Private ruling: PAYG Withholding- Employee Vs Contractor
Date of advice: 30 August 2016
Published: October 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the workers engaged by the entity 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 retains the services of multiple workers under contract agreements. All workers are required to have an ABN. All workers supply a tax invoice for the work completed. The entity operates in two communities, with offices and equipment supplied by the company who holds the contract lease. The entity does not supply the equipment The entity supplies the support staff for the workers and the support staff are all direct employees of the entity. The worker takes the commercial risks in relation to the work, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. The worker has freedom in the way the work is performed, subject to the specific terms in any contract or agreement. The worker is operating their own business independently of the entity. The worker performs services as specified in their contract and is free to accept or refuse additional work. The worker does not receive an allowance or reimbursement for the cost of their own equipment, tools and other assets. The worker bills the entity a set weekly rate when in attendance. The worker does not bill if not in attendance and locum services are retained by the entity.

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 entity 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. The workers are required to conform to the same standard of professional conduct as may normally be expected from persons performing similar services. These are indications that the workers are not employees of the entity rather independent contractors providing services for the entity. | 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 workers have registered for Australian Business Numbers (ABNs) in their own name. The worker is free to accept or refuse additional work. The workers work on a weekly basis. When the work is completed, the workers are paid by the entity for the outcome of their work, not the time spent completing the task. All the workers have their own ABNs. They provide their services to other entities 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. Invoices are generated based on the outcome of work completed on a weekly basis. 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 the present case, it is the professional qualification and specific skill of the worker concerned that the entity enters into a contract for services. In this situation, it is highly unlikely that the worker would delegate the work to another worker with whom no such contract has been entered into by the entity. Therefore, even though, the worker is not able to delegate the work, it does not make the worker an employee of the entity as it is the very nature of the specific skill and qualification required for the service that stops the worker from delegating the work to another. | 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 legally responsible for their work and liable for the cost of rectifying any defects in their work. In this case, the information provided indicates that the risk of liability for the cost of rectifying work is mainly held by the worker and indicates a contractor relationship. | 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. The workers operate in two communities with offices and equipment supplied by the company who holds the contract lease. The entity provides support staff for the workers who are all direct employees of then entity. The workers also provide some of the equipment, but they do not receive an allowance or reimbursement for the cost of their own equipment, tools and other assets. As the entity is not responsible for supplying equipment 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 workers are contractors, and there is no obligation on the entity to withhold from payments made to the workers.