the only benefits provided is the use of the residence and the provision of water and electricity to the residence.

Weighing of the factors

In looking at the factors outlined above the Agreement doesn't clearly point to Persons A or B as being employees.

The Agreement is between a Person A or B and Entity A in which Persons A or B agree to provide services to in return they receive the use of a residence.

If we look at the original advertisement when offering the position the only benefit offered 'was the use of the residence.

In examining the Agreement, although it states that it is not a tenancy agreement, it is an arrangement in which the owner of property allows someone to use that property who in return provides a service to the owner of the property.

The services (and the time spent providing the services), are not fixed but the benefits Persons A and B receive are. All they receive is the use of the a residence and water and electricity connected to that residence.

This arrangement is one in which paragraph 53 of TR 2005/16 applies. It states:

There are circumstances in which the relationship between a person who engages another to perform work and the person engaged does not give rise to a payment for services rendered or provision of labour but rather a payment for something entirely different, such as a lease or 'bailment'. In these circumstances, a person enters into a lease or bailment for the use of property owned by another person, and the payments are made from the lessee or bailee to the lessor or bailor. Consequently, the lessee or bailee, rather than being a provider of services to the owner of the asset, acquires a right to exploit that asset for their own benefit in return for a 'rental' payment to the owner.

In looking at the totality of the Agreement it can be concluded that the ability to use of the Licenced area is not in lieu of a payment to Person A and B for services rendered or, for the provision of labour.

Rather the services provided by Persons A and B are a payment to Entity A for the use of Entity A's property and therefore Persons A and B are not employees as defined under subsection 136(1) of the FBTAA.