Private ruling: Whether individuals are employees or contractors
Published: April 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is there an obligation to withhold from payments made to individuals under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)? | A1: No


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

Reasons for decision: Summary: Under section 12-35 of Schedule 1 of 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 of 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. | Detailed Reasoning - Factors in deciding the relationship: The first consideration must be the terms of the contract. At all times, the underlying consideration is whether the worker is working: • in the service of another, as an employee, or • on their own behalf, as an independent contractor. Taxation Ruling TR 2005/16 provides guidance on the types of factors to be considered in each case. These features, 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. | 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. | 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. | Detailed Reasoning - Conditions of engagement: Provision of paid leave entitlements, for example, sick leave, long service leave and superannuation are persuasive indicators of an employment relationship. It should be noted that there is no standard set of indicators applicable to an employee and a different set applicable to an independent contractor. Most conditions of engagement when viewed individually are equivalent as indicators of the true character of the relationship. | Detailed Reasoning - Hours of work and mode of payment: An employee generally works standard or set hours. An independent contractor, on the other hand, generally sets their own hours of work. | Detailed Reasoning - Business risk and expenses: Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out his or her work, he or she is more likely to be an employee. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more he or she is likely to be regarded as being independent. Typically, a worker who derives piece rate payment and sustains large outgoings would be so exposed. The higher the proportion of the gross income which the worker is required to expend in deriving that income, and the more substantial the assets which the worker brings to his or her tasks, the more likely it is that the contract is for services. | Detailed Reasoning - Place of performance: Workers under a contract of service will generally perform the tasks on the payer's premises using the payer's assets and equipment. A contractor, on the other hand, generally provides all their own assets and equipment. | Detailed Reasoning - Integration: The question of whether the work is integrated into the business is another factor to consider. The presence of other workers doing the same work for the principal would indicate that the worker is an integral part of the business. In this case, the oral contract points towards a contractual relationship between the entity and the individuals. It was also intended that the individuals conducted their own business. There seems to be little scope for the exercise of supervision and control. The oral contract contemplates that the parties managed each task by consensus. The individuals and the representative discussed where the tasks will be performed. It cannot be ascertained whether individuals conducted their activities as a business i.e. systems, records and business plans. It is understood that it is a very informal arrangement between the entity and the individuals. The arrangement between the two parties indicates that independent business people are co-operating for the limited purpose of performing tasks and selling the result. Individuals bought their expertise and skills and preferred equipment. They could exit the arrangement at any time if they wished or not to perform the tasks in the first place. The entity bought the equipment and marketing arrangements to the workplace. The individuals were not integrated into the entity's business; each party had a function and they performed those functions individually and co-operatively. The individuals performed the tasks and if there was no performance there was no reward. Satisfactory completion of the tasks is the "result" for which the parties had bargained. It was the expertise and skill of the individual which would yield a "result" i.e. there would be no need to delegate the task to anyone else as the individual had the required skills. There was no evidence of an entitlement to paid leave etc. The only payment which is contemplated is performance of the tasks. Individuals bear risk, firstly if they don't perform the tasks they don't get any remuneration and secondly they bear the risk for sickness or injury as they are required to take out sickness and accident insurance. They also bear the risk for any damage done to the entity's equipment through neglect. The performance of the tasks by the individuals does not indicate that the individual is integrated into the entity's business. | Detailed Reasoning - Conclusion: When the above factors are considered, the individuals are considered independent contractors and not employees of the entity. As the individuals are not considered employees there is no obligation on the entity to withhold from payments made under PAYG withholding legislation.

Relevant facts: The entity operates a business. | In the course of operating this business the entity contracts persons to perform certain tasks. Individuals use their skill to perform the tasks. | The entity supplies some equipment and the individuals supply some of their own. | Individuals are free to take up the offer of performing the tasks for the entity. | There is consensus between the individuals and the representative from the entity about how and where these tasks are performed. | The entity is responsible for any damage caused through normal wear and tear on the equipment however the individual is liable for any damage they caused if they were negligent. | The terms of the engagement employed by the entity is that the individuals operate independent of direction of the representative and use their own expertise and skill to perform the tasks. The individuals are remunerated depending on the number of tasks performed and completed. | The entity and each individual enter into an oral contract prior to commencing tasks. | When, where and how the individuals utilise their skills is a matter of their own discretion. | The entity provides some equipment for the sole use and operation of each of the individuals and they are responsible for the care and control thereof and its cleanliness at the end of the day. | Individuals are not responsible for any prior preparation before commencing the tasks or work on the equipment when they return. | It is made clear to individuals that they are responsible for their own sickness and accident insurance cover. | There is no written agreement between the entity and the individuals however there is an oral agreement. | In essence, the amount each individual receives is contingent on how many tasks are completed and the market value of each of the tasks on the open market.