Private ruling: PAYG Withholding - employee or contractor
Date of advice: 22 July 2016
Published: September 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the worker engaged by the company considered to be an employee 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 company is a consultancy firm and provides consulting services to a number of large businesses. The company engages workers to perform this work. The company enters into a written agreement (the Agreement) with the workers. A clause of the Agreement states that the worker will provide services to the company 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. However, in order to comply with requirements imposed by the external client, the company may from time to time direct the worker to perform the services on certain days and during certain hours. A clause of the Agreement states that the relationship between the worker and the company is that of principal and independent contractor. It also states that the Agreement is not to be taken as construing or constituting or creating any other relationship between the Contractor and the company. A clause of the Agreement states that • the worker agrees that they are not entitled to claim payment for any benefits or entitlements ordinarily associated with an employment relationship in respect of both the contractor and any personnel engaged to perform the services. • the worker agrees that they are solely responsible for the payment of taxes, including payroll and income tax, and any other liability associated with the provision of services and the payment the contractor received for the provisions of the services. • The worker will make provision for and meet the cost of all annual leave, long service leave, public holidays, superannuation contributions, workers compensation insurance premiums in respect of the contractor and any personnel engaged to perform the services. A clause of the Agreement states that the worker may assign to, subcontract with, or engage personnel or otherwise determine the most effective and efficient manner to perform the services, including by assigning any of its rights and/or obligations under the Agreement, subject to obtaining the prior written consent of the company and to complying with the obligations under this agreement at all times. A clause of the Agreement states that the worker will be registered for an Australian Business Number and for GST purposes at the time the worker commences providing services to the company. A clause of the Agreement requires that the worker must submit an itemised tax invoice that complies with the relevant legislation including but not limited to the GST Act. The worker is required to submit monthly tax invoices in arrears for the payment of services. A clause of the Agreement states that the worker is required to provide all equipment and other property necessary for the provision of services. However, from time to time, the Company may provide equipment or other property to the worker for the purposes of providing the services. If the company provides equipment, the equipment or other property will remain the property of the company. A clause of the Agreement states that the worker will supply its own facilities, plant and equipment as required for the performance of the service. Clauses of the Agreement require the worker to take out and maintain insurance. The Schedule of the Agreement provides that this includes an obligation to take out and maintain public liability insurance, workers compensation, and professional indemnity insurance. A clause of the Agreement provides that the worker will keep indemnified at all times against any claim against the company arising out of the provision of services by the worker or their personnel. A clause of the Agreement states that the worker is free to engage in other business activities provided that the provision of services by the worker under the agreement is not affected or prejudiced in any way. The worker does not receive a business card from the company. The worker is not required to wear clothing displaying the company logo The worker is not provided with an email address of the company. The worker does not appear on the internal company telephone list. The worker is paid by the company's finance department and not by the payroll department.

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 company 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. However, in order to comply with requirements imposed by the external client, the company may from time to time direct the worker to perform the services on certain days and during certain hours. It appears that there is very little control exercised by the company over the manner in which services are conducted. This level of control is indicative of a contractor relationship. | 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 worker has registered for an ABN in their own name. They are also registered for GST and will be preparing their own BAS. The worker will be paid upon the provision of a tax invoice to the company. The invoices are paid through the finance department of the company, as opposed to the payroll section. The worker is not issued with a business card, email address, or phone number on behalf of the company. The worker is not required to wear clothing with the logo of the company. 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. The worker must submit an itemised tax invoice, which complies with all relevant legislation. The worker must submit monthly tax invoices, in arrears, for payment of services. 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. 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 this case, the worker may assign to, subcontract with, or engage personnel or otherwise determine the most effective and efficient manner to perform the services, including by assigning any of its rights and/or obligations under the Agreement, subject to obtaining the prior written consent of the company and to complying with the obligations under this agreement at all times. Although the company does require written notification prior to the engagement of other personnel, the worker is able to engage people to assist with performing the services. This is a strong indicator that the worker is engaged as an independent contractor. | 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 required to take out and maintain public liability insurance, workers compensation, and professional indemnity insurance. The Agreement also states that the worker will keep indemnified at all times against any claim against the company arising out of the provision of services by the worker and their personnel. In this case, the information provided indicates that the risk of liability for the cost of rectifying work is mainly held by the worker. | 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. In this case, the worker is required to provide all equipment and other property necessary for the provision of services. However, from time to time, the company may provide equipment or other property to the worker for the purposes of providing the services. If the company provides equipment, the equipment or other property will remain the property of the company. The worker will supply its own facilities, plant and equipment as required for the performance of the service. As the worker is responsible for supplying their own equipment and property 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 worker is a contractor, and there is no obligation on the entity to withhold from payments made to the worker.