Edited version of your written advice

Authorisation Number: 1051240260794

Date of advice: 27 July 2017

Ruling

Subject: PAYG Withholding - Employee Vs Contractor

Question 1

Are the workers engaged by the entity 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

Is the entity required to withhold from payments made to workers, where the workers have provided a statement by a supplier form?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The entity engages workers for one off workshop presentations, writing trial examinations and proof reading trial examinations.

The majority of workers are full time employees of other entities.

The workers may do presentations and other work for other organisations.

Some of the workers hold Australian Business Numbers.

The workers all sign a contract.

The workers do their work in their own time, with their own materials and tools within the timeframe in the contract.

The workers are required to do the work to an acceptable standard or payment will be withheld.

The entity has provided an example of the contract between entity and the workers.

The contract includes the following clauses;

Nature of engagement

(a) You are engaged by the entity as an independent contractor

(b) This Agreement does not create a relationship between the parties of employer and employee, principal and agent, partnerships or joint venturers.

(c) Other than expressly set out in this Agreement, you shall not receive any benefits or emoluments which the entities’ employees have received, or may be entitled to receive, including (without limitation) the following benefits:

(i) personal, holiday, parental or long service leave;

(ii) workers’ compensation;

(iii) public liability, motor vehicle or life insurance;

(iv) loans or leases given by the entity to its employees;

(v) bonuses or distribution of cash or shares given by the entity to its employees; or

(vi) superannuation.

Nature of performance

(a) You shall perform the Services:

(i) in a lawful, competent, professional and timely manner with the degree of skill, care and diligence expected of a consultant experienced in providing the same or similar services;

(ii) personally; and

(iii) using your best endeavours at all times to promote the business and interests of the entity.

(b) You shall not commit any act or omission which directly or indirectly may cause damage to the entities’ business, interests or reputation.

Liability

You are liable for all acts or omissions which are committed by you in the course of or as a direct or indirect result of performing the Services and you indemnify the entity from and against all losses, claims, damages and liabilities which arise out of any breach of the terms of the engagement or any act or omission by you.

No Agency

You are not authorised or empowered to act as an agent for the entity for any purpose and may not enter into any contract, warranty or representation regarding any matter on behalf of the entity except with the entities’ prior written consent.

Fee

(a) You must invoice the entity in arrears calculated from the date on which you commenced providing the Services.

(b) You must invoice the entity on the date of completion of services.

(c) The entity will pay the Fee within 14 days after it receives each invoice.

Tax

You must pay all taxes and levies and maintain all registrations, licenses and insurances required by law in connection with this Agreement and the provision of the Services.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Question 1

Section 12-35 of Schedule 1 to the 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?

Terms and the circumstances of the formation of the contract

In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties whether express or implied, in light of the circumstances surrounding the making of the contract.

Contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole- that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of the relationship is one of employment the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor.

As Gray J stated in Re Porter: re Transport Workers Union of Australia:

Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

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, so that outside the contractor is free to exercise their own discretion, because they work for themselves.

In this case, the workers present workshops and prepare and write trial examinations. They are given autonomy to present and prepare for the work in their own time.

Also, the worker is not empowered to act as an agent for entity for any purpose and may not enter in to a contract on behalf of the organisation.

These are indications that the worker is not an employee of the entity rather an independent contractor providing services for the entity.

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 workers have other full time jobs and may do presentations and work for other organisations. It does not indicate that the worker has been integrated as part of the business.

It appears that the relationship between the worker and the business is characterised as being that of a principal and contractor.

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 payment under the contract is linked to the outcome of the result, which in the present circumstances, is the completion of services. The nature of the contract is to be paid a fixed amount to complete a set number of tasks as required.

It appears that the basis of the contract is to achieve a specified result, that is the completion of the services provided under the contract. There is no indication that the worker is to be renumerated at any point prior to the completion of their task.

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, the worker must perform the services personally as per the contract. This shows that the worker has no capacity to delegate the work, and therefore this indicates that the worker is more likely to be an employee of 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.

The worker is legally responsible for their work and liable for the cost of rectifying any defects in their work.

In this case, the worker is liable for all acts conducted in their duties, and indemnifies the entity from and against all losses, claims, damages and liabilities which arise. The information provided indicates that the risk is mainly held by the worker and indicates a contractor relationship.

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 worker will complete the work using their own materials and tools.

Based on this information, the results of this test indicate a contractor relationship.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the worker is acting as an independent contractor, and is not an employee for PAYG Withholding purposes. Therefore there is no obligation on the entity to withhold from payments made to the worker.

Question 2

An entity does not need to withhold an amount from a payment if the supplier is an individual and has given the entity a written statement that states the supply is not being conducted as part of an enterprise in Australia.

However, the entity should withhold if it has reasonable grounds to believe that the statement supplied is false or misleading.

In this case, the workers are able to complete a “Statement by a Supplier” and tick the box “not required to have an ABN as not carrying on an enterprise in Australia.