Private ruling: Whether there is an obligation to withhold from payments
Date of advice: 3 December 2015
Published: February 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

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


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

Reasons for decision: Summary: Under section 12-35 of Schedule 1 to 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 to 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 you do not control how the work is to be performed by the contractor. The contractor has full discretion as to how the work is performed including being able to subcontract the work. Once the quote for a task is accepted the contractor is not paid until the task is complete therefore the contractor is paid for a result. The contractor is able to subcontract out work or employ others to carry out any tasks. The contractor acknowledges it is solely responsible for all remuneration, expenses, taxes, leave entitlements, superannuation, workers compensation and other insurances in respect of the contractor, its employees or subcontractors. Contractors do not have set hours of work. They liaise with customers on when tasks can be done. The contractor is responsible for all third party risks in relation to persons and property including public liability insurance, workers compensation insurance and any negligence by the contractor, an employee or subcontractor of the contractor. The place of performance is at customers' premises and the contractor is responsible for supplying their own transport, consumables and tools. | Detailed Reasoning - Conclusion: From the information supplied it is considered that all workers under the agreement are contractors and consequently there is no obligation under section 12-35 of Schedule 1 to the TAA to withhold from payments made to the contractors.

You currently employ workers in your business. | You wish to scale back your activities and in the future only engage contractors who have their own businesses and ABNs. | When a task is required you intend to enter into an Independent Contractor Agreement (Agreement) with a business. | The Agreement contains the following information: | • The engagement of the contractors commences on the date stated in the schedule and continues until terminated in accordance with the Agreement | • The contractor will provide the services in a professional manner to the required standards and be liable for rectification of any work not up to required standard | • The contractor is entitled to engage in any other employment, occupation, consulting or other business activity directly or indirectly competitive with the business of the principal, provided that the contractor does not directly or indirectly make any client, customer, employee or contractor of the principal or any of its related entities aware of the contractor's business or employment activities which are outside of the scope of the agreement. | • The contractor has full discretion as to the manner in which work is performed in the course of its agreement with the principal, including the ability to engage sub-contractors. | • The contractor will provide its own transportation, equipment and sundries in the provision of its services under the agreement. This is included in the remuneration of the contractor's invoice to the principal. The contractor is free to hire or use the equipment of third parties should they not possess the required equipment or alternatively pay third parties to perform the services. | • The contractor will submit a quote to the principal for all services to be performed under this agreement, and the principal must approve the quote prior to the commencement of any and all services. | • On completion of the quoted services the contractor will submit an invoice to the principal for the amount and services as per the approved quote. | • The contractor bears all risks associated with the performance of the services and forever indemnifies the principal against any claims associated therewith. | • Prior to the date of this agreement the contractor must obtain, and thereafter must maintain during the period of this agreement, current policies of insurance, in respect of the services, against: | • Workers compensation claims; and | • Either party may terminate the agreement for any reason by written notice to the other. | • The principal may terminate this agreement without notice if the contractor's services are no longer required due to a shortage of available work. | For the majority of the time the contractor will liaise with customer on times/days and certain works to best suit the customer. The contractor is able to subcontract out work or employ workers to carry out any tasks. | Contractors must have their own transport, consumables and tools and if they don't have the equipment they are free to use or hire from third parties or to contract that portion of the job out. | The contractor is free in the way in which they work and undertake the specified job provided the customer is satisfied and the quoted job is completed fully and properly. | The contractor operates their own business and as such is free to accept works from the public and other contractors and to advertise their services and as such they do not work exclusively for you. | The contractor bears the commercial risk for all works and is responsible for any defects. Works are only paid upon completion of quoted works to the accepted standard. The job that was quoted must be finalised before any payment is made.