Edited version of your written advice

Authorisation Number: 1051312467565

Date of advice: 7 December 2017

Ruling

Subject: Is the worker an employee or an independent contractor?

Issue 1

Question 1

Is the entity required to withhold PAYG under the Taxation Administration Act 1953?

Answer

Yes

Issue 2

Question 1

Is the entity required to make superannuation contributions under the Superannuation Guarantee (Administration) Act 1992?

Answer

Yes

This ruling applies for the following period:

1 July 2016 – 30 June 2020

The scheme commences on:

DDMMYY

Relevant facts and circumstances

The taxpayer (the Society) is a non-for-profit professional association comprising several state branches and the National Office in a specific State of Territory. The Chair of one of the state branches has been contracted to fill the role of Executive Officer (the Officer) at the National Office, with a fixed remuneration amount per quarter. According to the Contract, the Officer reports to the relevant Council and the Directors of the Society.

The contract first came up for discussion in mid-late 2016, but was deferred and eventually was passed as a motion in late 2016. The signed copy of the Contract provided by the Officer is dated DDMMXY; however the Contract specifies the Commencement Date DDMMYY.

The Officer was treated as an independent contractor until a new committee member questioned their status suggesting they might be an employee. The Officer used the ATO online calculator which suggested that they might be a contractor.

The Officer performs high level administrative duties and supervises a part-time clerical assistant. They work from the Society’s office, but had to supply some of their own equipment (a photocopier, two handsets for the landline and a shredder). The Officer didn’t get compensated by the employer for the office equipment that they had purchased. Occasionally they used their personal printer for work. They also used their own laptop and iPad in order to attend teleconferences and take minutes. They used their own car for mail pick-ups, purchasing of office stationary and printing materials and delivering bulky paperwork and reports between offices. The Officer doesn’t get any compensation or allowance from the employer to cover their above work-related expenses.

The Officer holds an ABN. They registered the ABN in 2000 when they set up a sole trader business as a professional consultant. The Officer has continued with the private business outside of their employment with the Society.

Relevant legislative provisions

The Taxation Administration Act 1953

Section 12-1

Section 12-35

The Australian Business Number Act 1999

Section 8

Section 38

The Superannuation Guarantee (Administration) Act 1992

Subsection 12(1)

Subsection 12(3)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the taxpayer.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1

Question 1

Summary

The Officer doesn’t satisfy the tests for an independent contractor set out in Taxation Ruling TR 2005/16 (TR 2005/16). Therefore, under Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), the Society must withhold certain amounts from payments made to the Officer in their capacity as an employee (Executive Officer).

Detailed reasoning

According to Section 12-35 of TAA 1953, employers must withhold certain amounts from payments they make to individuals in their capacity as employees. The payments might include salary, wages, commission, bonuses or allowances.

Section 12-1 of TAA 1953 lists three types of payments that are not subject to the withholding rule set out in Section 12-35:

● Payments that are exempt income in the hands on the recipient;

● Living-away-from-home allowance fringe benefits; and

● Expense payment fringe benefits.

The term “employee” is not defined in TAA 1953, and has its ordinary meaning.

TR 2005/16 provides guidance as to whether an individual is paid as an employee for the purposes of TAA 1953.

Paragraph 17 of TR 2005/16 describes the relationship between an employer and employee as a contractual one. It is often referred to as a “contract of service”. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a “contract for services”. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour.

TR 2005/16 discusses a number of features that indicate whether an individual is an employee or a contractor:

Control

An employee is told not only what work is to be done, but also how and when it is to be done. An independent contractor works for themselves, therefore, is able to exercise some discretion, even if their contact of services has a high degree of direction.

With increased usage of skilled labour in the modern workforce, the supervisory function has decreased. The existence of control is determined not so much by its actual exercise as by the right of the employer to exercise it. Dixon J in Humberstone v. Northern Timber Mills (1949) 79 CLR 389 explains that control exists in the situation where the person performing their work is subject to the employer’s orders and direction, even in the absence of the actual supervision.

Based on the information provided by the Officer, they perform high level administrative work. They oversee administrative affairs of the Society, independently handling a number of general financial and administrative duties, as well as complex administrative issues, for example:

● entering, maintaining and supervising all financial data as determined by the relevant Council;

● co-ordinating the lodgement of compliance documents with ASIC and the ATO;

● handling a subpoena served on the Society by appearing in the witness box and writing a letter to address the subpoena;

● answering enquiries about the services of the Society, training, journal articles, etc., either independently or with the consultation of one of the directors.

The Officer also supervises the work of a part-time clerical assistant.

While working without much supervision and managing staff, the Officer doesn’t work for themselves and is still subject to the employer’s orders and direction. The employer doesn’t need to exercise control over the officer’s work due to their own skill and experience, but still retains the right to do so. The Contract specifies that the Officer shall report directly to the relevant Council and the Directors of the Society.

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

Another important distinction between an employee and an independent contractor was discussed in Marshall v. Whittaker's Building Supply Co (1963) 109 CLR 210. An employee “serves” the employer in the employer’s business, while the independent contractor carries on a trade or business of their own.

According to the Officer’s Contract, the Officer is engaged to operate in the business of the payer (the Society) as an Executive Officer and Secretary Board of Education.

'Results' contracts

The existence of a contract to achieve specific results is considered strong, but not conclusive, evidence that the contract is between a principal and an independent contractor. Paragraph 30 of TR 2005/16 quotes a number of court cases where the remuneration based on results achieved was still found to be part of employer/employee relationships:

The High Court in FC of T v. Barrett & Ors found that land salesmen who were engaged by a firm of land agents to find purchasers for land entrusted to the firm for sale and who were remunerated by commission only were employees and not independent contractors. Likewise, the High Court in Hollis v. Vabu considered that payment to the bicycle couriers per delivery, rather than per time period engaged, was a natural means to remunerate employees whose sole purpose is to perform deliveries. Further, the Full Court of the Supreme Court of South Australia in Roy Morgan found that interviewers who were only paid on the completion of each assignment, not on an hourly basis, were employees and not independent contractors.

