Private ruling: Obligations to withhold from payments made to workers under PAYG Withholding legislation
Date of advice: 8 January 2016
Published: March 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is there an obligation on the entity to withhold from payments made to workers under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)? | A1: Yes


Relevant legislative provisions: Taxation Administration Act 1953 Section 12-35 to Schedule 1 | Income Tax Assessment Act 1997 S ection 960-100

Reasons for decision: Summary: Under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 ( TAA) an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that entity or another entity ). An 'entity' is defined under section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean an individual, body corporate, body politic, partnership, any other unincorporated association or body of persons, a trust, a superannuation fund and an approved deposit fund. Where section 12-35 of schedule 1 to the TAA refers to an employee, the reference is to an employee at common law. There is no one factor that determines whether a person is an employee or an independent contractor. A number of factors must be considered. The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship). Such a relationship is typically contrasted with the independent contractor/principal relationship that, at law, is referred to as a contract for service . An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result). An independent contractor works in his or her own business (or his or her own account) while an employee works in the service of the employer that is in the employer's business. Whether a payee is considered to be engaged as an employee or as an independent contractor for taxation purposes is a question of fact that is looked at on a case by case basis. Taxation Ruling TR 2005/16 provides guidance on the types of factors to be considered in each case. These factors, which are discussed below, have traditionally been regarded by the courts as indicators to assist in determining the true nature of the contract. | Detailed Reasoning - The control test: The basic test for determining whether the relationship of master and servant exists is the exercise of control over the manner in which work is performed. With increasing usage of skilled labour and consequential reduction in supervisory functions, the focus of the control test has changed from the actual exercise of control to the right of control. Moreover, while control is important, it is not the sole indicator of whether or not a relationship is one of employment. The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. In fact, a high degree of direction and control is not uncommon in contracts for services. The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract otherwise the contractor is free to exercise his or her discretion (subject to any terms implied by law). This is because the contractor is working for himself or herself. Under a contract of service, on the other hand, the employer has an implied right within the limits imposed by industrial relations laws, to direct and control the work of an employee. This is because the employee is working in the employer's business and the owner of a business has the right (within the confines of applicable law) to manage that business as the owner sees fit. The High Court stated that what matters is lawful authority to command, so far as there is scope for it. The more control that is held over the person performing the work, the more likely it is that the person will be an employee. Under the terms of the entity's agreement a contracted worker must work within the operating framework of the Terms of Reference (TOR). This includes participating in a training program, working collaboratively with the entity's support officers, providing feedback and reports to the support officers and the requirement to participate in teleconference/webinars with the entire expert group periodically and consulting with other members of the expert group as necessary. The TOR also appears to indicate that work queries are directed from the support officer to a worker. A worker is to report to the support officer if they cannot complete a job within the specified time period so that the job may be transferred to another worker if necessary. The above factors indicate that a worker under this arrangement does not have the level of control of an independent contractor as the entity directs the ways and methods of getting the end result. Jobs are essentially being provided to workers according to their area of expertise and availability and they are required to work collaboratively with the support officer who directs workflow, monitors timeframes, collects reports and oversees the provision of the end product. The role of the support officer can be likened to a supervisory role of an employer. The fact that a worker may have some discretion on the amount of hours they work per month does not have a major impact on this test. | Detailed Reasoning - Integration: Another significant factor in establishing the nature of a contractual relationship at common law is to determine whether the worker's services are an integral part of the employer's business (under a contract of service as an employee) or providing services as an individual carrying on his or her own business (under a contract for services as an independent contractor). This is known as the 'integration' test. If the worker's services are an integral and essential part of the employer's business that engages them, they are considered by the courts to be a common law employee. If the worker is providing services as an individual carrying on their own business, they are an independent contractor. It is necessary to keep in mind the distinction between a worker operating their own business and a worker operating in the business of the payer. The worker needs to be running their own business or enterprise and have independence in the conduct of their operations. Here there are both arguments for and against the integration test being met. Under the agreement a worker is only required to work a maximum of a set number of hours per month and has the right to work for other employers. However, the entity's business primarily provides advice and support to workers and workers are the means of how this service is provided, therefore the service provided by the workers is an essential part of this business. Workers are also encouraged by the entity to work as a team. It is also noted that the benefits arising from a completed query flow to the entity rather than the worker as evidenced by the entity acquiring the intellectual property rights resulting from the Project. | Detailed Reasoning - Results test: In a contract for services, the contract specifies the services to be performed in return for an agreed payment. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. Conversely, under a contract of service, payment is not necessarily (but may be) dependent on the completion of specified services. 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. It is clear in this case that workers are paid a set amount for a maximum number of hours worked per month. There are not a set number of queries or other tasks to be completed by a worker. A worker is merely paid for the time spent providing their expert advice to the entity. The provision of timesheets and forms is for the entity's statistical purposes, however, this can also be an indication that work provided is for a contract of labour. The conditions outlined above are not consistent with a result based contract. | Detailed Reasoning - Delegation test: The power to delegate was considered to be an important factor in deciding whether a person is an employee or an independent contractor. An unlimited power to delegate work is an important indication that the service provider is an independent contractor. 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. The terms of the agreement state that a worker must not engage any other individual or entity to perform the Project on their behalf, subsequently, a worker does not have the right of delegation. | 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 accordance with the agreement a worker will indemnify the entity for all losses, costs and expenses arising from any negligent, fraudulent or reckless act or omission by them in the course of performing the Project. This indemnity also extends to misuse or disclosure of any confidential information of the entity, aspects of the project rights being in breach of any law and claims from a third party that it has intellectual property or moral rights which are, or will be, infringed by the entity's use of the Project results. Subsequently, a worker will bear a significant risk in relation to defective work. | 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. Furthermore, 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. The Project is not the type of work that requires a worker to provide much in the way of tools and equipment as it is primarily the provision of intellectual labour. However, a worker is paid a monthly allowance for operational costs which is indicative of an employee/employer relationship. | Detailed Reasoning - Other indicators: In addition to the above, other indicators of the nature of the contractual relationship have been variously stated and have been added to from time to time. Those suggesting an employer-employee relationship include the right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award for employees. You have stated that workers are responsible for their own tax and superannuation obligations and under the terms of the agreement the entity may terminate the agreement for any reason at any time by written notice. | Detailed Reasoning - Conclusion: From the information supplied it is considered that all workers under the agreement are common law employees and consequently there is an obligation under section 12-35 of Schedule 1 to the TAA to withhold from payments made to the workers.

