Private ruling: Salary Sacrifice Arrangement
Date of advice: 16 August 2016
Published: September 2016
Ruling period: 1 April 2017 to 31 March 2021
Date scheme commenced: 31 December 2009

Ruling: A4: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Ruling Applicant is a public hospital which is subject to the provisions of section 57A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The Ruling Applicant wishes to attract and retain high-quality visiting medical officers (VMO) by allowing VMOs to salary sacrifice their grants, mostly up to the applicable fringe benefits tax (FBT) concessional limit. Services provided by VMOs are under two different contracts: a standard contract (VMO Agreement) and a separate standard employment agreement for on-call services (On-call Agreement).

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 137(1) | Taxation Administration Act 1953 Schedule 1, Section 12-35

Reasons for decision: Summary: A VMO under a standard contract (VMO Agreement) (other than superannuation) is not an employee at common law. | Detailed Reasoning - Detailed reasoning: There are a number of factors to consider in determining whether a worker is an employee or an independent contractor, with no one factor necessarily conclusive. A payer must examine all the facts in each case, including the terms of their contract with the worker showing the intent of both parties. | Detailed Reasoning - Control over work: A key factor in deciding if a worker is an employee is the degree of control that can be exercised over the worker. If the payer has the right to direct how, when, where and who is to perform the work, the worker is likely to be an employee. Paragraph 26 of Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) states: 26. The classic '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. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. As stated by Dixon J in Humberstone v. Northern Timber Mills: The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's orders and directions. A VMO must comply with his/her obligations under clause X of the VMO Agreement which are in the nature of quality control, not control over the way a VMO performs his/her work. Clause X of the VMO Agreement contains the obligations of the practitioner. Clause X states that the practitioner shall comply with the Ruling Applicant's by-laws and clause X states that the practitioner shall comply with all the reasonable directions of the Director. How a VMO performs his/her professional obligation is bound by the Ruling Applicant's by-laws and the ultimate authority over a VMO in the performance of his/her work resides in the Director. With regard to this test, a VMO is likely to be an independent contractor. While control is important, it is not the sole indicator of whether or not a relationship is one of employment. | Detailed Reasoning - 'Results' contracts: Another key factor to consider is whether the worker is being paid for the time they work, or being paid for a result. Workers being paid by the hour are more likely to be employees. Workers being paid for a result are more likely to be independent contractors. A VMO shall be available to perform services to public patients as part of the duties specified in this contract. The Ruling Applicant shall not be required to pay any fees for attendances on, or professional services rendered to, a public patient, unless such attendance or service is properly recorded in the patient record maintained by the Ruling Applicant. A VMO is not remunerated if he/she does not see clients. A VMO is paid per job rather than receiving wages based on time worked. That is, a VMO is being paid for a result and he/she is working and operating on his/her own account. This would indicate that a VMO is likely to be an independent contractor. | Detailed Reasoning - • Whether the work can be delegated or subcontracted: • Paragraph 42 of TR 2005/16 states: If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. Under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). Unless the contract expressly requires the service provider personally to perform the contracted services, 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 VMO must deliver medical services personally or otherwise through another doctor appointed in accordance with the Ruling Applicant's policy. This would indicate that a VMO is likely to be an employee. | Detailed Reasoning - Commercial risks: A VMO has some indemnity cover as a named insurer in the Ruling Applicant's liability and malpractice insurance contract, but this does not cover a VMO for claims for damages by private or compensable patients. A VMO takes commercial risks and can make a profit or loss from his/her work performed. This would indicate that a VMO is likely to be an independent contractor. | Detailed Reasoning - Tools and equipment: Generally, an employer provides tools and equipment for employees to use whereas a contractor provides his/her own. The Ruling Applicant provides nursing staff and basic equipment, word processing, hospital facilities and consumables. A medical practitioner would pay for equipment when it is for their own personal use. This would indicate that a VMO is likely to be an employee. | Detailed Reasoning - Nature of the relationship: It is stated in the VMO Agreement that the relationship is one of principal and independent contractor. That is, a VMO is not recognised as being part and parcel of the Ruling Applicant's business. | Detailed Reasoning - Provision of benefits such as annual, sick and long service leave: A VMO is not entitled to have paid holidays or sick leave. This would indicate that a VMO is likely to be an independent contractor. | Detailed Reasoning - Requirement to wear a company uniform: A VMO has to comply with the Ruling Applicant's by-laws and policies and procedures. If a VMO is required to wear a uniform, they will need to comply. This indicates an employer/employee relationship between the Ruling Applicant and a VMO. Based on the arrangement set out in the VMO Agreement, the Commissioner considers that the relationship between the Ruling Applicant and a VMO is that of a principal and independent contractor at common law because a VMO: • is paid for results achieved • has freedom in the way the work is done • bears risks in respect of legal liability arising out of claims for damages • is not recognised as part of the business of the Ruling Applicant • provides services to the general public and other businesses • is not entitled to sick leave, annual leave, long service leave or superannuation, and • is in a position to make a profit or loss. | Summary: It is not possible for the amounts received to be the subject of an effective salary sacrifice arrangement under Taxation Ruling TR 2001/10. | Detailed Reasoning - Detailed reasoning: A salary sacrifice arrangement (SSA) is an arrangement between an