Edited version of your written advice

Authorisation Number: 1051443391218

Date of advice: 22 October 2018

Ruling

Subject: PAYG withholding for an au pair

Question

Are you required to register as an employer of a working holiday maker and withhold 15% tax on pocket money paid to a live in au pair?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You are a private household wanting to be a host family of an au pair.

The main purpose of the au pair placement is a cultural exchange, which gives the au pair an opportunity to improve his or her language skills.

You have three children.

You are looking at paying the au pair pocket money of $350 - $400 per week. This will depend on the experience of the engaged au pair. The amount could vary between $275 and $500 per week. The amount has been calculated via the industry standard and minimum wage.

The au pair will also receive board, meals, Wi-Fi and utilities.

In order to source the au pair, you are looking at using an au pair Facebook group, or an agency specialising in au pair placement.

You do not have a written description of duties for the au pair at this time. There will be some expectations set in regards to what hours and duties are expected each day and they may be written down.

The sole focus of the au pair is looking after the children.

The au pair will be responsible for preparing the children for school/day care, preparing meals and laundry tasks. The purpose of getting the au pair is to have the children at home as much as possible.

The proposed working days are Monday to Friday each week, but the parent will be working from home some days per week which will result in the au pair having some free time.

It is expected that the au pair will work 38-50 hours per week depending on requirements.

The au pair will not be required to work on Saturday or Sunday.

The initial appointment will be for a period of six months. However, this may be shorter or longer depending on the wishes of the au pair and the family.

There is no notice required to be given by wither party in order for the arrangement to be terminated. Both you and the au pair can exit the arrangement at any time.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Summary

Where an au pair is on a genuine cultural experience, being treated as a member of the family, potentially enrolled in an English language or similar course, while providing only incidental domestic services (minimal hours), it would be less likely they would have entered into a legally enforceable contract and be employed by the host family.

The prime motivation for the family in such a case is to provide a cultural experience and the family may not obtain the degree of benefit from the arrangement that the au pair does. It is also likely that, the more informal the arrangement, the more likely that one or other of the parties is not obliged to fulfil its obligations under an informal arrangement such as this. This would particularly be the case if payment of the au pair’s expenses is discretionary, varies, or is not directly related to work performed by the au pair.

In contrast, and as is outlined in your proposal, an au pair working and being remunerated for significant hours of service, with distinct responsibilities and duties would more likely be a party to a legally enforceable, express or implied contract and would be considered to be employed by their host family.

Detailed reasoning

From 1 January 2017, employers of working holiday makers are required to withhold tax from amounts they pay to their workers under the pay-as-you-go (PAYG) system.

A working holiday maker is an individual who holds a Subclass 417 (Working Holiday) visa, a subclass 462 (Work and Holiday) visa or certain related bridging visas which are issued by the Department of Immigration and Border Protection. The visas allow young adults aged 18 to 30 from eligible partner countries to work in Australia while having an extended holiday. Work in Australia must not be the main purpose of the visa holder's visit.

The amended legislation requires employers of working holiday makers to register with the Commissioner, which will allow such employers to withhold tax at income tax rates applying to working holiday makers.

An employer needs to register with the ATO before employing a working holiday maker. Once registered, an employer will be able to withhold a flat rate of 15% up to $37,000 in total payments made to each individual working holiday maker within an income year. Where total payments exceed $37,000, different rates apply.

Traditionally, au pairs came to Australia on a cultural experience and were treated like members of the family, helping out with incidental childcare in exchange for the Australian experience and some pocket money. At times, the au pair would be studying English while in Australia and immersing themselves in a local family would help enhance these language skills. They would not be expected to work during their study hours.

This type of au pair were commonly referred to as ‘demi au pairs’ and it was expected that the au pair must enrol in an English language or other academic program in conjunction with their au pair arrangement. While this type of au pair still exists, the cultural exchange factors have diminished and the distinction between an au pair engaged as part of a cultural experience and an au pair employed purely for domestic and childcare assistance has blurred.

In order to determine whether or not there is an employer/employee relationship between a host family and an au pair, it is necessary to establish whether their arrangement constitutes:

● a legally enforceable contract for the provision of the au pair’s services in return for accommodation, board and payment; or

● an informal arrangement primarily aimed at providing the au pair with a cultural experience.

Intention to create legal relations

In most jurisdictions contracts do not need to be represented in writing and oral contracts are as enforceable as written contracts.

For a contract to exist, whether written or verbal, the parties to an agreement must intend to create legal relations. If the circumstances show that the parties ‘did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts’ then there is no contract.

At common law, there are certain requirements that must be satisfied in order for a valid contract to exist:

● the need for one party’s offer of terms to correspond with the other’s acceptance,

● for the terms agreed to be certain and complete,

● the need to meet the necessary formalities, and

● an intention to create legal relations and consideration.

The proposed duties explains your children's routine and the au pair’s responsibilities including child minding responsibilities, meal preparation and laundry tasks.

Your au pair will be provided remuneration consisting of board, meals, Wi-Fi, utilities and ‘pocket money’ of $350-400 per week.

Based on the above, it is concluded there is an implied contract entered between the parties.

