Private ruling: Is there an obligation to withhold from payments made under PAYG Withholding legislation
Date of advice: 13 January 2016
Published: March 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Is there an obligation on the entity 1 to withhold from payments made to entity 2 for the services of a previous employee under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)? | A1: No


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

Reasons for decision: Detailed Reasoning - PAYG Withholding: Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity) Taxation Ruling TR 2005/16 discusses Pay As You Go - withholding from payments to employees. Paragraph 10 states section 12-35 applies to payments made to individuals in their capacities as employees. It does not apply to payments made to other entities - provided the arrangement is not a sham or a mere redirection of an employee's salary or wages. Paragraph 11 states the payer does not need to have regard to the operation of personal services income measures in Part 2-42 of the Income Tax Assessment Act 1997 in determining whether an individual is an employee for the purposes of section 12-35. Paragraph 58 in part states a sham is an arrangement that creates the appearance of rights and obligations different from those actual rights and obligations that the parties intended to create. The parties must have a common intention that the arrangement is a mere façade, disguise or false front for a sham arrangement to exist. In this case it is proposed that an agreement will be drafted with the parties being entity 1 and entity 2. If that proposal is put in place there will not be an agreement between entity 1 and the ex-employee (employer/employee). The ex-employee will no longer be an employee of entity 1. The ex-employee has a relationship with entity 2 (either as an employee or sub-contractor) but not with entity 1. This arrangement is being proposed by the ex-employee. From the information provided there is nothing to suggest that the intention of entity 1 will be to enter into the arrangement as a facade, disguise or false front. Entity 1 therefore will have no obligation in respect to withholding from payments which will be paid to entity 2 under Section 12-35 of Schedule 1 of the TAA. | Detailed Reasoning - Conclusion: Entity 1 will have a contract with entity 2 and not with the ex-employee. Entity 1 has no obligations in relation to PAYG withholding as the ex-employee will not be an employee of entity 1.

Relevant facts: The entity operates a business. | The entity currently employs an employee who works set hours and has tasks to do every day. | It is proposed that entity 1 will contract with entity 2. Entity 2 will engage the former employee to provide services to entity 1 on behalf of entity 2. | Entity 1 would stipulate in the contract with entity 2 that it would not accept a replacement employee from entity 2 as the former employee is the one person who has the skills entity 1. Entity 2 is not free to hire other people to perform this work and the ex-employees hours would be set.