Relevant facts: The entity supports workers in a particular industry. | The entity provides professional advice and resources for a particular project (Project). The agreement the workers work under states they will perform for the Project as independent contractors in accordance with the Terms of Reference attachment. | The following relevant terms are contained in the agreement: | • Workers assign absolutely to the entity all intellectual property rights arising as a result of performing the Project and the residing results of the Project, and they agree to perform all things necessary or desirable to give effect to ownership of intellectual property rights vesting in the entity. | • Workers will indemnify the entity for all losses, costs and expenses arising from any: | a. negligent, fraudulent or reckless act or omission by them in the course of performing the Project | b. misuse or disclosure of any confidential information of the entity | c. aspects of the Project rights being in breach of any law | • Workers must not engage any other individual or entity to perform the Project on their behalf. | • The entity may terminate this agreement for any reason at any time by written notice. | • Upon termination of the agreement workers will deliver to the entity all material and information made available by the entity to them and all material produced in the course of performing the Project | • Workers warrant to the entity that they have the right to undertake the obligations and commitment contained in the agreement including, without limitation, being in a position with respect to ownership of intellectual property rights to ensure the vesting of all intellectual property rights (except for their own intellectual property rights) in the Project results with the entity. Workers will perform the Project in accordance with the Project brief contained in the Terms of Reference attachment. | • The entity will pay workers a set amount for a maximum set of hours on a regular basis for a set period. | The Terms of Reference (TOR) attached to the agreement describes the skill sets required and the operating framework for members (workers) who form the expert group for the entity. The TOR provides the following relevant terms: | • A worker will be paid a periodic amount for the provision of their advice and an allowance for operational costs. | • A worker will require an ABN. | a. participate in a training program at the commencement of their appointment | b. commit to working a set amount of hours per month | c. work collaboratively with the entity's support officers in providing expert advice and direction to workers | d. respond to queries as they arise | e. communicate with clients via email, phone or online | f. be in regular communication with the support officer for feedback and reporting purposes | g. participate in teleconferences/webinars with the entire group of expert workers periodically | h. The expert group will invite input from workers regarding the development of resources, forms and suitable templates to aid in receiving queries and delivering advice to clients. | • Clients will submit queries online or via email that will be answered by the support officer or directed to a worker to complete. | • The support officer or worker will compile a written response to the query. | • The support officer will post the response in the public forum as well as sending the response directly to the client via email. | • A worker will communicate to a support officer if they are unable to keep to the timeframes or are unable to provide a suitable answer to the query, so that query can be passed on to another member if necessary. | • The expert group workers will be encouraged to work as a team and be supported where appropriate by the support officer. | • A worker will be required to submit a form for each query that they have researched, including time spent on the query. | The agreement states that they will 'perform the project as an independent contractor' and they are to be treated as contractors where they have been responsible for their own tax and superannuation obligations | a. each worker has agreed they will work for the entity for a maximum of a set number of hours per month to provide a specific output (advice and resources). Each worker has freedom in when and how the hours are used and in how the work is done | b. the workers do not always work the full allotted hours per month | c. the number of hours they work per month is at their own discretion and they do not have to work for the entity every month | d. each worker provides a monthly timesheet of hours worked and the associated deliverables (advice and/or resources) and an invoice for that month.