Edited version of private advice

Authorisation Number: 1052095227197

Date of advice: 23 March 2023

Ruling

Subject: Status of the worker

Question

Is the Engaging Entity required to withhold from payments to:

a.    Individual A under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA), and

b.    Individual B under section 12-35 or section 12-40 of Schedule 1 to the TAA?

Answer

The Engaging Entity is not required to withhold from payments made to Individual A under section 12-35 of Schedule 1 to the TAA because Individual A is not an employee of the Engaging Entity.

The Engaging Entity is also not required to withhold from payments made to Individual B under either section 12-35 or 12-40 of Schedule 1 to the TAA because Individual B is not an employee of the Engaging Entity, and has not received remuneration as a director of the Engaging Entity.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Contract with Company A

The Engaging Entity (the Ruling Applicant) entered into a contract with Company A for services in November 20XX.

The contract between the Engaging Entity and Company A provides for services to be provided through a 'nominated person'. This person is Individual A, who is the sole director of Company A.

Under the contract with Company A, the annual rate for the services is $X per annum, paid monthly at a rate of 1/12 of the annual rate.

Company A agreed to issue invoices to the Engaging Entity on a monthly basis.

Individual A signed the contract between Company A and the Engaging Entity in his personal capacity.

Contract with Company B

The Engaging Entity entered into a contract with Company B for Chief Executive Officer (CEO) services.

The contract between the Engaging Entity and Company B provides for the CEO services to be provided through a 'nominated person'. This person is Individual B, who is the sole director of Company B.

Under the contract with Company B, the annual rate for the services is $X per annum, paid monthly at a rate of 1/12 of the annual rate.

Company B agreed to issue invoices to the Engaging Entity on a monthly basis.

Individual B signed the contract between Company B and the Engaging Entity in his personal capacity.

Individual B was the sole director of the Engaging Entity between 20XX and 20XX. He is still a director of the Engaging Entity, however he now shares the role with other directors.

Both contracts referred to above have identical terms and will be referred to as 'the Contract'.

Relevant legislative provisions

Taxation Administration Act 1953Section 12-35 of Schedule 1

Taxation Administration Act 1953Section 12-40 of Schedule 1

Reasons for decision

Section 12-35: Withholding from Payments to an Employee (Individual A and Individual B)

Under section 12-35 of Schedule 1 to the TAA, an entity must withhold an amount from salary, wages, commission, bonuses or allowances its pays to an individual as an employee. The term 'employee' is not defined in the TAA, and therefore takes its ordinary common law meaning.

The relationship between an employer and employee is a contractual one. When a business engages a worker, generally it will either be a relationship of employment, often referred to as a 'contract of service', or a principal/independent contractor relationship that is referred to as a 'contract for services'.

The leading case outlining the principles governing the ordinary meaning of 'employee' is Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contacting Pty Ltd [2022] HCA 1 (Personnel Contracting). The majority of the High Court in Personnel Contracting confirmed that whether a worker is an employee of a putative employer is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

As such, the totality of the relationship is derived from the rights and obligations created by the contract between the parties, construed at the time they entered into it. Where the parties have comprehensively committed the terms of their relationship to a written contract, and the contract has not been varied, challenged as a sham or subject to legal or equitable relief, then it is the legal rights and obligations in that contract alone that are relevant in this analysis.

Identifying parties to a contract

Parties may find themselves relying upon or seeking to enforce contracts where one or more parties have been mis-described, for example by the addition or omission of a word in their name, or as a result of a typographical error. Such errors may be treated by courts as 'misnomers' which are capable of correction (as a matter of contractual construction) without the need for rectification.

The misnomer rule was considered in New South Wales Land and Housing Corporation v Australia and New Zealand Banking Group Limited [2015] NSWSC 176 (NSW Land and Housing) concerning a guarantee for indemnity issued by the ANZ Banking Group Limited at the request of Nebax Constructions Australia Pty Ltd (In Liquidation). The New South Wales Land and Housing Corporation (ABN 24 960 729 253) claimed that it was the intended beneficiary under the guarantee despite the beneficiary being described in the guarantee as "New South Wales Land & Housing Department trading as Housing NSW ABN 43 754 121 940", an entity which, as described, did not exist. The Court in that case found that the test for a misnomer which can be corrected by construction was:

...whether the misnomer was the product of a mistake made in circumstances in which it would have been plain to all who are concerned with the relevant document as to who the party was that was referred to in the document.