The Officer’s Contract doesn’t appear to be results based. They are paid a fixed quarterly rate ($X,XXX) for performing the duties set out in the position description in the Contract. The position description contains a detailed listing of general administrative and financial duties the officer is to carry out, with no specification of the results to be achieved. According to the Officer, their actual average hours of work vary considerably depending on the activities and time of year.

Whether the work can be delegated or subcontracted

Where an individual has unlimited power to delegate the work to others, that individual is likely to be an independent contractor. An employee, especially in a managerial role, may also be able to delegate tasks to other employees. However, the employee won’t be responsible for paying the other employees, therefore, the delegation will have the character of substitution or sharing the work load.

It appears from the Contract as well as from the Officer’s own description of their work, that they do not have the power to delegate work to others and to pay the other employees themselves for performing the delegated tasks. The Officer supervises the work of a clerical assistant, however the assistant is also employed and is remunerated by the Society.

Risk

An employee bears little or no financial risk in relation to possible injuries or defects when carrying out their work, while an independent contractor will bear the commercial risk and responsibility. An independent contractor often carries out their own insurance and indemnity policy.

The Officer doesn’t bear any financial risks in relation to possible injuries or defects when carrying out their work.

Provision of tools and equipment and payment of business expenses

Provision of significant equipment and tools, and incurring of expenses generally indicates that the individual is 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.

The Officer operates from the Society’s premises which are fitted out with basic equipment. However, they have had to supply a photocopier, two handsets for the landline and a shredder. The Officer hasn’t received any compensation or allowance from the Society for purchasing the office equipment.

Occasionally the Officer uses the personal printer at home to produce handouts for work.

They also use their own car for mail collection and dispatch, transportation of office supplies and printed materials, and delivering paperwork to other offices.

They frequently work from home using their own laptop and iPad to take minutes of teleconferences and other administrative tasks.

The Officer doesn’t receive any compensation or allowance from the Society for the above work-related expenses.

While tools and equipment are usually provided by an independent contractor, it is not necessarily inconsistent with an employment relationship. The weight given to this indicator depends on the particular circumstances and nature of the work.

Paragraph 48 of TR 2005/16 relies on the findings in Hollis v. Vabu (2001) 207 CLR 21, where the bicycle couriers owned and maintained their bicycles, and yet were considered to be employees. The High Court stated that the conclusion might have been different if the investment in capital had been more significant or if a greater skill or training had been required to operate the equipment.

In your case, the equipment purchased by the Officer does not constitute a significant capital investment, nor does it take special skill or training to operate. All the other circumstances of your case should be taken into consideration in deciding whether the Officer is an employee or an independent contractor.

The interaction of ABN with the TAA 1953

Section 8 of the Australian Business Number Act 1999 (ABNA) provides that an entity is entitled to an ABN if they carry on an enterprise in Australia. Section 38 of the ABNA provides that an enterprise includes activities done in the form of a business but does not include activities done by a person as an employee.

The fact that an individual has an ABN does not prevent that individual from also being engaged as an employee. Paragraph 56 of TR 2005/16 provides an example of an IT consultant who uses his ABN for running his own IT business as a sole trader. He also works as a barman at the local hotel, where he is considered to be an employee despite his ABN.

The Officer holds an ABN as an Individual/Sole Trader registered on DDMMYY. As per the facts of the case, they initially acquired the ABN in order to run their own business, and they still continue to run it alongside their employment with the Society.

Therefore, the presence of the ABN in this case is not indicative of the Officer being an independent contractor for the Society.

Conclusion

Having considered all of the above circumstances, the Officer is an employee of the Society. Therefore, under Section 12-35 of TAA 1953, the Society must withhold amounts from payments they make to the Officer in her capacity as an Executive Officer. However, the Officer’s income may be under the income tax threshold for the respective income years. Please check the ATO Tax tables for the correct amount to withhold:

https://www.ato.gov.au/Rates/Tax-tables/

Issue 2

Question 1

Summary

As the Officer is an employee of the Society, the employer is required to make superannuation contributions into a complying superannuation fund of the Officer’s choice

Detailed reasoning

The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires that employers make superannuation contributions into a complying superannuation fund or Retirement Savings Account for the benefit of their eligible employees in accordance with minimum prescribed levels. If an employer does not make the required superannuation contributions, they will be subject to the superannuation guarantee charge (SGC).

SGAA does not contain a definition of an “employee”. Subsection 12(1) of SGAA provides that the word “employee” has its ordinary meaning. Subsections 12(2) to 12(11) expand on the meaning of this term. In particular, subsection 12(3) of SGAA states:

If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

The word “labour” is not defined in SGAA. According to Deputy Commissioner of Taxation v Bolwell (1967) 1 ATR 862, labour includes mental and artistic effort, as well as physical work.

Superannuation Guarantee Ruling SGR 2005/1 (SGR 2005/1) explains the term “employee” both in its ordinary and extended meaning.

The test used for the ordinary meaning of “employee” is the same as the one for PAYG Withholdings rules above. Based on this test, the Officer is an employee in the ordinary meaning of this term.

The Officer works under a contract with the Society. The Contract contains a position description, which consists of work duties requiring “mental effort”. Therefore, the Officer is an employee for the purposes of subsection 12(3) of SGAA.

Conclusion

Under SGAA, the Society is required to make superannuation contributions into a complying superannuation fund of the Officer’s choice.