Private ruling: PAYG Withholding
Date of advice: 10 January 2018
Published: April 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the worker considered to be an employee for the purposes of subsection 10-5(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)? | A1: No. | Q2: Is the Worker an employee under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A2: No.

Relevant facts and circumstances: You are a business which buys and sells items. You use a number of sub-contractors to buy and sell items on your behalf. To achieve this, you contract with private companies for the use of a worker and pay a commission to the private company upon subsequent sales. The role of the workers through their companies is to source the vehicles from a variety of places and the company invoices you for a commission based on the sales of those vehicles by the dealership. Any profit made by the companies is based on whether you make a profit or loss on the sale.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-40 of Schedule 1 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Detailed Reasoning - PAYG Withholding: Taxation Ruling TR 2005/16 discusses Pay As You Go – withholding from payments to employees. Paragraph 10 states Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) applies to payments made to individuals in their capacity 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 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. In this case agreements exist between a company and other companies. There is no agreement between you and an individual worker. The individual workers are therefore not employees of you. The individual workers have a relationship with their respective companies (either an employee or sub-contractor) but not with you. You have no obligation in respect to Section 12-35 of Schedule 1 of the TAA as there are no payments made to individuals. Payments are made to their respective companies. From the information provided there is no indication that this arrangement is not what both parties intended to create, consequently no sham arrangement exists. You therefore will have no obligation in respect to withholding from payments which will be paid to the companies under Section 12-35 of Schedule 1 of the TAA as the workers are not your employees. | Detailed Reasoning - FBT: As per subsection 136(1) of the FBTAA, a “fringe benefit” must be provided to an employee or an associate of an employee. The definitions of an “employee” and an “employer” in subsection 136(1) of FBTAA are based on the payment or liability to pay salary or wages: ● “current employee” means a person “who receives, or is entitled to receive, salary or wages”; ● “current employer” means a person “who pays, or is liable to pay, salary or wages”. Salary or wages is defined in subsection 136(1) of the FBTAA to mean: (a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 (TAA) listed in the table, to the extent that the payment is assessable income… Section 12-35 of Schedule 1 to TAA says: An entity must withhold an amount from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). While TAA doesn’t contain a definition of the term “employee”, the term is used in its ordinary meaning. Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides guidance for determining whether an individual is an employee or an independent contractor. As discussed above, the workers are not considered to be your employees under the factors listed in TR 2005/16. Paragraphs 64-65 of TR 2005/16 specify that the employment relationship does not necessarily have to exist between the entity making the payment, and the individual. The essential element is the nature of the connection between the payment and the individual's employment with the payer or any other entity. If the payment is in respect of the employment of the individual, it is not relevant who actually made the payment. In your case, the nature of the connection between you and the worker is one between a principal and an independent contractor (a contract for services). The worker is not an integral part of your business, but rather provides services as an individual carrying on his or her business through the Private Company. Therefore, the worker is not your employee under FBTAA.