Private ruling: Whether there is an obligation to withhold from payments made to another entity under PAYG legislation
Date of advice: 3 November 2015
Published: November 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is there an obligation to withhold from payments made to an entity 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 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 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 sole trader carries on their own independent business. They have their own website and their own independent customers and offers their services to the general public. The entity merely informs them of a job and it is up to them whether they will accept the job. Even if they personally cannot do the job they may subcontract the work to another person. When a job is accepted by them it is up to them as to how it will be done and there is no further input from the entity on how the job is to be done. When they do a job they merely send an invoice for their services to the entity. They are responsible for their own insurance and if a job is not satisfactorily completed it is up to them to rectify it, therefore them alone bear the risk for any job given to them by the entity. When they are given a job, it is up to them when they do the job, they are not tied in to working set hours. They have their own tools, mobile phone, motor vehicle, advertising and uniform. They only do jobs for the entity on an infrequent basis and the time taken is only a minor percentage of their total work. Each job would typically only require them to be on site for a few minutes per job. They send the entity a tax invoice for time taken. | Detailed Reasoning - Conclusion: It is clear from the facts that the sole trader is an independent contractor and not an employee of the entity therefore there is no obligation to withhold from payments made to them under PAYG withholding legislation.

Relevant facts: An entity has operated a business for many years. | The entity has a large number of customers some of whom operate State-wide. | When a customer needs particular services they contact the entity. The entity then sources a local business to attend to, and provide the services. The entity uses the services of a sole trader. | The sole trader carries on their own independent business. They have their own website and their own independent customers and offers services to the general public. | The sole trader can refuse to accept a job in which case the entity will source another local business to provide the service required. The sole trader is free to engage another person to assist with providing the service. | The entity does not instruct the sole trader how to do the work. The sole trader has their own tools, mobile phone, motor vehicle, advertising and uniform. Their business makes no mention of the entity and does not claim to be associated with it. The sole trader is responsible for, their own work, and has their own public liability policy. They have to rectify any defects at their own expense. The amount of jobs they do for the entity would only be a minor percentage of their total work. Each job would typically only require them to be on site for a very short period of time per job. The sole trader sends the entity a tax invoice for time taken plus a service call fee and any parts if applicable. The company adds a percentage and an $x service fee and then forwards an invoice to their customer.