employer and an employee, where the employee agrees to forego part of the total remuneration that he or she would otherwise expect to receive as salary or wages, in return for his/her employer providing benefits of a similar value. As per paragraphs 19 and 21 of Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements (TR 2001/10), an SSA is considered to be effective if the employee agrees to receive part of his or her total remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages. In order to enter into an effective SSA, either the Pay As You Go (PAYG) withholding provisions in sections 12-35, 12-40 or 12-45 of Schedule 1 to the Taxation Administration Act 1953 (TAA) must apply, or there must be an employer/employee relationship within the meaning of those terms in section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA). For section 12-35 of Schedule 1 to the TAA to apply, there must be an employer/employee relationship within the ordinary meaning of those terms. Sections 12-40 or 12-45 of Schedule 1 to the TAA does not apply as a VMO is not a company director or an office holder in this application. Section 12 of the SGAA is not considered here. | Detailed Reasoning - Is there an employer/employee relationship between the Ruling Applicant and a VMO?: With reference to the response provided to Question 1A, a VMO under the VMO Agreement is not considered to be in an employee/employer relationship with the Ruling Applicant. Is the remuneration paid by the Ruling Applicant to the VMO salary or wages? Subsection 136(1) of the FBTAA states that salary or wages means: (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 listed in the table, to the extent that the payment is assessable income; and (aa) a payment from which an amount must be withheld (even if the amount is not withheld) under paragraph 12-110(1)(ca) (about parental leave pay) in Schedule 1 to the Taxation Administration Act 1953 , other than a payment under Part 3-3 of the Paid Parental Leave Act 2010 (Payment of instalments by Secretary); and (b) a payment from which an amount must be withheld (even if the amount is not withheld) under section 12-47 in Schedule 1 to the Taxation Administration Act 1953 where: (i) the payment is made to a religious practitioner by a religious institution; and (ii) the activity, or series of activities, for which the payment is made is done by the religious practitioner as a member of the religious institution. No amount is withheld under a provision in Schedule 1 to the TAA from amounts a VMO receives from the Ruling Applicant. Therefore, amounts received in respect of a principal/independent contractor relationship are not salary or wages. As a SSA is an arrangement where the employee agrees to forego part of the salary or wages, without any salary or wages, it is not possible for the amounts received by a VMO to be the subject of an effective SSA. | Summary: A VMO under an On-call Agreement (other than superannuation) with the Ruling Applicant is an employee at common law. | Detailed Reasoning - Detailed reasoning: Based on the facts provided in respect of the On-call Agreement, the Commissioner considers that the Ruling Applicant has engaged a VMO under the On-call Agreement as a casual employee in the legislative context of income tax, as a VMO: • is paid for days available on the roster • performs the duties of their position which includes supply on-call services; telephone advice; call-in services and attendance at quality meetings • receives an allowance, which includes a loading to account for annual leave and sick leave • receives superannuation pursuant to the SGAA • is subject to the policies, procedures, protocols, requirements and insurance arrangements of the Health Service relating to the appointment and termination of practitioners, and • has their employment conditional upon their clinical privileges and credentials being maintained. | Summary: It is possible for the amounts received to be the subject of an effective salary sacrifice arrangement (SSA) under Taxation Ruling TR 2001/10. | Detailed Reasoning - Detailed reasoning: Paragraph 9 of TR 2001/10 defines salary or wages. 'Salary or wages' is defined in subsection 136(1) of the FBTAA and means a payment, to the extent that it is assessable income, from which an amount must be withheld under either section 12-35, 12-40, 12-45, 12-115 or 12-120 of Schedule 1 to the TAA… 'Salary or wages' in subsection 136(1) of the FBTAA means a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the TAA, to the extent that the payment is assessable income. Section 12-35 of Schedule 1 to the TAA applies to payments made to individuals in their capacity as employees. For the provision to apply, there must be an employee, a payment to an employee and the payment made by an entity as a consequence of his/her employment, and an amount is withheld. The Ruling Applicant engages a VMO under the On-call Agreement personally. Service provided by a VMO is being performed for the business of the Ruling Applicant. A VMO is an employee who is entitled to be paid at fixed intervals when he/she performs services for his/her employer over a fixed period. Subsection 137(1) of the FBTAA ascertains that a benefit would constitute salary or wages when the benefit would have been provided in respect of employment and is provided by way of a cash payment. PAYG is withheld under a section of the TAA in respect of amounts received for services and a payment summary is issued to a VMO. Therefore, in respect of amounts received for services provided by a VMO having a standard employment agreement (On-call Agreement), the amounts constitute salary or wages. Salary sacrifice is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value. Hence, it is possible for the amounts received by a VMO under an On-call Agreement with the Ruling Applicant to be the subject of an effective SSA when the arrangement satisfies the criteria of being effective.

Is a visiting medical officer (VMO) under a standard contract for medical services agreement (VMO Agreement) (other than superannuation) with the Ruling Applicant an employee at common law? | Question 1B: In respect of the amounts received for services provided by a VMO having a medical services agreement (VMO Agreement) (other than superannuation), can the Ruling Applicant and the VMO enter into an effective salary sacrifice arrangement pursuant to Taxation Ruling TR 2001/10? | Question 2A: Is a VMO under a separate standard employment agreement (On-call Agreement) (other than superannuation) with the Ruling Applicant an employee at common law? | Question 2B: In respect of the amounts received for services provided by a VMO having a standard employment agreement (On-call Agreement) (other than superannuation), can the Ruling Applicant and the VMO enter into an effective salary sacrifice arrangement pursuant to Taxation Ruling TR 2001/10?