Private ruling: PAYG Withholding - Employee Vs Contractor
Date of advice: 13 January 2017
Published: June 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2016

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: The entity employs X full time employees and also contracts Z independent workers to provide services to customers. The X full time employees comprise the Y company directors and one administration personnel. The Z independent contractors are engaged by the entity to provide services. The contractors are engaged by the entity under signed Independent Contractor Agreements. Terms of Engagement The entity does not advertise for workers. The workers were performing their work independently prior to commencing work with the entity and approached the owners to work from their premises. The workers do not have formal qualifications. The owners accept workers in accordance with their portfolio and performance of a test. The workers are not engaged on an ongoing basis because they tend to come and go. The owners do not pay holiday or sick pay, or any insurance for the workers. Control The workers are independent, decide their hours of work, run their own jobs and promote themselves via social media. The workers can accept or refuse work without recourse. The workers do not have to ask for permission to take time off. The workers are allowed to arrange viewing evenings to display their work for promotional purposes. The owners do not provide any verbal or written instruction, training, procedures or manuals apart from a hygiene manual. The owners do not stipulate how much the worker should charge each client. The owners do not stipulate the number of hours to be worked. The owners do not discuss the progress of the work, supervise, prioritise or check the work performed. The owners do not tell the worker to stop one task and start another. The owners do not stipulate the quality of the materials used by the worker or stipulate where these products are purchased. Integration Workers can be approached directly by other entities. They can work for other entities but tend not to do so. Normally this only happens when they perform a guest spot interstate or go to a convention. No management fee is payable to the owners on these occasions. The workers do not undertake any other duties for the owners. The workers are not required to wear a uniform or display a logo of the business. The workers do not advertise on their cars. The workers advertise on social media and on business cards. They receive feedback via their social media pages. Each worker has their own ABN and maintains their own accounting records. Customers choose a worker by word of mouth or looking at the work of the workers on the internet. Customers contact the entity by phone or in person to make an appointment with their preferred worker. Customers prepay on arrival to the office manager for each appointment. Customers can contact the worker directly via phone or social media. If a worker does not show up when expected, the owners would phone the client to cancel and reschedule the appointment. Results The workers are able to negotiate different rates of pay and terms and conditions. For example, the owners only retain 30% of the fee charged by the worker to the customer on weekends (40% on week days) because the owners do not work on weekends and provides less. The workers usually charge customers in accordance with Australia wide standard rates. The workers are able to invoice for progress payments on a job because clients pay upfront prior to each of their appointments. The workers do not complete timesheets or invoice the owners for reimbursements, material, travel etc. The owners determine the percentage they would receive from each client in accordance with their calculation of their expenses providing the rooms etc. The owners make direct credit payments to the account of the worker. The owners have never made an additional payment or reimbursement (they only pay in accordance with the invoice). The owners would not make a deduction from the amount paid to the worker unless it was requested. Delegation The workers do not have employees. The workers undertake the work personally but they can arrange for another worker to do the work if the client agrees. Customers usually only want the worker they have selected. Risk The workers have their own insurance (policies shown to the owners) and are required to rectify any mistakes or provide a refund if the client is dissatisfied. The owners would terminate the contract of a worker who developed a bad reputation. Provision of tools and equipment The workers paid for their participation in a hygiene course required by the owner. The workers supply and pay for their own tools, car, mobile phone and business cards.

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 - Terms and the circumstances of the formation of the contract: In determining the nature of the contractual relationship, it is important to consider all the terms and conditions of the contract between the parties, whether express or implied, in light of the circumstances surrounding the making of the contract. Contractual arrangements often contain a clause that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole- that is, the parties cannot deem the relationship between themselves to be something that is not. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. If the underlying reality of the relationship is one of employment the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker's status is that of an independent contractor. As Gray J stated in Re Porter: re Transport Workers Union of Australia: Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck. | 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 shall perform the services in the way in which it is deemed by the worker to be most appropriate and efficient. The workers are independent, decide their hours of work and promote themselves. The workers can accept or refuse work without recourse. The owners do not provide any verbal or written instructions to the workers. The owners do not discuss the progress of the work, supervise, prioritise or check the work performed. These are indications that the workers are not employees of the entity rather independent contractors providing services for the entity. | 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 have registered for Australian Business Numbers (ABNs) in their own name. The worker is free to accept or refuse additional work. The workers do not undertake any other duties for the owners. The workers are not required to wear a uniform or display a logo belonging to the business. It appears that the worker is providing services while operating their own business, and the nature of the relationship is that they are a contractor. | 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 able to negotiate different rates of pay and terms and conditions for each job. The workers are able to invoice for progress payments as clients pay upfront for each appointment It appears that the basis of the contract is to achieve a specified result, that is the completion of the services provided under the contract. There is no indication that the worker is to be renumerated at any point prior to the completion of their task. Overall, the worker is free to employ their own means to achieve a contractually specified outcome, which is a further indication of a contractor relationship. | 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 do not have employees. The workers undertake the work personally but they can arrange to have another worker do the work if the client agrees. The worker is able to engage people to assist with performing the services. This is a strong indicator that the worker is engaged as an independent contractor. | 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. The worker is legally responsible for their work and liable for the cost of rectifying any defects in their work. In this case, the workers have their own insurance and are required to rectify any mistakes or provide a refund if the client is dissatisfied. The information provided indicates a contractor relationship. | 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. The workers operate in a building which is supplied by the entity. The workers supply their own tools, car, mobile phone and business cards. The workers also paid for their own participation in a hygiene course required by the owners As the entity is not responsible for supplying equipment in order to perform the services, it is more indicative of a contractor relationship as opposed to an employee/ employer relationship. | 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.