Private ruling: Employee or contractor
Date of advice: 23 June 2015
Published: June 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Are you an employee of the foreign company? | Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You entered into a 'consulting agreement' (the agreement) with a foreign resident company (the company) to provide your services as a 'consultant'. The agreement states that your position is that of a full-time consultant as a business manager based in Australia. You are responsible for performing various tasks associated with representing the company's products and increasing sales volume. Your remuneration under the agreement comprises of an annual retainer paid monthly and a performance based bonus based on commission from sales revenue paid quarterly. You are required to submit an invoice each month to facilitate the payments. The company reimburses you for expenses relating to travel, entertainment, mobile phone, internet access and home office expenses including a laptop computer. The company does not deduct any Australian or foreign income tax from the payments it makes to you. The company does not make any payments of Australian superannuation on your behalf. The agreement provided for you to receive a loan to assist you with relocation costs. You are entitled to receive paid time off for all Australian government holidays. The agreement specifies that you will have access to the company's confidential information and trade secrets. The agreement does not specify a period for the term of the engagement and you or the company may terminate the agreement at any time by giving 30 days prior notice. However, the company may immediately terminate the agreement should your behaviour be unsatisfactory, as specified in the agreement. You have an Australian Business Number (ABN).

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

Reasons for decision: Summary: The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal-independent contractor relationship that is referred to as a contract for services. Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 states that an entity (that is registered to conduct business in Australia) 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 withholding requirement does not apply to independent contractors. Instead, these individuals are subject to the Goods and Services Tax (GST) legislation and may also be subject to the personal services income rules. The term 'employee' is not defined in taxation law; therefore it has its ordinary meaning. Consequently, whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators as developed in case law. No one indicator of itself is determinative of that relationship. Instead, the totality of the relationship between the parties must be considered. Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides guidance on the key indicators that should be considered when determining whether an individual is an employee of a paying entity. | Detailed Reasoning - Control: TR 2005/16 states that the classic 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 usually told by their employer what work needs to be done and how and when it is to be done. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but whether they have the right to exercise it. 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 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 their discretion. This is because the contractor is working for themselves. While control is considered to be the most important indicator of the contractual relationship, the totality of the relationship between the parties with reference to all the other indicators must be considered. In your situation, you are engaged as a business manager and the agreement specifies that you are required to undertake various tasks on behalf of the company. However, the agreement does not go in to any detail about how you should actually perform these tasks. Consequently, you do not appear to be subject to a great degree of control by the company. Nevertheless, your role is similar to many employee positions of a managerial or executive nature in which the worker exercises his or her discretion in deciding how to best carry out the duties of the position. | Detailed Reasoning - Operating on own account or in the business of the payer: When applying the indicators of employment listed in TR 2005/16, it is necessary to keep in mind the distinction between a worker operating on his or her own account and a worker operating in the business of the payer. In the case of Hollis v. Vabu (2001) 207 CLR 21; 2000 ATC 4508; (2001) 47 ATR 559 the majority of the High Court quoted the following statement made by Windeyer J in Marshall v Whittakers Building Supply Co (1963) 109 CLR 210; ….the distinction between an employee and independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employers business, and a person who carries on a trade or business of his own. In your situation, you are working in a full-time managerial position and are responsible for carrying out numerous tasks that involve many aspects of running the sales business of the company. You also have access to the confidential information and trade secrets of the company. You are fully integrated with the company and represent the company in the region you are responsible for. Consequently, you cannot be said to be carrying on a business of your own. | Detailed Reasoning - Payment for result: Another consideration is a focus on whether the substance of a contract for work is to achieve a specified result. If this is the case there is a strong but not conclusive indication that the contract is one for services, and not employment. Under results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker 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. In your situation, you entered into an agreement with no specified end date to undertake various tasks for the company in exchange for an annual retainer paid monthly. You are also paid a performance based bonus, have your work related expenses reimbursed by the company and were also eligible for a company provided loan. From the above, it is evident that your situation differs from that of a person who is paid to achieve a specified result in a specified period of time. Further, the manner in which you are remunerated is consistent with an employer-employee relationship. The fact that Australian income tax is not deducted from your remuneration payments and you are required to submit an invoice for payment has no great bearing on whether you are considered to be an employee or a contractor. | Detailed Reasoning - Power to delegate or subcontract the work: The power to delegate or subcontract (in the sense of the capacity to engage others to do the work you are responsible for) is a significant factor in deciding whether a worker is an employee or independent contractor. If the worker is contractually required to personally perform the work, this is an indication that the person is more likely an employee, whereas if an individual has unlimited 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. In the latter circumstances, a key point would be where the contractor is responsible for remunerating the replacement worker. In your situation, the agreement requires you to personally perform the work involved. There is no mention in the agreement of you being able to delegate any of your responsibilities to others or to pay others to complete work with company funds. | Detailed Reasoning - Risk: Where a worker bears little or no risk for the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of the work. This means that an independent contractor will often carry their own insurance and indemnity policies. In your situation, there is nothing in the agreement that indicates that you are subject to any great degree of commercial risk. | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: It has been held in a variety of cases that the provision of assets, equipment and tools by an individual is an indicator that the individual is an independent contractor. There are situations where, having regard to the practical circumstances and nature of the work, very little or no tools of trade or plant and equipment are necessary to perform the work. This fact alone will not lead to the conclusion that the individual is engaged as an employee. The weight or emphasis given to this or any other indicator depends on the particular circumstances, the context and the nature of the contractual work. Further, TR 2005/16 also states that 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 your case, you are required to provide your own work area (home office) and equipment to carry out your duties (mobile phone and laptop computer). However, the company reimburses you for these expenses which are consistent with an employer-employee relationship. | Detailed Reasoning - Other indicators: In addition to the above, other indicators of the nature of the contractual relationship have been variously stated. TR 2005/16 states that those indicators 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 to employees. However, the fact that a contract does not contain provisions for annual or sick leave alone does not alone indicate an independent contractor arrangement. While it is possible to terminate a contract with an independent contractor where the payer is not satisfied with the quality of work provided, there is similar recourse to employers who have employees performing below the required standard in their work. In your situation, the agreement contains provision for you to be paid for national public holidays, but does not contain provisions for annual leave or sick leave. | Detailed Reasoning - Existence of an ABN: TR 2005/16 states that the fact that an individual has an ABN does not prevent that individual from also being engaged as an employee in another role. The fact that an ABN is provided during, or at completion of, the contract is an indicator that must be examined together with the overall contractual arrangement. | Detailed Reasoning - Conclusion: When we examine each of the indicators in the context of the whole arrangement, we consider that the agreement you have with the company constitutes an employer-employee relationship. Specifically: • you work for one payer exclusively in a full-time role; • your role is fully integrated with the business of the payer; • the term of the agreement is open ended with no end date; • the majority of your remuneration is by way of an annual retainer paid monthly; • your work related expenses are reimbursed by the payer; • the agreement does not provide for you to delegate work to others; and • you do not appear to bear any commercial risk. Based on the arrangement provided in this ruling application, we consider that you are engaged as an employee for Australian taxation purposes. Consequently you are not subject to the GST or personal services income provisions of the taxation legislation.