Private ruling: PAYG Withholding - Employee Vs Contractor
Date of advice: 22 April 2016
Published: June 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the workers engaged by the entity considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)? | A1: No

Relevant facts and circumstances: You are the owner of a business. You have two workers who work within the practice delivering services that are labour based. Each worker is responsible for maintaining their own registration and public liability insurance. Each worker determines the says, times, types and number of clients they see within the practice. Each worker supplies the materials for the job, for example, computer, books, their own training and qualifications. The owner provides the practice management software and phone in order to be able to have the admin coordinate their diaries during the hours they specify they are available. Each worker issues an invoice for services delivered. Each worker is only paid for services delivered. Each worker is paid super by the owner of the practice. Each worker receives referrals in their name, albeit under the name of the entity. Critical features of the engagement are as follows: • The worker has freedom in the way that the work is done. The owner does not determine which type of approach the worker deems suitable, or how they maintain files. • The worker is operating their own business independently of the owner. • The worker performs services, as specified in their contract, and is free to accept or refuse additional work. • The workers are paid on a per client basis. • The workers will invoice the owner, who pays them once the work has been done. If the worker does not see the client or the client does not show, then they are not paid. • The worker does not quote for each client as the worker and the owner agreed on a price per consultation. • There is no payment for result as the end goal is determined by the client. Work tends to be ongoing until a sufficient and usually client determined level of completion is reached. • The worker does have the ability to delegate or subcontract, the likelihood of this happening midway through service delivery is very low. This is due to the work being centred around and depending on the individual relationship with the worker. • The workers do make locum arrangements when someone is away and the worker will pay the locum. • If worker is busy, they will tend to decline the referral rather than call in a subcontractor. • The worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. • The worker provides all or most of the equipment, tools and other assets required to complete the work and does not receive an allowance or reimbursement.

Relevant legislative provisions: Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision: Summary: Section 12-35 of Schedule 1 to the TAA 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? | Detailed Reasoning - 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 determines the days, types, times and number of clients they will see. The worker is free to conduct the tasks any way they see fit. They will determine the actions to be taken and are responsible for their own record keeping. This level of control is indicative of a contractor relationship. | Detailed Reasoning - 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. In this case, the workers engaged by the owner run their own businesses independently, and take other work at their discretion. The workers perform the services as specified in their contract. They are also able to reject work offered to them by the owner. | Detailed Reasoning - 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 workers are paid based on a per client basis. The workers invoice on an agreed hourly rate. There are no quotes as the worker and the owner agreed on a price per consultation. The completion of a specific job is dependent on when the psychologist and the client agree to a determined level of wellbeing being reached. The nature of the industry is that the payment for services are in reference to hours worked. However, as the payment is for an agreed or predetermined result, which is the consultation with the client, it appears that the relationship is that of a contractor rather than an employee | Detailed Reasoning - 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 workers are not given specific instructions about whether the worker has to complete the work personally. The workers are more likely to turn down the work rather than engage someone else on their behalf. If they do take on the work, the workers are able to delegate work to others if required. If the worker is away they do make locum arrangements where they pay the locum. This indicates that they are able to delegate work if required. | Detailed Reasoning - 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 bears the risk and responsibility of liability. The workers engaged are legally responsible for their work and are required to correct any defects in their work. The workers are responsible for maintaining their own registration and public liability insurance. As the workers bear the responsibility and the liability, it is likely that the nature of the relationship is that of an independent contractor. | Detailed Reasoning - 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, workers engaged by the owner are required to provide their own equipment and materials for the job. Where a worker is required to purchase specific equipment, the worker does not receive an allowance or a reimbursement. | Detailed Reasoning - Conclusion: After assessing the facts against the indicators in TR 2005/16, it is considered that the workers are contractors, and there is no obligation on the entity to withhold from payments made to the workers