Employer/employee

The expression ‘employee’ is not defined in income tax legislation. Therefore, it has its ordinary meaning. The Tax Office provides guidance to assist in determining whether an arrangement constitutes an employment arrangement in Taxation Ruling TR 2005/16 Income tax: Pay As You Go withholding from payments to employees.

Paragraph 7 of TR 2005/16 states:

'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 provides key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law. I have listed the key indicators from the ruling that are relevant to your situation:

Control test - The degree of control which the host family can exercise over their au pair is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. At common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that an agreement may specify how the services are to be performed does not necessarily imply an employment relationship.

The Full Bench held in Swift Placements Pty Ltd v. WorkCover Authority of New South Wales [2000] NSWIR Comm 9 that control over a worker did not merely relate to the on-the-job situation, but rather the ultimate or legal control over the worker. It stated:

…control by an employer over an employee is not to be viewed merely in the on-the-job situation in directing a person what to do and how to do it, but rather in the sense of the ultimate or legal control over the person to require him to properly and effectively exercise his skill in the performance of the work allocated …

Ultimate control would, amongst other things, enable the relevant entity to withdraw the worker from an assignment and terminate the contract with the worker. However, specifying in detail how contracted services are to be performed does not of itself necessarily imply an employment relationship.

A host family has a high degree of day-to-day control over their au pair. They usually set the working hours, what is to be done during that time, and when it needs to be done (for example, picking up kids from school, taking them to classes, providing food at specific times of the day). The host family provides the au pair with a written or verbal explanation of the weekly or daily routine, precise duties, time off, strategies for managing the children and can include a curfew time when working the following day.

It is likely that the au pair has some input into these arrangements (such as which night they are available for babysitting or when they might decide to travel). However, it is also likely that the host family would have ultimate control to require the au pair to be available for a particular task.

This ultimate control is reinforced by the fact that the host family has the right to terminate the arrangement with four weeks’ notice (or without notice in certain circumstances). This means that if the host family is dissatisfied with the performance of the au pair, they can terminate the arrangement at any time.

As we have discussed above, you have provided duties which explains your children's routine, child mining responsibilities, meal preparation and laundry the au pair will be doing. You also expect that either you or the au pair will have the right to terminate the arrangement, should it not be satisfactory, with no notice required to be given by either party.

As such you have a strong degree of control of which you can exercise over the au pair, which is demonstrated by the au pair’s defined duties, days they are required to work, and your ability to terminate the agreement.

Integration – Unlike a typical commercial arrangement, an au pair is not engaged in a business enterprise of the host family. However, they provide direct services to the host family. From the perspective of a third party, they would be seen to be part of the family (particularly as they live with them) and providing services that are integral to the running of the family. They use the family’s car and equipment (rather than their own) and do not project themselves as operating independently such as through advertising or business cards.

In your case the au pair will be providing direct services to your family as outlined in the proposed duties.

As such the au pair will work directly for and will be integrated into your family.

Results – Although they receive a weekly amount, au pairs usually are paid for hours worked, not for a result. The rate paid to an au pair is usually negotiated between the host family and the au pair. If they work beyond a set amount of hours they must receive additional pay, often at babysitter rates per hour.

When hours change, for example if the au pair accompanies the family on a vacation, changes to regular duties would accompany changes to pocket money. These factors show the agreements are equivalent to the remuneration received being commensurate with being paid on a time basis.

You propose that your au pair will be given pocket money of $350-400 for between 38 to 50 hours of domestic assistance during the week. You have considered the amount of work your au pair will be undertaking and have calculated an amount based on the number of hours worked, whilst also giving consideration to ensuring that they have enough money to support their cultural activities, hobbies and travel whilst they are in Australia.

This indicates that your au pair will be paid for hours worked, and not for a specific result.

Other - Other indications suggesting an employer/employee relationship include:

● the right to suspend or dismiss the person engaged; and

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

Conclusion

When weighing up the indicators, it can be seen that as a host family you will be exercising a great deal of control in the arrangements you will have with your au pair. You will determine which au pair is suitable, how much you will pay, the working conditions, the duties, the terms of engagement and you can terminate with four weeks’ notice.

Your au pair is likely to have some input into the detail of these arrangements but we consider that you will have ultimate control and would be able to direct the au pair to undertake a particular task.

You propose the au pair will work directly to and will be integrated into the family. The au pair will be paid by the hour and provide a personal service that is not likely to be delegated to a third party.

While the au pair will have some reasonable upfront costs, your family will cover all costs associated with the au pair’s duties while working for you.

These factors indicate an employment relationship.

Further issues for you to consider

If you will be hiring someone on a working holiday visa, in addition to registering as an employer you may also need to check if they will be eligible for superannuation contributions.

Superannuation

An employee is typically entitled to compulsory super contributions from their employer. From 1 July 2014, these super guarantee contributions must be at least 9.5% of their ordinary earnings, up to the ‘maximum contribution base’.

Generally, the employee is entitled to super guarantee contributions from their employer if they are:

● 18 years old or over, and

● paid $450 or more (before tax) in a month.

It doesn’t matter whether the employee is full time, part time or casual, or if they are a temporary resident of Australia.

If they are under 18, they must meet the above conditions and work more than 30 hours per week to be entitled to super contributions from their employer.