Private ruling: PAYG Withholding - Employee or Contractor
Date of advice: 22 March 2017
Published: August 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 is a business that creates resumes and relevant documents to assist their clients in applying for positions within Australia. The entity services both government and private clients looking for work. The entity would like to engage workers to create the documents. This involves consulting with the client and preparing documents in line with the position requirements in the job advertisement. The entity will supply the templates to create the final documents; the worker will supply their own PC, phone and other sundry material. The worker can be a sole trader, partnership, company or trust. The worker representatives do not need to create the finished product themselves but they must ensure that the person they distribute the work to has the necessary skills to complete the task. There is a seven day review period for the client where they can request amendments. The worker would need to make these amendments. Any amendments outside the seven days are charged to the client. The agreement is between the entity and the worker's business (i.e. sole trader, partnership, company etc.) The worker can distribute this work to their employees, however, they must ensure that the quality is as expected - if not, they will need to resolve this at their own cost. The agreement will state that the worker can distribute this work to others provided quality is maintained and they confirm they will rectify any issues with the completed work at their own expense. The worker is to invoice the entity for works completed covering the seven day review period. The entity will pay invoices in line with the workers payment terms provided this invoice has been generated after the seven day review period i.e. when the work is completed, otherwise the invoice will be paid on completion of the seven day period. Once allocated, unless the work has been paid as an “Express job” by the customer, there is a five day period to complete the work. This allows for a final edit/review by the entity The entity is still to confirm which of the following payment options to use: ● The worker would charge a set amount per piece of work with the amount to be determined by the entity. This allows the business to offer increased rates to the workers when their prices increase and limits the risk of the worker underquoting for work, which may result in reduced quality. ● The worker would charge a set amount per piece of work with the amount to be quoted by the worker and agreed to by the entity. This allows the worker to set a rate that they are happy with. There is a risk that the worker will underquote leading to a reduction in work quality. The work must be created in line with the requirements set out by the company advertising the position. If the advertisement specifies a two page response, the work must be set out at two pages; if the advertisement specifies selection criteria to be addressed, the worker must ensure that the selection criteria are addressed. Where no page limit for work is mentioned in the job advertisement, the client will set the page limit at the time of order. The worker can accept/refuse work based on their capacity - if the worker cannot meet their obligations, they need to let the entity know as soon as possible so the job can be reallocated to another worker as required. The worker is to contact the client within a reasonable period of accepting the job to arrange a time for a consultation. If the work is an urgent request, the worker needs to contact the client within four hours.

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 will provide services to the entity as set out in the agreement. 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 required to conform to the same professional standards as may normally be expected from persons performing similar services. 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 can operate their business in any manner they see fit. The worker is free to accept or refuse additional work. The workers work for an amount for each set piece of work. When the work is completed, the workers are paid by the entity for the outcome of their work, not the time spent completing the task. They are free to provide their services to other entities 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 worker is paid upon the supply of a tax invoice. Invoices are paid once the seven day review period has passed for each piece of work regardless of when the invoice is supplied to the entity. 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. The entity has indicated two potential methods for determining the payment amount. Whether the amount is set by the entity or the worker, both methods will result in the worker not being paid until the provision of the invoice once the task is completed. 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 the present case, the contract will state that the worker is able to distribute work to their employees as long as they ensure that the quality of the work remains at an acceptable standard. The ability to delegate tasks without approval of the entity indicates that the workers are contractors rather than employees of the entity. | 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 responsible for their work and liable for the cost of rectifying any defects in their work. There is a seven day review period for the client to request amendments and the worker is responsible for making these amendments. In this case, the information provided indicates that the risk of liability for the cost of rectifying work is mainly held by the worker and 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 entity provides support templates for the workers to complete the final documents. The workers also provide some of the equipment, including their own PC, phone and other sundry materials. 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.