Private ruling: Withholding obligation for salaries and wages
Date of advice: 26 September 2018
Published: November 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you required to withhold an amount from salary, wages, commission, bonuses or allowances you to pay to individuals that have entered into an agreement, pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 ? | A1: No.

Relevant facts and circumstances: You manage and operate a team of individuals. Depending on an individual’s attributes, they are selected on a case-by-case basis to be a member of the team. The selection of individuals is at your sole discretion. Each individual selected by you entered into an agreement. The agreement contains a number of clauses pertaining to the expectations of individuals, rules and regulations they comply with, a statement setting out they are not employees, and the requirement to maintain their own health insurance. In the 20XX calendar year, there were only a small number of occasions that the team operated. Any training for the team occurred one week prior to when they performed as a team. For the 20XX calendar year, the situation is likely to be the same as the 20XX calendar year.

Relevant legislative provisions: Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (‘TAA 1953’)

Reasons for decision: Summary: Section 12-35 of Schedule 1 to the TAA 1953 provides that: 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 provision only applies where a payment is made to an employee as a consequence of their employment. | Detailed Reasoning - What is an employee?: The term ‘employee’ is not defined in the TAA 1953, and therefore takes 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. Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees discusses these indicia and provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35. Paragraph 20 of TR 2005/16 provides that it’s important to consider all the terms and conditions of the contract between the parties, and paragraph 21 provides that although contracts often contain a clause that purports to characterise the relationship between parties, such a clause cannot receive effect if it contradicts the effect of the agreement as a whole. The parties cannot deem the relationship between them to be something that it is not. As such, while the agreement provides that the agreement is not an employment contract, this is not itself determinative of the issue. Paragraphs 26 to 52 of TR 2005/16 set out the key indicators of whether an individual is an employee. | Detailed Reasoning - Control: Paragraph 26 of TR 2005/16 sets out that the classic test for determining the relationship between two parties in the context of employment is the degree of control which the person has over the other person they have so engaged. A common law employee is told not only what work is to be done, but how and where it is to be done. In your case, individuals that enter into the agreement agree to perform to the best of their ability and comply with all relevant rules and regulations. The individuals are encouraged and expected to attend related functions. We consider that you do exercise a degree of control over the individuals as you expect them to attend related functions and perform to the best of their ability. However, paragraph 28 of TR 2005/16 provides that merely because a contract specifies how services are to be performed does not necessarily imply an employment relationship. It is expected that a payer has a right to specify how the services are to be performed. Considering the totality of duties of the individuals, particularly their key duty, and usage of the terminology in the agreement, we consider it likely that the individuals are able to exercise significant discretion and perform their duties under the agreement without detailed control. | Detailed Reasoning - Does the worker operate on their own account or in the business of the payer?: Paragraph 32 of TR 2005/16 quotes a statement made by Windeyer J in Marshall v Whittaker’s Building Supply Co : ... the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own. In your case, we consider that the individuals do not operate on their own account, as they are a member of a team that is operated and managed by you. | Detailed Reasoning - ‘Results’ contracts: Paragraph 35 of TR 2005/16 provides that contracts that are to achieve a specific result have a strong indication that the contract is one for services. In such contracts, payment is often made for a negotiated price, as opposed to an hourly rate. In your case, the individuals receive a fixed payment when they attend training or participate as a member of the team when the team operates. We consider that the payments represent payment to achieve a specific result. | Detailed Reasoning - Whether the work can be delegated or subcontracted: Paragraph 41 of TR 2005/16 provides that the power to delegate or subcontract is a significant factor in deciding whether a worker is an employee, and that if a person is contractually required to personally perform the work, that would be an indication the person is an employee. In your case, individuals are selected by you to be members of the team. Considering the nature of the agreement, we consider that the work could not be delegated or subcontracted. | Detailed Reasoning - Risk: Paragraph 44 of TR 2005/16 provides that where a worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. In your case, the individuals are required to maintain their own health insurance. The individuals will be unable to fulfil the expectations of the agreement if they become ill, injured, or unfit. We consider that the individuals bear significant risk of the costs arising out of injury or defect in performing the duties required by the contract. | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: Paragraph 45 of TR 2005/16 provides that the provision of equipment and tools by an individual, and the incurring of expenses and other overheads is an indicator that an individual is not an employee. In your case, under the terms of the agreement, you provide a significant portion of the relevant tools and equipment. | Detailed Reasoning - Other indicators: Paragraph 51 of TR 2005/16 provides that other indicators of the nature of the relationship include: n right to suspend or dismiss the person engaged; n right to exclusive use of the services of the person engaged; and n provision of benefits such as annual, sick and long service leave. In your case, the agreement sets out what can occur if the terms of the agreement are breached, including suspension or termination of the contract. The agreement contains no provision for annual, sick or long service leave. | Detailed Reasoning - Are individuals in the team employees?: There are many indicators as to whether an individual is an employee, and no one factor is determinative. The weight or emphasis given to any one indicator depends on the particular circumstances and the context and nature of the contractual work. All factors must be considered to determine whether an individual is an employee. In considering the indicia discussed in TR 2005/16, we consider the following indicators incline towards the Players being employees: n your level of control over the individuals, including the requirement to comply with all rules and regulations; n the individuals do not operate on their own account, but if selected, participate as a member of a team that is managed and operated by you; n performance under the agreement cannot be delegated or subcontracted; and n you provide a significant amount of the necessary tools and equipment. Notwithstanding the above, after considering the totality of the facts and circumstances in this case, we consider that the individuals are not employees. This view is reached on the basis of the following factors, which we consider to be more persuasive in the characterisation of the contractual relationship between you and the individuals: n the level of discretion the individuals can exercise under the Agreements without detailed control; n the payments made pursuant to the agreement appear to be more for an achievement of a specific result; n the individuals carry a significant amount of risk relating to illness, injury, or defect in the duties they perform; and n the individuals receive no annual, sick or long service leave. Furthermore, whilst not specifically raised in TR 2005/16, we also consider the following factors to be relevant: n the individuals are selected at your sole discretion to participate as a member of the team in a match; n the consideration they receive is entirely conditional on whether they are so selected; n no entitlement to payment arises from the agreement; and n the term and duration of the agreement. | Detailed Reasoning - Do you have a withholding obligation?: Because the individuals are not employees, the amounts you pay to them are not paid as a consequence of their employment. Consequently, there is no obligation to withhold an amount from these payments pursuant to section 12-35 of Schedule 1 to the TAA 1953.