Edited version of your written advice

Authorisation Number: 1051371972003

Date of advice: 17 May 2018

Ruling

Subject: PAYG Withholding – Employee V Contractor

Question

Is the worker engaged by the entity considered to be an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

16 April 20XX

Relevant facts and circumstances

The entity currently holds a corporate estate agent’s license.

You intend to engage the worker to conduct their own real estate business, utilising your corporate estate agency license.

The worker holds an agent’s representative certificate.

The worker would operate under your license as an agent’s representative.

The worker will benefit from the use of your software, subscriptions, trust account usage (as required under the real estate agent’s Act), email address.

The worker will utilise your software and real estate subscription services to market their properties for sale.

The worker will pay a minimal monthly fee to utilise the benefits.

There is no upper or lower limit on income generated. The worker is free to generate income from other sources.

The worker will run their own business and receive a higher split of all commissions that they generate, compared to a traditional agency operation.

The workers will be required to provide a compliant tax invoice for every commission.

The worker will be required to take out and maintain suitable insurance for their business operations.

The worker is allowed to pay someone else to do the work, although if the work is to operate as an agent’s representative, then the law requires that the person must be an agent’s representative and must meet all requirements of the Act. If it is an administrative role, this is not required.

The worker is able to set their own hours of work.

The worker must at all times hold a valid ABN.

You have a written contractor agreement between the entity and the worker.

Details of the Contractor Agreement are as follows:

Licensing:

The entity holds a Corporate Estate Agents License and agrees to appoint the Contractor, as an Agents Representative. As such the contractor will be authorised to carry out all the functions of an Agent’s Representative such as listing and selling property and taking deposits for the trust account. Accordingly, all sales commission agreements will enjoy the full enforceability of real estate law.

Property Sales:

Where the contractor lists and sells the property, he/she will be entitled to a Commission equal to a percentage of the total net commission amount received. If the sale was made by another consultant’s listing, then a different commission split will apply, negotiated on a case by case basis.

Independent Contractors:

The parties agree and acknowledge that the Contractor is not employed by the Agent and that the relationship between the parties is one of contractor and principal and the transfer of monies between the parties will always be by way of Tax Invoice. For clarification, the Contractor can pay someone else to do the work, so long as the y comply with all State and Federal laws. The contractor will at all times advise clients by all mediums of communication, that they are an independent contractor.

Insurance:

The Contractor will obtain professional indemnity insurance and public liability insurance and have the entity as an interested party. Furthermore the Contractor indemnifies the Agent in respect to all claims and causes of action arising out of the contractors activities which activities result in loss or damage to the Agent. A current policy must be maintained always, and copy supplied to the Agent upon request.

Fees:

There is an access fee payable monthly by direct debit which covers the use of the business systems, subscriptions and branding. Currently this fee is an amount per day plus GST. The fee may be adjusted from time to time.

Parties to conduct themselves professionally:

The Parties shall always conduct themselves and their business in accordance with relevant professional codes of conduct so as not to risk bringing themselves into disrepute and comply with all legislation in any way relating to the performance of this agreement including State and federal laws relating to trade practices, fair trading, consumer protection, investment, financial advice and services. The parties agree to serve each other honestly, faithfully and diligently to act in the best interests of the other always.

No commitment to liability:

The contractor agrees that he/she will not commit or attempt to commit the Agent to any liability of any nature whatsoever outside of this agreement.

Termination:

This agreement may be terminated by either party at any time by giving of written notice to the other. Upon any such termination the parties shall forthwith cease making representations that they work conjunctionally.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Employee vs contractor

Section 12-35 of Schedule 1 to the TAA 1953 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?

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 worker will work independently and will be responsible for finding their own work, and determining their work hours. The worker will be running their own business and will pay a fee for the use of your systems. The worker is free to generate income from other sources and you will have no control over the percentage of income derived from this relationship. This level of control is indicative of a contractor relationship.

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.

The worker will pay a fee to use the software, subscriptions and trust account (as required under the estate agents act). The worker will receive a percentage of the total net commission generated on each sale. The worker will at all times advise clients that they are operating as an independent contractor in a separate business.

In this case, it appears that the worker is providing services while operating their own business, and the nature of the relationship is that of a 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 worker will be paid upon the supply of a tax invoice following the completion of a sale. The worker is able to determine their own hours of work. The worker will generally submit an invoice for an amount of the total net commission amount received. They are also able to negotiate different amounts depending on the nature of the sale.

It appears that the basis of the contract is to achieve a specified result, that is, the completion of the sale of a property. Therefore it appears that the worker is free to employ their own means to achieve a contractually specified outcome, which is a further indication of a contractor relationship.

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 is allowed to pay someone else to do the work, although if the work is to operate as an agent’s representative, then the law requires that the person must be an agent’s representative and must meet all requirements of the Act. If it is an administrative role, this is not required. This is a further indication of a contractor relationship.

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.

In this case, the worker will obtain professional indemnity insurance and public liability insurance. The worker also indemnifies the Agent in respect to all claims and causes of action arising out of the worker’s activities, where these activities result in loss or damage to the Agent. As the worker incurs the commercial risk and responsibility, this is indicative of 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 pay a fee in order to use the software and account of the Agent. They are also running their business independently and will provide their own tools and equipment. This is generally not consistent with an employee/employer relationship.

Conclusion

After assessing the facts against the indicators in TR 2005/16, it is considered that the worker is a contractor, and there is no obligation on the entity to withhold from payments made to the worker.