Private ruling: Obligation to withhold from payments
Published: July 2013

Ruling: Q1: Is there an obligation on the entity to withhold from payments made to contractors under section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA)? | A1: This ruling applies for the following periods Year ended 30 June 2013 Year ending 30 June 2014 Year ending 30 June 2015 Year ending 30 June 2016 The scheme commenced on 1 July 2012


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

Reasons for decision: Summary: 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? 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 entity only provides the location of the task and the task specification. The contractor is free to conduct the task any way they see fit provided it is within the specifications. The contractors are responsible for their own work and fix any errors if they are to be paid for the task. The contractors are also free to work elsewhere, which most of them do. Many contractors reject tasks offered to them by the entity as they are already engaged by a competitor elsewhere. 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 entity provides a location and the task specifications and how that task is done is up to the contractor. They enter into a contract for a specific task i.e. a specific task at a client's location. They have full discretion as to how the work is done provided it is done within the specifications. They also have no obligation to work for the entity and are free to work for other organisations. They are also able to reject work offered to them by the entity. 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 contractors are paid for a given result i.e. a successful task at the client's location. The contractors are free to employ their own means to achieve the result, including sub-contracting out the task. 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 contractor is able to delegate work to others without approval of the entity. 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 contractors bear the risk of any below standard work on a job site. They have to rectify any problems or they don't get paid. They also have to pay any expenses and are not reimbursed by the entity. 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 does not provide any tools or equipment to the contractors to enable them to complete a task. Conclusion After assessing the facts against the indicators in TR 2005/16, it is considered that there is no obligation on the entity to withhold from payments made to contractors.

Relevant facts: The entity operates a business. | The entity contracts with contractors to provide comprehensive services to clients. | Contractors are entitled to sub-contract aspects of the contracts with clients. They do this among associated entities and independent contractors. | The fee quoted by the contractors to the client is a fixed fee charged on a regular basis, based on a number of factors including: | · type of equipment leased | · nature and scope of the consultation service; and | · the expected services that will be required. | Contractors sub-contract aspects of their obligations under the contract with clients to the entity. | The entity seeks out contractors who are capable of doing the job given the specifications and locations. The client will inform them of the expected times to complete the obligations. | The company seeks out contractors via: | · a database it maintains | The criteria used when selecting a suitable contractor include: | · a good reputation and track record | · whether they have specific skills required for the job | · whether they are available to do the job | · whether they have available staff | · whether they have the required team management skills | · the standard of their services | · whether they are deemed to be able to complete the work in the timeframe required and to the quality expected by the client; and | · whether their fees are considered reasonable. | Critical features of the engagement are as follows: | once selected the contractor enters into a formal written contract with the company | a basic introduction of a particular task is provided over the phone. They are also given task specifications and a safety handbook | The contractor then deals directly with the client and negotiates adjusting times without any reference to the entity | the entity monitors each task by ensuring all contractors record their attendance for a task | The entity pays the contractor an agreed lump sum per task. This amount is paid whether the contractor takes longer or less time to finish the task | If a particular contractor is unable to commit to a particular task the search will continue for another suitable contractor | Contractors do not provide written quotes. They are provided with a specification and an offer of remuneration by the entity in return for achieving a client expectation at the client's location. | Upon engagement the entity is liable to pay the contractor in accordance with the contract. Where the contractor is registered for GST the company will receive an invoice. | Contractor's fees are paid on a regular basis provide an invoice has been received and verified by the entity | All contractors must provide an ABN before any payment is made to them | If a client reasonably refuses payment to a contractor for any reason and the entity is satisfied that it arises as a result of a default by the contractor the entity will not pay the fee to the contractor for that particular task | If the entity's monitoring system does not confirm attendance at a task the contractor will not be paid unless there is evidence to the contrary | Contractors are not reimbursed for any expenses incurred in relation to a task. Contractors are entitled to sub-contract the task and this is done on many occasions. Permission is not required from the entity as the contractor is ultimately responsible for the finished product and the contractor will not receive payment if the task is not completed in accordance with the agreement. The contractor is responsible for paying any sub-contractor who completes work for them | Contractors indemnify the entity for any loss or damage caused to the entity arising from negligence of the contractor or its sub-contractor/s in conducting a task | Contractors are free to take time off as they can get someone else to do their task. There is no requirement for the contractor to give notice of termination or to re-engage services | The entity does not provide any uniforms or identification badges indicating that the contractors have an association with the entity | The entity does not provide any tools or equipment to the contractors to enable them to complete a task nor does it reimburse them for any expenses incurred. The contractor may provide equipment to the client for its needs and charges a leasing fee for the use of the equipment. The client will make that equipment available for use by the contractor. | Contractors fall into two broad categories: | · Full time professional contractors - who widely advertise their capabilities (either in yellow pages or on websites) and who are engaged by various parties, some of whom are in competition with the company; and | · Casual contractors - who are otherwise employed full time in a completely different capacity or only wish to be engaged for a few hours per week. These contractors commonly contract to a small number of service recipients whom they trust.