Private ruling: PAYG withholding for an au pair
Date of advice: 14 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you required to register as an employer of a working holiday maker and withhold 15% tax on pocket money paid to a live in Au Pair? | A1: Yes

Relevant facts and circumstances: You have engaged an au pair who will stay with you for the next three months. You and your partner both work full time on rostered shifts. You invited the au pair to stay with you to experience the Australian culture and lifestyle. There was no agency or external parties involved in finding your au pair. You signed up with a website and once you received a response to your advertisement, you continued to communicate with the au pair via internet and phone applications. You did not require any qualifications or experience from your au pair. As long as they are fit, healthy with the appropriate Australian visa, they were considered appropriate to be an au pair for your family. You do not have a written or informal verbal agreement with the au pair. You treat the au pair as a member of your family. You have a mutual understanding that encourages open communication that whatever you carry out in your day to day living is for the best outcome for the family. As part of the mutual understanding, your au pair has the right to leave the arrangement while they also have the responsibility to provide you with sufficient notice so that you can arrange to find a replacement without hampering your work duties and your children’s health and safety. You invited your au pair to stay as you see it as beneficial for your children’s enrichment to interact and communicate with a person from another culture. You have two children. The au pair will be able to travel within Australia, and get to experience and immerse themselves in culture, lifestyle and arts. The au pair is also keen to learn and practice their English language skills. The au pair will contribute to household duties, including helping with the child minding and light household chores. You do not have a written list of duties or expectations for your au pair. You mutually understand that your priority is the health and safety of the children therefore it is your understanding that their mobile phone should be kept away while they are minding the children, unless there are urgent calls as the au pair deems necessary. You do not require your au pair to carry out housework. However, you mutually understand that as a member of the family, the au pair has the responsibility to take part in keeping the household in order. This may include doing the dishes and making the children’s beds. Your au pair will be provided with an amount per week of pocket money which they will use for private English classes, treats, and travel within Australia. You provide a car for your au pair to use. You also supply petrol for a vehicle as the au pair will use the vehicle for dropping the children at school on certain days. You have also included the au pair on the vehicle insurance. You ensure that there is sufficient food available for the au pair. You also provide unlimited internet and access to entertainment streaming services which they can use as a member of the family. The au pair will still be paid the amount of pocket money per week even if they are away travelling and unable to work the 30 hours per week. You and your partner work in opposite shifts so your au pair will not be minding the children for more than 30 hours per week. The au pair may only mind the children between five and 26 hours per week without any specific time in a given day or days. You and your partner also have off duties during the week which will enable the au pair ample time to travel and explore the area. You do not count the specific hours and let the extra hours that accumulate go in order to avoid confusion and friction between you and the au pair. One of your children goes to school for 2.5 days per week.

