Private ruling: PAYG withholding obligations
Date of advice: 21 February 2019
Published: May 2019
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Entity A required to withhold an amount pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (Cth) under the arrangement by which foreign country resident employees subcontract to the entity in Australia? | A1: No

Relevant facts and circumstances: The Parties Company A is incorporated in and is a tax resident of a foreign country. Company A is involved in dredging, offshore engineering and marine construction projects of a large scale. Entity A is incorporated in and is a tax resident of Australia. Entity A is a wholly owned subsidiary of Company A. Entity B is incorporated in and is a tax resident of a foreign country. Entity B is a subsidiary of Company A. Entity B owns and operates a vessel, for itself and on behalf of other Company A companies. The Project Entity A has been successful in tendering for a land reclamation project (the “Project”). As part of the Project, there will be both onshore and offshore activities. Entity A will undertake onshore activities as part of the Project. However, Entity A does not currently own or lease any dredging vessels. As such, it is proposed that Entity A subcontract the offshore activities to Entity B (the “Subcontract”). Entity B proposes to bring the vessel to Australia to perform the subcontracted offshore activities for a period of just less than three months. The offshore location is within Australian territorial waters. The Overseas Employees Entity B employees are employed under an agreement with Entity B (“Overseas Employees”). The Overseas Employees will undertake offshore activities within Australian territorial waters only, which will be performed on the vessel. The Overseas Employees are residents of foreign countries. The Overseas Employees will remain under the supervision, direction and control of Entity B for the duration of the Subcontract. Entity B will direct the duties and activities of the Overseas Employees during the Subcontract. Entity B will provide the Overseas Employees with the instructions as to the activities to be completed, under the sole control and responsibility of Entity B. The Overseas Employees will fly into Australia. Once in Australia, they will undertake work and sleep on board the vessel. The individuals may spend recreational time in Australia between work shifts. The Overseas Employees will work on the vessel in Australia on a Temporary Work (Short Stay Activity) visa (subclass 400). The Overseas Employees are not present in Australia for a period exceeding three months in an Australian year of income. The Overseas Employees will remain residents of their home jurisdiction for tax purposes while they are present in Australia. The Overseas Employees will continue to be subject to tax in their foreign countries and Entity B will continue to withhold foreign country taxes on the salaries paid. The rates of tax and social security in these jurisdictions are comparable to that paid in Australia. The Overseas Employees will continue to be remunerated by Entity B and the remuneration will be administered by Entity B. No payments will be paid by Entity A to the Overseas Employees. The Overseas employees will continue to contribute to retirement benefits and other social security schemes in their home jurisdictions and a Certificate of Coverage will be obtained. Entity A will not be directly recharged for the work performed by the Overseas Employees, rather Entity A will be charged by Entity B for the cost of the entire Subcontract, including the associated costs of working with the vessel. Terms relating to the remuneration, leave entitlements and termination are based on the Overseas Employees’ existing agreements with Entity B.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-35

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. Under Australian common law, the factors listed below are considered in determining whether an employment relationship exists in respect of particular arrangements. The Commissioner will consider these factors in determining who is considered to be the employer for the purposes of the short-term visit exception: ● who exercises ultimate control over the worker - the right to control in terms of the ability to withdraw a worker from an assignment and/or terminate the relationship with the worker; ● who exercises day-to-day control over the worker - that is, the degree of actual control exercised in terms of, for example, how, when and what is to be done; ● integration - the nature of the services rendered by the worker and whether they are an integral part of the business activities carried on by the enterprise to which the services are provided; ● the terms of engagement - for example, entitlements to leave and who has obligations to deduct PAYG instalments, pay superannuation contributions and workers' compensation insurance; ● who is responsible for payment of remuneration for the worker's services; ● who bears the responsibility or risk for the results produced by the worker; ● whether or not the contract is for the achievement of a specified result; ● who provides or maintains the necessary equipment and resources to perform the work; and ● whether or not the work can be delegated by the worker. Control Entity B is the employer of the Overseas Employees and has the exclusive right to exercise control over the Overseas Employees. The Overseas Employees will remain at the direction of Entity B, who will provide instructions on the vessel for the duration of the Subcontract. At all times during the Subcontract, the Overseas Employees will remain under the supervision, direction and control of Entity B. None of the agreements entered into by Entity B and Entity A are intended to alter the nature of the Overseas Employees’ employment agreements with Entity B. Entity B retains the right to terminate the Overseas Employees at any time under the terms of their existing employment agreements. Entity A has no control or capacity to withdraw the Overseas Employees from an assignment or terminate the Overseas Employees’ employment. Integration While providing subcontracted services for Entity A, the Overseas Employees are not considered an integral part of the business activities of Entity A, as the Overseas Employees will only be completing the offshore activities of the project. The Overseas Employees are not serving Entity A as their employer, rather serving Entity B to ensure Entity B meets their obligation under the subcontract agreement with the Entity A. The Overseas employees will also remain on the vessel for the duration of the Subcontract, only completing offshore activities and not completing onshore activities undertaken by the Entity A. This indicates that the Overseas Employees would not be considered an integral part of Entity A. Terms of engagement Entity A has no terms of engagement with the Overseas Employees directly. The terms of engagement of the Overseas Employees are set out in the existing employment agreements between Entity B and the Overseas Employees individually. Payment of remuneration Entity B is responsible for payment of remuneration for the Overseas Employees’ services. Entity A will at no point make payment to the Overseas Employees, and the remuneration will continue to be administered by Entity B. Responsibility Entity B has sole responsibility for the results produced by the Overseas Employees during the period of the Subcontract. As the employer, Entity B is solely responsible for the work completed by each Overseas Employee. Results There is no contract between Entity A and the Overseas Employees directly. Entity A is party to a subcontracting agreement with Entity B, who have been subcontracted to achieve the specified result of completing the offshore activities under the Project. Equipment The work to be completed by the Overseas Employees will be performed using the equipment and resources, including the vessel, provided and maintained by Entity B. Entity A will not provide any equipment to the Overseas Employees to complete the offshore activities. Delegation Entity A will have no control of the ability of the Overseas Employees’ to delegate their duties to other workers. | Detailed Reasoning - Conclusion: After assessing the facts against the indicators in TR 2013/1, it is considered that the workers are employees of Entity B, and there is no obligation on Entity A to withhold from payments made to the workers.