Private ruling: whether there is an obligation to withhold from payments under PAYG legislation
Published: March 2014
Ruling period: Year ended 30 June 2007 | Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2006

Ruling: Q1: Is there an obligation on the entity to withhold from payments made under section 12-35 of Schedule 1 of the Taxation Administration Act 1953 ? | A1: Yes


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

Reasons for decision: Summary: Based on the information you have provided, the Commissioner considers that there is a requirement to withhold from payments made to the tenderer. | Detailed Reasoning - Detailed reasoning: Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (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? 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, otherwise the contractor is free to exercise their own discretion, because they work for themselves. In this case the supervisor allots jobs to the tenderer. They work standard hours from Monday to Friday) for the entity at the entity's workplace. The tenderer is also on call 24 hours a day seven days a week to undertake any urgent work which may occur outside of standard hours for the entity. They are paid on an hourly basis and not on the number of tasks performed. The workplace manager directs any rework into the general work schedule. The tenderer works on any jobs given to them by the manager. The tenderer is also unable to work outside the designated hours or on other than ordinary working days unless they get permission from the manager. From the hours worked it appears that they work full time for the entity. 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 tenderer performs tasks in the business of the entity and not in their own business. They don't have a high degree of flexibility in their work as they are given jobs by the manager during normal working hours. As they have special skills they complete tasks using the skills they possess. 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 tenderer provides their labour for standard working hours from Monday to Friday and submits invoices on a weekly basis, depending on the hours worked for the week. They can sub-contract out work but it must be approved by the entity. They stated in their tender application that they did not, nor intend to, employ workers during the currency of the contract. 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 this case the tenderer doesn't have unfettered power to delegate work to others. They must get written permission before being allowed to do so. They has also stated they have no intention of using the services of sub-contractors during the contract period. 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. In this case the tenderer is required to, and has taken out public liability insurance. It is stated that the manager directs any re-work into the general work schedule. It is not clear whether the tenderer has to perform any rework during their own time but it appears that any rework is done during normal scheduled working hours. 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. In this case the entity provides the venue and all the necessary equipment although the tenderer uses their own hand tools. The entity does not charge for the use of the workplace or equipment. The entity also provides all supplies required to perform the allotted tasks. | Detailed Reasoning - Conclusion: After consideration of the facts in light of all of the indicators in TR 2005/16, it is considered that there is an obligation on the entity to withhold from payments made to the tenderer. On the balance of all the facts the tenderer is an employee.

Relevant facts: The entity invites tenders from the general public to provide a number of services. | Tenders can be submitted by individuals or entities with employees. | A tender was submitted by an individual to provide specified services to the entity. | The tender was accepted by the entity. | Prior to tendering for the contract with the entity the tenderer was the sole trader providing the same services. | The end of the contract was extended and the hourly rate under the contract was increased. | In their tender application the tenderer certified that they did not, nor intended to, employ workers during the currency of the contract. | The tenderer provided a daily service at the entity's workplace between the standard hours. Their attendance at the workplace was not on a job by job basis. | The tenders were only to provide labour with materials being supplied by the entity. | The workplace contains all the necessary equipment for the tenderer to undertake the tasks allocated to them, but they do supply their own hand tools. The entity does not charge rent for the tenderer use of its equipment. Tasks are allocated on a priority basis by the manager. The manager is not required to oversee the tenderer's work. The tenderer must negotiate time off with the workplace manager. The workplace manager directs any rework into the general work schedule. | Under the contract the entity arranged for the purchase and supply of all necessary parts and components. | As has been the case since the start of the first contract the tenderer made themself available between normal working hours on Monday to Friday and also undertook to make themself reasonably available to undertake after hours work onsite or callouts offsite as requested. They also made themself available by phone 24 hours a day, 7 days per week. | The tenderer stated in their latter tender application that they were currently engaged fulltime in providing the services (during that contract period) as outlined under the contract. | Under the terms of the contract, before commencing work under the contract the contactor shall take out and maintain a public liability insurance to cover their liabilities to third parties. The tenderer has public liability insurance. | The terms of the contact also state that the customary working hours and ordinary working days shall be those for day workers as stated in one of a number of government awards and no work will be performed outside of customary working hours or on other than ordinary working days without the prior approval of the manager. The contractor shall provide at least 48 hours written prior notice to the manager of the intention to work outside the working hours and working days of the manager's supervisory personnel. | Under the terms of the contract the prior written permission must be obtained before any work can be performed by a sub-contractor. The tenderer has indicated that they have access to the services of a qualified person should the need arise. | During the term of the contracts the tenderer submitted invoices weekly. The hours per week worked averaged around 40 hours per week.