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

Reasons for decision: Summary: Where an au pair is on a genuine cultural experience, being treated as a member of the family, while providing only incidental domestic services (minimal hours), it would be less likely they would have entered into a legally enforceable contract and be employed by the host family. The prime motivation for the family in such a case is to provide a cultural experience and the family may not obtain the degree of benefit from the arrangement that the au pair does. It is also likely that, the more informal the arrangement, the more likely that one or other of the parties is not obliged to fulfil its obligations under an informal arrangement such as this. This would particularly be the case if payment of the au pair’s expenses is discretionary, varies, or is not directly related to work performed by the au pair. In contrast, and as is outlined in your proposal, an au pair working and being remunerated for significant hours of service, with distinct responsibilities and duties would more likely be a party to a legally enforceable, express or implied contract and would be considered to be employed by their host family. | Detailed Reasoning - Detailed reasoning: From 1 January 2017, employers of working holiday makers are required to withhold tax from amounts they pay to their workers under the pay-as-you-go (PAYG) system. A working holiday maker is an individual who holds a Subclass 417 (Working Holiday) visa, a subclass 462 (Work and Holiday) visa or certain related bridging visas which are issued by the Department of Immigration and Border Protection. The visas allow young adults aged 18 to 30 from eligible partner countries to work in Australia while having an extended holiday. Work in Australia must not be the main purpose of the visa holder's visit. The amended legislation requires employers of working holiday makers to register with the Commissioner, which will allow such employers to withhold tax at income tax rates applying to working holiday makers. An employer needs to register with the ATO before employing a working holiday maker. Once registered, an employer will be able to withhold a flat rate of 15% up to $37,000 in total payments made to each individual working holiday maker within an income year. Where total payments exceed $37,000, different rates apply. Traditionally, au pairs came to Australia on a cultural experience and were treated like members of the family, helping out with incidental childcare in exchange for the Australian experience and some pocket money. At times, the au pair would be studying English while in Australia and immersing themselves in a local family would help enhance these language skills. They would not be expected to work during their study hours. This type of au pair were commonly referred to as ‘demi au pairs’ and it was expected that the au pair must enrol in an English language or other academic program in conjunction with their au pair arrangement. While this type of au pair still exists, the cultural exchange factors have diminished and the distinction between an au pair engaged as part of a cultural experience and an au pair employed purely for domestic and childcare assistance has blurred. In order to determine whether or not there is an employer/employee relationship between a host family and an au pair, it is necessary to establish whether their arrangement constitutes: ● a legally enforceable contract for the provision of the au pair’s services in return for accommodation, board and payment; or ● an informal arrangement primarily aimed at providing the au pair with a cultural experience. Intention to create legal relations In most jurisdictions contracts do not need to be represented in writing and oral contracts are as enforceable as written contracts. For a contract to exist, whether written or verbal, the parties to an agreement must intend to create legal relations. If the circumstances show that the parties ‘did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts’ then there is no contract. At common law, there are certain requirements that must be satisfied in order for a valid contract to exist: ● the need for one party’s offer of terms to correspond with the other’s acceptance, ● for the terms agreed to be certain and complete, ● the need to meet the necessary formalities, and ● an intention to create legal relations and consideration. Although the proposed duties are not formally described, the primary focus is the health and safety and care of your children. The au pair’s responsibilities include child minding responsibilities and light housework. Your au pair will be provided remuneration consisting of board, meals, the use of a vehicle, and an amount of ‘pocket money’ per week. Based on the above, it is concluded there is an implied contract entered between the parties. | Detailed Reasoning - Employer/employee: The expression ‘employee’ is not defined in income tax legislation. Therefore, it has its ordinary meaning. The Tax Office provides guidance to assist in determining whether an arrangement constitutes an employment arrangement in Taxation Ruling TR 2005/16 Income tax: Pay As You Go withholding from payments to employees. Paragraph 7 of TR 2005/16 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 provides key indicators that should be considered when determining whether an individual is an employee or independent contractor at common law. I have listed the key indicators from the ruling that are relevant to your situation: Control test - The degree of control which the host family can exercise over their au pair is a classic test for determining the nature of the relationship: Hollis v Vabu (2001) 207 CLR 21; 47 ATR 559. At 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 an agreement may specify how the services are to be performed does not necessarily imply an employment relationship. The Full Bench held in Swift Placements Pty Ltd v. WorkCover Authority of New South Wales [2000] NSWIR Comm 9 that control over a worker did not merely relate to the on-the-job situation, but rather the ultimate or legal control over the worker. It stated: …control by an employer over an employee is not to be viewed merely in the on-the-job situation in directing a person what to do and how to do it, but rather in the sense of the ultimate or legal control over the person to require him to properly and effectively exercise his skill in the performance of the work allocated … Ultimate control would, amongst other things, enable the relevant entity to withdraw the worker from an assignment and terminate the contract with the worker. However, specifying in detail how contracted services are to be performed does not of itself necessarily imply an employment relationship. A host family has a high degree of day-to-day control over their au pair. They usually set the working hours, what is to be done during that time, and when it needs to be done (for example, picking up kids from school, taking them to classes, providing food at specific times of the day). The host family provides the au pair with a verbal explanation of the weekly or daily routine in order to care for the children and complete light household duties. It is likely that the au pair has some input into these arrangements (such as which night they are available for babysitting or when they might decide to travel). However, it is also likely that the host family would have ultimate control to require the au pair to be available for a particular task. This ultimate control is reinforced by the fact that the host family has the right to terminate the arrangement with the au pair. This means that if the host family is dissatisfied with the performance of the au pair, they can terminate the arrangement at any time. As we have discussed above, you have provided duties which explains the child mining responsibilities, and light housework the au pair will be doing. You also expect that either you or the au pair will have the right to terminate the arrangement. Should the au pair wish to leave, the au pair has a responsibility to provide you with sufficient notice in order to arrange for a replacement. As such you have a strong degree of control of which you can exercise over the au pair, which is demonstrated by the au pair’s duties, days they are required to work, and your ability to terminate the agreement. Integration – Unlike a typical commercial arrangement, an au pair is not engaged in a business enterprise of the host family. However, they provide direct services to the host family. From the perspective of a third party, they would be seen to be part of the family (particularly as they live with them) and providing services that are integral to the running of the family. They use the family’s car and equipment (rather than their own) and do not project themselves as operating independently such as through advertising or business cards. In your case the au pair will be providing direct services to your family as outlined in the proposed duties. As such the au pair will work directly for and will be integrated into your family. Results – Although they receive a weekly amount, au pairs usually are paid for hours worked, not for a result. The rate paid to an au pair is usually negotiated between the host family and the au pair. Your au pair will be given pocket money for up to 30 hours of domestic assistance during the week. You have considered the amount of work your au pair will be undertaking and have calculated an amount based on the number of hours worked, whilst also giving consideration to ensuring that they have enough money to support their cultural activities, hobbies and travel whilst they are in Australia. This indicates that your au pair will be paid for hours worked, and not for a specific result. Other - Other indications suggesting an employer/employee relationship include: ● the right to suspend or dismiss the person engaged; and ● the right to the exclusive services of the person engaged; | Detailed Reasoning - Conclusion: When weighing up the indicators, it can be seen that as a host family you will be exercising a great deal of control in the arrangements you will have with your au pair. You will determine which au pair is suitable, how much you will pay, the working conditions, the duties, and the terms of engagement. Your au pair is likely to have some input into the detail of these arrangements but we consider that you will have ultimate control and would be able to direct the au pair to undertake a particular task. You propose the au pair will work directly to and will be integrated into the family. The au pair will be paid by the hour and provide a personal service that is not likely to be delegated to a third party. While the au pair will have some reasonable upfront costs, your family will cover all costs associated with the au pair’s duties while working for you. These factors indicate an employment relationship.