Private ruling: PAYG Withholding- Employee Vs Contractor
Date of advice: 1 December 2016
Published: May 2017
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the workers the entity engaged to provide services considered to be employees 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 entity is a small company that operates a business providing services for the public at large. The company has four employees that provide services, as well as administrative tasks, and one employee who is responsible for management of the office. All other workers are engaged by the company on a case by case following a request from a client. In a typical transaction, the company will be contacted by a client to provide services. The company will then select a worker to provide these services from a database of suitably qualified people. There are number of factors which are significant in selecting a worker for a particular job. These include the workers track record and reputation, whether they have any specific skills relevant to the individual job, whether they hold accreditation, and whether their fees are considered acceptable within the contact of the company's quotation for that particular project. Once the most suitable person has been determined, the company will then send an offer to that person to take the job. The worker is under no obligation to accept a particular job and, in the event that a job is not accepted by one worker, it is simply offered to the next most suitable candidate. On average, a worker is engaged by the company to complete a job once every month. When a job is accepted by a worker, they are provided with a time limit in which to complete the work but are able to complete the work at any hours they choose. The contractors use their own offices, faxes, stationary and other related equipment. The company is not required to supply any tools or equipment. The company does not, in any way, supervise or dictate the task. The worker is completely responsible for their own work and must rectify any errors personally. There is no requirement that the worker perform the work themselves and they are free to delegate work to any other qualified person, although they are inevitably responsible for the finished product and will not be paid unless the work completed is satisfactory. Furthermore, the workers are not prevented from using any of the commercially available tools or systems to produce the specified result. Workers are usually paid a fixed set rate for the completion of tasks, although some contractors do set their own rates, which usually reflect increased demand for their particular services. Payment is made based on results rather than time. Workers charge the company by way of invoice and approximately 98% of workers engaged by the company have an ABN. The company does not reimburse the workers for any expenses incurred in relation to the assigned work. Workers widely advertise their services and they are not required to provide their services to the company exclusively, or even primarily. The workers do not use a business card of the company, wear a company uniform, or represent the company in any way. Many of the workers engaged by the company live interstate or overseas and, in most instances, the company has never met or had any face to face interaction with the workers.

Relevant legislative provisions: Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision: Detailed Reasoning - PAYG withholding: The legislation relating to pay as you go (PAYG) withholding is found in Schedule 1 to the TAA 1953. Section 12-35 of Schedule 1 to the TAA requires an entity (the withholder) to withhold an amount from a payment of salary, wages, commissions or bonuses it makes to an individual as an employee. | Detailed Reasoning - Employee Vs Contractor: The employer-employee relationship is a contractual one often referred to as a 'contract of service' which can be contrasted with a principal/independent contractor relationship typically referred to as a 'contract for services'. That is, an independent contractor generally contracts to achieve a result, whereas an employee contracts to provide labour (to enable the employer to achieve a result). The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services. A determination of whether an individual under a specific arrangement is an employee cannot be made at random, but by considering the facts presented in light of all of the criteria determining the status of that individual. It is the totality of the relationship that needs to be considered. Taxation Ruling TR 2005/16: Income Tax Pay As You Go withholding from Payments to Employees at paragraph 7 states: 'Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered.' The ruling has provided the following key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law: 1. Terms and circumstances of contract - a clause in a contract that purports to characterise the relationship between the parties as that of principal/independent contractor and not that of employer/employee must be considered with all the other terms of the contract. That is, the parties cannot deem the relationship between themselves to be something that it is not by simply giving it a different label. 2. Control test - the degree of control which a person who engages another person can exercise over that person is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. A common law employee is told not only what work is to be done, but how and where it is to be done. However, the mere fact that a contract may specify how the contracted services are to be performed does not necessarily imply an employment relationship. 3. Contract for results - where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for services. Other indicators of a contract for services include where the person is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome, the consideration is for a fixed sum on completion of the specified services which is the result, as opposed to an amount paid by reference to hours worked. 4. Whether work can be delegated - if a person is contractually required to personally perform the work, this is an indication that the person is an employee. However, "delegation" exercised by an employee (e.g. a manager or supervisor) is fundamentally different from the delegation exercised by a contractor where the contractor is responsible for the cost and the emphasis is on achieving a result. 5. Risk - where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor also often carries their own insurance and indemnity policies. 6. Provision of tools/payment of own 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. Further, the Tax Office considers that 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. 7. Other - other indicia suggesting an employer-employee relationship include: ● the right to suspend or dismiss the person engaged; ● the right to the exclusive services of the person engaged; ● provision of benefits such as annual, sick and long service leave; ● provision of other benefits prescribed under an award for employees; or ● a requirement that a worker wear a company uniform. | Detailed Reasoning - Application to your circumstances: In your case, the entity engages workers to perform services following a request from a client. The workers are selected from a database of appropriately qualified people based on a case by case basis. Several factors are relevant when selecting an appropriate person and these include the track record and reputation, whether they have any specific skills relevant to the individual job, whether they hold accreditation, and whether their fees are considered acceptable within the contract of the company's quotation for that particular project. Once the most suitable person has been selected, the company sends an offer of the job. However, the candidate is under no obligation to accept a particular job and, in the event that a job is not accepted by one contractor, it is simply offered to the next most suitable candidate. Considering that facts of the arrangement, it is clear that the workers engaged by the company to provide services are contractors, rather than employees. Due to the nature of the work performed and the irregular basis on which workers are engaged, no contract exists between the company and the workers. Each job offer is treated on a case by case basis and, therefore, the determination of the workers as contractors is based on the application of the various other tests outlined in TR 2005/16. With respect to the control test, you have advised that the company exercises no control over how or when the tasks are performed, aside from providing a deadline for the provision of services. Workers are engaged on a contract for results basis and payment is made by way of an invoice supplied to the company by the worker upon completion of the set task. As each contractor will work at different times and different speeds depending on their experience and abilities, no consideration is given to the time taken to achieve the result. With regards to risk and delegation, workers are free to delegate work and engage any other person to assist in the completion of work, where required, without the company's knowledge or approval. In many cases, this right is exercised and some workers even use commercially available tools or systems to produce the specified result. The company does not, in any way, supervise or dictate the task. The worker is completely responsible for their own work and must rectify any errors so that the document provided to the company is in its final form. The worker is inevitably responsible for the finished product and will not be paid unless the work completed is satisfactory. The workers use their own office space, IT equipment, faxes and stationery to achieve the set results and the company does not provide any of the tools or equipment required for the workers to carry out their work. Workers are not required to wear a company uniform or represent the company in any way. In fact, as many live interstate or overseas, the company has never met or had any face to face interactions with some of the workers. As work is infrequent and is dependent on public demand, there is no such provision as annual leave, sick leave or long service leave. All of these factors point conclusively to the fact that the workers engaged by the company are contractors and not employees. As the contractors are not considered to be employees, there is no obligation to withhold tax in accordance with section 12-35 of Schedule 1 of the TAA 1953.