In finding that such an error constituted a misnomer, the Court cited the following passage from Kingstream Steel Ltd v Stemcor UK Ltd [2001] WASCA 138 (Kingstream Steel):

In our view the misdescription of the guarantor in the first two documents is simply that, and an error of that kind is not fatal to the validity of the guarantee...

...That was, in each case, simply a misnomer made in circumstances in which it must have been plain to all who were concerned with the document that it was the applicant which was the guarantor there referred to...

Courts have also held that evidence of post-contractual conduct is admissible on the question of whether a contract was formed. As held in Tomko v Palasty [2007] NSWCA 258, subsequent communications may legitimately be used against a party as an admission by conduct of the existence or non-existence of a subsisting contract, where an issue concerns the identity of the contracting parties.

Application to facts: Identifying parties to a contract

In this case, the terms and conditions state that the Contract is between the Engaging Entity and Company A and between the Engaging Entity and Company B.

However, each agreement has been executed by Individual A and Individual B respectively, in their own capacities and not on behalf of the companies that the Contract purports to be between. This raises a question about whether Individual A and Individual B are intended to be parties to each Contract.

In this case, Individual A is the sole director of Company A and Individual B is the sole director of Company B. This means that they are authorised to sign documents on behalf of their respective companies. In order for Company A and Company B to execute the Contracts, Individual A and Individual B should have signed their respective agreements "on behalf of" their companies rather than in their own personal capacity.

The test for a misnomer was defined in NSW Land and Housing as being plain to the parties of the document, who was the intended party. In this case, the terms of the Contract are clear that Company A and Company B are the intended parties of the arrangement. Further, both Individual A and Individual B would have otherwise signed the agreements as representatives of Company A and Company B respectively.

We consider that Individual A and Individual B mistakenly signed the agreements in their own capacity and given that the Contract is clear on who the intended parties are, that the misnomer rule will apply to correct the mistake.

Further, either party is permitted to put on post-contractual evidence to demonstrate who the parties of the contract are. This evidence could include invoices or other written communication that will demonstrate who has contracted under the arrangement.

Therefore, we accept that the respective contracts are between the Engaging Entity and Company A and between the Engaging Entity and Company B as intended. Individual A and Individual B are not parties to the Contracts by nature of a mistaken signature.

Tripartite contracts

As held in Personnel Contracting, where a worker does not contract directly with a business, but instead engages to perform work for the business as a partner of a partnership or through an entity such as a company or trust, this may indicate an employment relationship has not been created between the business and the worker. This is because there may be no contractual rights and obligations existing between the business and the worker (in their individual capacity).

However, a different conclusion may be reached if a worker uses an interposed entity but is also directly a party to the contract with the engaging entity. For example, an engaging entity may enter into a contract with both the interposed entity and the worker.

Application to facts: Tripartite contracts

There was a tripartite contract arrangement in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet). In Moffet, there were three parties to the arrangement: Mr Moffet, Immediate Dental (Mr Moffet's company) and Dental Corporation (the acquiring entity). There were also two separate agreements - the first was the Acquisition Agreement and the second, the Services Agreement. The parties to both agreements were Immediate Dental, Dental Corporation and Dr Moffet. Under the services agreement, Mr Moffet was obliged to provide services for Dental Corporation.

The difference in this case is that the arrangements are between the Engaging Entity and Company A and between the Engaging Entity and Company B (the 'intermediary companies'). Individual A and Individual B ('the workers') are not a party to either arrangement.

However, the workers are listed in their respective Contracts as 'the nominated person'. Each Contract specifically states that the contracted services are to be provided solely through the nominated person and both intermediary companies agreed not to substitute another nominated person without the Engaging Entity's prior written approval. Once approval is provided, a new nominated person would be listed and responsible for providing the services.

Whilst this indicates an intention under the Contract for the services to be solely provided through the workers, neither worker is a party to the Contract and the nominated person can be replaced by agreement between each intermediary company and the Engaging Entity. As the nominated person in each Contract can be replaced, this indicates that the Contract is not specific to the workers, but rather the intermediary companies can control who is providing the services.

