Edited version of private advice

Authorisation Number: 1052184733580

Date of advice: 21 December 2023

Ruling

Subject: Withholding payments to individuals

Question: Withholding payments to individuals

Is there an obligation on the Principal to withhold from payments made to individuals and entities engaged as independent contractors (Workers) pursuant to section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commences on:

1 July 2023

Relevant facts and circumstances

The Principal operates a business in which it agrees to provide comprehensive work related services to clients at residential and commercial premises.

The Principal charges a fixed monthly fee to its clients for the services. The amounts of the fee are based on a number of factors, including:

a)    The scope and nature of any consulting provided by the Principal as to the client's working needs; and

b)    The volume of physical work required to be undertaken.

The Principal also engages independent contractors (Workers) to undertake work for the clients.

The Principal seeks out prospective Workers through word of mouth and adverts in newspapers.

The criteria used by the Principal when selecting a suitable Worker include:

a)    Whether the Worker has a good reputation and track record;

b)    Whether the Worker has specific skills required for the job;

c)    Whether the Worker is available to do the job;

d)    Whether the Worker has available staff;

e)    Whether the Worker is considered to be able to complete the work in the timeframe required and to the quality expected by the client; and

f)    Whether the Worker's fees are considered reasonable.

Prior to engagement of a Worker, a senior manager has a meeting with the prospective Worker in which:

a)    The Principal and the Worker negotiate the price to be charged by the Worker; and

b)    The Principal explains the expectations of the quality of the services to be performed.

The relevant terms and circumstances of the engagement of the Worker by the Principal are as follows:

a)    Upon engagement the Principal is liable to pay the Worker in accordance with the contract;

b)    The Principal pays the Worker an agreed lump sum per job. This amount is paid whether the Worker takes longer or less time to finish a work;

c)    The Worker's fees are paid on a regular basis provided an invoice has been received and verified by the Principal. Payments are usually made each fortnight;

d)    Workers are entitled to sub-contract a job. Permission to sub-contract is not required from the Principal as the Worker is ultimately responsible for the work and the Worker will not receive payment if the task is not completed in accordance with the agreement. The Worker is responsible for paying any sub-contractor who works for them;

e)    Workers are free to decline to undertake any work. There is no requirement for the Worker to give notice of termination should they wish to not undertake work in the future;

f)    The Principal does not provide any uniforms or identification badges.

g)    All Workers must provide an Australian Business Number to the Principal before payment is made;

h)    Following an initial introduction by the Principal, the Worker and the client will negotiate between themselves any adjustment to the time in which the jobs are to be conducted;

i)    Workers are to hold relevant public liability and worker's compensation insurance policies with copies of the policies to be given to the Principal prior to any work being undertaken by the Worker; and

j)    The Workers supply all their own materials and equipment, that is, work products, work equipment and own mode of transport with no reimbursement or allowance paid by the Principal for any expenses.

The Principal provides the following further information in relation to the arrangements:

a)    None of the Workers work exclusively, or even primarily for the Principal. The Workers concerned provide the same services to other businesses.

b)    The Workers are engaged by the Principal in cases where demand for cleaning services exceeds what can be undertaken by the Principal's employed cleaners. If there is a decline in demand from the Principal's clients, the Workers will not be engaged.

c)    Workers work, on average, 6 to 8 hours for the Principal each week.

d)    In some months, Workers will not be engaged by the Principal at all.

e)    The Principal negotiates certain aspects of the service relationship with the Workers. These include the location of the job and a mutually acceptable rate/quote for the entire work. However, All other aspects of the services are determined by the Worker, including:

(A)      the appropriate working equipment and materials to be used in undertaking the work;

(B)      the manner and sequence in which the work is completed; and

(C)      the time taken to complete the work.

f)    The Workers fees are not based on time but on the result. Some Workers will obviously be able to undertake a job faster than others. However, the time taken to complete the job does not affect the amount fees paid by the Principal.

g)    The Principal is engaged by its clients to provide comprehensive working solutions, which includes consulting. Accordingly, the Workers engaged by the Principal provide just one component of the overall service offering that the Principal provides to particular clients.

h)    The Principal offers jobs on a specific assignment basis. Should a Worker refuse an assignment for any reason, the assignment will simply be offered to the next available Worker. Workers are entirely free to accept or decline an assignment.

i)    The Workers do not use the principal's business cards nor are they expected to comply with a dress code. There is no expectation that Workers work exclusively for the Principal or that they represent it in respect of engagements.

j)    The fees charged vary depending on a number of factors, primarily due to rates imposed by the particular Workers.

k)    The Workers use their own equipment and vehicles to undertake the work. Any or all of the resources and tools required to perform the task are the sole responsibility of and are solely provided by the Workers.

l)    The Workers are not, in any way, guided as to the manner in which they must perform their work. The Principal does not supervise nor dictate any aspect of the work. The Workers are completely responsible for their own work and must fix any errors. If the services provided by a Worker do not meet the expectations of the Principal's clients, then the Worker may not be engaged for future Workers assignments.

m)    The Workers may delegate the work to another person. The only condition that the Principal places on such delegation is that responsibility for the work must be borne by the Worker that it engaged to accept the assignment.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply

Reasons for decision

Question:

Is there an obligation on the Principal to withhold from payments made to individuals and entities engaged as individual contractors (Workers) pursuant to section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA)?

Answer

No.

Summary

The Principal is not required to withhold pay as you go (PAYG) withholding amounts from payments made to Workers under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA states an entity must 'withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity)'. The withheld amount is referred to as 'PAYG withholding'.

Taxation Ruling TR 2022/D3 Income Tax: Pay As You Go - withholding from payments to employees (TR 2022/D3) provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA.

Paragraph 14 of TR 2022/D3 states that there must be:

1.    an employee

2.    a payment of salary, wages etc to an employee

3.    a payment made as a consequence of his/her employment, and

4.    a payment made by an 'entity'.

In terms of the first condition, it is necessary to determine whether or not the contractors are employees of the company.

The term 'employee' is not defined in the TAA. For the purposes of withholding under section 12-35 of Schedule 1 to the TAA, the word 'employee' has its ordinary meaning.

In some cases, it is self-evident whether an employee and employer relationship exists. In other cases, it can be difficult to discern the true character of the relationship.

There is no single factor which is determinative of a contractual relationship. The totality of the relationship must be considered to determine whether, on balance, an individual is an employee.

The Courts have considered the common law relationship between parties in many situations, and a substantial and well-established body of case law has developed on the issue, from which a range of indicia has arisen.

Paragraphs 26 to 52 of TR 2023/D3 sets out 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 of 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, otherwise the contractor is free to exercise their own discretion, because they work for themselves.

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 payer's business, but the work is not integrated into the business; rather, it is an accessory to it.

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.

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 workload. This is not delegation consistent with that exercised by a contractor.

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.

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 Principal uses individuals or entities (Workers) contracted to provide work services. The Workers are only told the time and venue of the residence they are required to work. They are not told how to work. Workers are paid for a given result i.e. the satisfactory of the client that requested the work service. The Workers are chosen because they have the requisite skills.

After comparing the facts against the above factors, it is considered that Workers are not employees of the Principal.

As Workers are not employees of the Principal, amounts paid to the Workers are not paid as a consequence of employment. Therefore, there is no obligation to withhold from payments made to them under section 12-35 of Schedule 1 to the TAA.