Private ruling: PAYG withholding
Date of advice: 31 October 2018
Published: January 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the worker engaged by the entity in order to conduct classes 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: You engage instructors to run group classes for the entity. The instructor could conduct one or more classes per week, for a period between six and forty weeks, depending on the popularity of the class. In addition to working for the entity, the instructor may work with other businesses or private clients. The instructor completes a services agreement with the entity. The instructor is also required to provide their ABN, relevant licenses, evidence of Workers Compensation and Public Liability insurance. At the end of each month, the instructor invoices the entity for classes conducted. The Services Agreement is completed with agreement between the parties as to what services the instructor will supply to the entity. The instructor will supply the services to the entity during times specified in the agreement or as directed by the entity. The Services Agreement contains a list of essential personnel for the instructor that are regularly and personally involved in the performing of the services. The entity will pay the instructor for their services under the agreement, a specified amount per month on invoices rendered for services performed in the previous per month

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? | Detailed Reasoning - 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. | Detailed Reasoning - 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 in conjunction with the entity as part of their initial contract negotiations. The worker is free to conduct the tasks any way they see fit. The instructor will conduct the classes but the entity has very little control over the content of each class. The instructor’s skill and experience will determine the content of the program. It appears that there is very little control exercised by the entity over the manner in which services are conducted. This level of control is indicative of a contractor relationship. | Detailed Reasoning - 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 and can provide their services to other individuals or businesses. The worker does not train, supervise or assess the work of other employees at the entity. The worker will be paid upon the provision of a tax invoice to the entity each month on completion of their work for the organisation. 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. | Detailed Reasoning - 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 of each month, detailing the number of classes conducted for the entity in that time period. It appears that the basis of the contract is to achieve a specified result, that is the provision of exercise classes for the client. 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. | Detailed Reasoning - 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 instructor is able to list additional essential personnel that will be used in the provision of their classes. The entity does not provide direction as to who must perform the work as long as the worker has met relevant police and working with children” checks. As the worker is able to delegate responsibility for their tasks, it is a strong indicator that the worker is engaged as an independent contractor. | Detailed Reasoning - 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. The worker is responsible for paying Worker’s Compensation insurance, public liability insurance and any other relevant insurance. If the instructor breaches any of the conditions of the contract, the instructor will resupply the services at no cost to the entity, or will refund any payment made by the entity for the services provided. In this case, the information provided indicates that the worker bears the commercial risk and responsibility for their work, which is indicative of a contractor relationship. | Detailed Reasoning - 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 equipment which includes for their classes. The worker does not receive any reimbursement for their assets, equipment or tools. As the entity is not responsible for supplying equipment in order to perform the services, it is more indicative of a contractor relationship as opposed to an employee/ employer relationship. | Detailed Reasoning - 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.