Ultimately, the Contracts between the Engaging Entity and Company A and between the Engaging Entity and Company B can be differentiated from the arrangement in Moffet. This is because Individual A and Individual B are not parties to their respective arrangements and there is a mechanism within the Contracts that allow the intermediary companies to provide the services to the Engaging Entity by people other than Individual A and Individual B.

Therefore, we do not consider there is a basis for concluding that a contractual relationship has formed between the workers and the Engaging Entity, or that there are any legal rights or obligations between those parties. This precludes any finding that there is an employment relationship between the Engaging Entity and the workers.

Nevertheless, for completeness, we have analysed the contractual terms between the Engaging Entity and the intermediary companies to determine whether they would give rise to an employment relationship if, contrary to the above, they were found to give rise to a legal relationship between the Engaging Entity and the workers.

Analysis of contractual terms

The common law indicia include the level of control exerted by the putative employer, the extent of integration of the worker into the business, whether the worker is able to delegate, whether the remuneration is for a specified result, whether the worker uses their own tools and equipment, whether either party generates goodwill and the level of risk borne by each party. Importantly though, the indicia are not to be applied as if they are a mechanical checklist.

As indicated by the High Court in Personnel Contracting, an analysis of the indicia can demonstrate whether an employment relationship exists in a tripartite arrangement.

Control

An employer is usually able to control how, where and/or when its employee performs their work. The importance of control in this context lies not in its actual exercise, but rather in the contractual right of the employer to exercise such control.

As provided in Personnel Contracting, where the main operating activity of the business is the supply of labour or a service of some kind, often a critical element of the business is the need to retain control over that labour or the workers providing the service.

A term in a contract that purports to confer a right to control must be interpreted in the context of the broader contract and the services being provided. As held in ZG Operations Pty Ltd v Jamsek & Ords [2022] HCA 2 (ZG Operations), a contract may afford an employer a different kind of control, such as control over how long a casual worker can work, or the clause may allow 'reasonable direction' as distinguished from a true right to control a worker.

Application to the facts: Control

In the current case, each Contract provides that the services are to be provided in accordance with the Engaging Entity's reasonable instructions and directions. Further, the intermediary companies have agreed to provide the services by exercising due care, skill and diligence and in a proper and professional manner and in accordance with best industry practice.

However, the respective intermediary companies agreed to coordinate all aspects of the services.

The Contracts are silent on hours of work and the provision of holidays.

No clause in either Contract purport to truly control how the services are provided. In particular, it is worth noting that the workers are free to coordinate all aspects of these services. This absence of control leans against a finding of an employment relationship.

Payment

The way in which a worker is remunerated for their services, and the process through which the parties determine this remuneration, can help to identify whether a worker is being engaged to serve in an engaging entity's business or has merely contracted with that business to produce a specified result.

Application to the facts: Payment

In these respective Contracts, the services are both paid at an annual rate of $X paid monthly at a rate of 1/12 of the annual rate. These fixed annual amounts include an allowance for X weeks per year non-working days that are not public holidays. There is no working day accrual from one calendar year to the next.

The Payment Terms provide that where the services are provided on a daily rate, the intermediary companies may issue invoices to the Engaging Entity on a monthly basis on the 10th of the month for the expected days that the intermediary companies will work for the month. Payment will be adjustment according to the prior month - estimate days verse actual days worked.

This suggests that the intermediary companies are being paid for the labour of the nominated person rather than to produce a result.

Ability to delegate or sub-contract work to others

An unlimited, unfettered power to delegate or sub-contract to others to perform the work is usually an indication that the worker is not an employee. That is so even if the contractor actually does perform the work personally and had no intention of doing otherwise. In contrast, where a person is contractually required to personally perform the work, this points to the person being an employee. Personal service is generally seen as a critical feature of an employment relationship, whereas a contractor having the ability to utilise their own workforce is consistent with carrying out their own business.

Some contracts may provide a 'limited or occasional' power of delegation where the scope and operation of the power is narrow and the worker cannot exercise it unilaterally - for example, because the engaging business needs to provide consent before a subcontractor is engaged. This factor is not necessarily inconsistent with an employment relationship, as the engaging business effectively has full control over who provides the services.

