Private ruling: PAYG withholding - Employee Vs Contractor
Date of advice: 19 May 2016
Published: June 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the worker engaged by the entity considered to be an employee 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 company has engaged a contractor to perform services in their business. The company commenced trading in 200X. In order to offer a complimentary service to their clients, the company went in search of an individual that could offer services to clients for a split of commissions earned by worker. The company and the worker agreed to work together as a business arrangement and a contract was created. The worker was previously employed with an establishment. The worker has registered with an ABN in their own name and has registered for GST. The worker will be preparing their own BAS and tax returns. In the industry, you are unable to operate unless you are an authorised representative beneath a holder of a licence. The company is a corporate authorised representative beneath a licensor, and the worker will be an authorised representative of the company. This allows the contractor to carry out services which would otherwise not be possible. Payment for services performed will be paid upon the provision of a tax invoice at the completion of any work. The worker pays the company a monthly charge for access to the companies' premises in order for the worker to perform their duties including: • Private air conditioned office • Access to the practice's boardroom for clients appointments • Access to car parking and kitchen amenities • Administrative staff's support • Telephone use • Desktop Computer Critical features of the engagement are as follows: Control • The contractor is able to come and go as they choose, and may stipulate their own hours and days of work. • The company receives a split of commissions from all work that the worker performs due to the usage of their license. • The worker has no set timeframes for completion of work, but is required to meet client expectations and liaise with the client on their own behalf should the work be held up for any reason. • The worker may choose not to proceed with a client request if they feel it is not in the best interest of the client. It is at the worker's discretion, and the company allows the worker the flexibility to make their own decisions. The worker is required at all times to act within the boundaries of the law, and to never bring the reputation of the company into disrepute. Organisation or Integration • The company sources referrals for the worker to action. The worker also sources their own referrals, in addition to servicing a book of clients that they brought with them from their former employment. • The agreement between the company and the worker states - Due to the nature of our industry and licensing requirements, you agree to work exclusively as an authorised representative of the entity which is a corporate authorised representative of a company. • The agreement states the worker is obligated to attend reasonable induction procedures to become acquainted with our policies and expectations and that of our licensee. Results • The worker will provide a tax invoice in order to receive payment. • The contractual agreement established between the company and the worker states that the company earns a percentage of all commissions written by the worker. • The worker does not benefit from commissions written directly by the company or its existing employees. Delegation • The worker is not able to delegate any work to other subcontractors due to licensing requirements. However they may employ the services of a personnel to assist with the completion of their duties. • Should the worker choose to engage any other personnel to provide the services, they will engage and pay the wages and wage related costs and expenses for all personnel required by the worker to provide the services Risk • If a client is dissatisfied with the recommended service, and the client chooses to terminate their relationship, all clawed back commissions are to be repaid by the worker and the company in the same proportion as originally allocated. • The worker is also obligated to have their own insurance for any possible litigation that may be brought against them. The worker is also covered by Professional Indemnity Insurance held by the licensor providing the licence to the company. Provision of tools and equipment • The worker supplies their own laptop, mobile phone and motor vehicle. The company provides the software licensed in the name of the company and an office should the worker choose to meet clients at the premises of the company. • The company will charge a monthly fee to the worker for access to premises and use of equipment, materials and software on site. • The worker has the discretion to choose to work from a home office or at the client's location as an alternative to the company premises.

Relevant legislative provisions: Taxation Administration Act 1953 Section 12-35 of Schedule 1 Reasons for decision | 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? | 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. | 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 determines the days and hours of work. They are also able to determine the location of the work to be conducted. The worker is free to conduct the tasks any way they see fit. The worker also has the discretion whether or not to proceed with a client request or to provide services to the company. It appears that there is very little control exercised by the company over the manner in which services are conducted. This level of control is indicative of a contractor relationship. | 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 worker has registered for an ABN in their own name. They are also registered for GST and will be preparing their own BAS and tax returns. | The worker will be paid upon the provision of a tax invoice to the company. The company will earn a percentage of commissions due to the worker's use of the companies' license. | 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. | 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, at the completion a service for clients. The worker is able to set their own timeframes for completion of work as per the needs and requirements of their clients. | It appears that the basis of the contract is to achieve a specified result, which is the completion of a service. There is no indication that the worker is to be renumerated at any point prior to the completion of their task. | Overall, it appears that the worker is free to employ their own means to achieve a contractually specified outcome, which is a further indication of a contractor relationship. | 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 worker is not able to delegate any work to subcontractors due to licensing requirements. However, the worker may employ the service of personnel to assist with the completion of their work. | The agreement states that should the worker engage any other personnel to provide services, they will engage and pay the wages and wage related costs and expenses for all personnel required by the worker to perform the services. | Although the licensing requirements do restrict their ability to delegate, the worker is able to engage people to assist with completing their tasks. This is a strong indicator that the worker is engaged as an independent contractor. | 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 worker is required to have their own insurance for any possible litigation that may be brought against them. The worker is also covered by professional indemnity insurance held by the licensor providing the license. | Where a client chooses to terminate their relationship, all commissions are to be repaid by the worker and the company in the same proportion as originally allocated. | In this case, the information provided indicates that the risk of liability for the cost of rectifying work is mainly held by the worker. | 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 worker supplies their own laptop, mobile phone and motor vehicle. The worker will pay all other costs and outgoings required by them in the management and operation of their business in the provision of the services, including paying the wage and other expenses of any personnel engaged by the worker to provide services. | The company also provides "access to premises and use of equipment, materials and software on site" for a charge of a monthly fee. This charge is deducted from the worker's regular payment of each month. | The charging of a fee for use of the premises, equipment and software usage is generally not consistent with an employer/employee relationship. | Conclusion | After assessing the facts against the indicators in TR 2005/16, it is considered that the worker is a contractor, and there is no obligation on the entity to withhold from payments made to the worker.