Application to the facts: Ability to delegate or sub-contract work to others

While the Contract contains a right for the intermediary company to sub-contract the provision of the services, it is subject to the Engaging Entity's consent which may be withheld at its absolute discretion. As such, this right is limited and fettered.

Conversely, the Contract expressly requires the nominated person to be the sole provider of the services, and written consent is also required prior to changing the identity of the nominated person.

Notwithstanding this, the Contract makes multiple references to the intermediary companies' personnel. In particular, the Contract explicitly provides that the intermediary companies' personnel will remain engaged by the intermediary company and will not be directly engaged by the Engaging Entity.

While an overall reading of the Contract suggests a default expected situation in which the services are performed by the nominated person, on balance the Contract reflects the fact that it is a company being engaged to provide the services, through the engagement of their own personnel (namely the nominated person). As such, this does not indicate the worker is serving directly in the Engaging Entity's business in their individual capacity as an employee.

Conclusion - Section 12-35 of Schedule 1 to the TAA (Individual A and Individual B)

Neither Individual A nor Individual B are common law employees of the Engaging Entity. This is because Individual A and Individual B are not a party to the Contacts for the provision of services respectively. Further, based on an analysis of the contractual terms and particularly the lack of control that the Engaging Entity can exercise over the nominated persons (Individual A and Individual B), we do not consider there is an intention by the contracting parties to create an employment relationship between the Engaging Entity and the nominated persons.

Section 12-40: Withholding from Payments to a Company Director (Individual B)

Section 12-40 of Schedule 1 to the TAA requires an incorporated company to withhold from payments of remuneration made to an individual as a director of the company, or as a person who performs the duties of a director of the company.

A director is considered an officer of a company, usually with different duties to those of an employee, including management and 'big-picture' strategy. Many directors have no role in the day-to-day running of the company. This does not mean a director cannot also be considered an employee.

Under section 201G of the Corporations Act 2001 (Cth), a company must appoint a person as a director by resolution. Section 12-40 of Schedule 1 to the TAA can only apply to Individual B as he is a director of the Engaging Entity; Individual A is not an appointed director and section 12-40 has no potential application to any payments made to him.

The phrase 'remuneration as a director, or as a person performing duties of a director' requires the relevant payments to relate to the entitlements the person has in their capacity as director; the mere fact that a person is a director of a company does not mean every payment made to that person will be captured by section 12-40 of Schedule 1 to the TAA.

It is a well-established common law principle that directors of a company are not entitled to claim remuneration from the company for services performed unless specifically provided for in the company's constitution or approved by shareholders. A company determines the remuneration to be paid to directors by resolution under section 202A(1) of the Corporations Act 2001 (Cth). In the case of Kelly v Federal Commissioner of Taxation (No 2) [2012] FCA 689 (Kelly), the Federal Court found a director was not 'entitled' to remuneration where the trustee company had not passed a resolution in respect of the director's remuneration.

The position of CEO can be distinguished from a position of a director within a company. It was held in AWA Ltd v Daniels t/as Deloitte Haskins & Sells & Ors (1992) 10 ACLC 93 that a:

Chief Executive is a director to whom the board of directors had delegated its powers of management of the corporation's business. Usually, the Chief Executive is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the Chief Executive will exercise the care and skill to be expected of a person in that position. The degree of skill required of an executive director is measured objectively.

Part of the role of the board of directors is to appoint the company's CEO.

For section 12-40 of Schedule 1 to the TAA to apply, Individual B needs to be entitled to payment for the performance of duties as a director under a company resolution. The fact that the Engaging Entity is paid to provide CEO services is irrelevant to the application of section 12-40. This is because Individual B's position of CEO is distinct from his role as director. There would generally need to be a company resolution authorising payment to Individual B in his role as director in order for that payment to be captured by section 12-40.

Conclusion - Section 12-40 of Schedule 1 to the TAA (Individual B)

The Engaging Entity is not required to withhold from payments made to Individual B for CEO services. However, if by a company resolution, Individual B is entitled to receive payments as a director of the Engaging Entity, the Engaging Entity will be required to withhold from these payments under section 12-40 of Schedule 1 to the TAA.