Private ruling: Employee
Published: June 2013
Ruling period: 1 July 2013 to 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Does an employee/employer relationship exist in the arrangement for the purposes of PAYG withholding under section 12-35 of the Tax Administration Act 1953 (TAA)? | A1: No

Relevant facts and circumstances: · Proposed arrangement between the individual operators and the company: a. The individual operators will pay the company rental fees, in return for occupying the company's premises and use of equipment and facilities such as power, water, and furniture. b. Rental fees are either an agreed weekly amount and/or a percentage of sales. c. The individual operators will provide their services within the opening hours of the premises, set by the company. · The individual operators will collect all money related to their own services and sales from their own clients using their own separate facilities. · The customers make payments directly to the individual operators who use their own facilities such as EFTPOS, cash register and computer software. · The individual operators may set their own prices for the services and goods they provide. · The individual operators will provide all of their own tools and products used to provide services and provide their own products to retail. · The individual operators are wholly responsible for all work performed and would be wholly responsible for rectifying any defect work. They will be also be required to possess all relevant insurances. · The individual operators are free to control all aspects of their work including the hours of work and the type of work they accept. · Due to the nature of the business, sub-contracting is not common practice and would be discouraged unless it has been deemed to be legal and proper, although as individual operators they are permitted to employ support staff to help them grow their business. · The individual operators are to operate as totally separate entities, working independently from the company, and must operate either as a sole trader, partnership, company or trust, with their own ABN.

Relevant legislative provisions: Tax Administration Act 1953 section 12-35

Reasons for decision: Summary: Section 12-35 of the TAA states: An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). Taxation Ruling TR 2005/ 16 Income tax: Pay As You Go - withholding from payments to employees discusses the key indicators that should be considered when determining whether an individual is an employee or an independent contractor. These factors can be applied to the particular circumstances of this arrangement to evaluate whether they are indicative of the individual operators being employees of the company or tenants operating their independent business. | Detailed Reasoning - Control: The first issue for consideration is that of control. Paragraph 26 of TR 2005/16 suggests that a common law employee is usually told by their employer what work needs to be done and how and when it is to be done. The issue of control does not always rely on whether the employer exercises it, although this is clearly relevant, but more whether they have the right to exercise it. 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 exercised 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 particular arrangement, the individual operators are able to set their own working hours within the opening hours of the business, book and choose their own appointments and are able to set their own prices. The agreement in place only specifies that the individual operators will occupy the premises of the company in return for paying weekly rent. This demonstrates that the individual operators have a high degree of control and discretion over when they work, where they do it and how it is conducted. | Detailed Reasoning - Operating on own account: The second consideration is the issue of whether the individual operates on their own account or as part of the business of the payer. In Hollis v Vabu (2001) 207 CLR 21, the majority of the High Court quotes the following statement made by Windeyer J in Marshal v. Whittaker's Building Supply Co (1963) 109 CLR 210: …the distinction between an employee and independent contractor is 'rooted fundamentally in the difference between a person who serves his employer in his, the employer's business, and a person who carries on a trade or business of his own'. In this arrangement, the individual operators are free to run and administer their business as they see fit. They are responsible for reporting their own income and expenses, and for complying with taxation and government obligations and regulations. The individual operators collect their income directly from their customers, and this is administered through their own cash register and EFTPOS machine. They are responsible for supplying their own products for use and for retail sale to customers. The individual operators will each pay a weekly rental payment to the company and/or a percentage of their takings through a pre-agreed rate, which is calculated at the time of initial negotiations. This demonstrates that the individual operators account for their business income and deductions separate to that of the company. | Detailed Reasoning - Payment for result: The third consideration is a focus on whether the substance of a contract for work is to achieve a specified result. If this is the case there is a strong but not conclusive indication that the contract is one for services and not employment. In World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327, Sheller JA said: Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor. Under results based contracts, payment is often made for a negotiated contract price as opposed to an hourly rate. The production of a specified outcome or result is not limited to the performance of one individual. The worker 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. In this arrangement, the individual operators receive payment directly from their customers on completion of the service provided, and only pay a periodic rental to the company. The individual operators are considered to be engaged in their own business, and are not actually working in the business of the company. | Detailed Reasoning - Power to delegate: The fourth consideration determines whether the work can be delegated or subcontracted. Paragraph 41 of TR 202005/16 provides: The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) is a significant factor in deciding whether a worker is an employee or independent contactor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee. If the worker is contractually required to personally perform the work, this is an indication that the person is an employee whereas if an individual has unlimited 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. In the later circumstances, a key point is that the contractor is the party responsible for remunerating the replacement worker. Under this arrangement, the individual operators choose their own working hours and can make or refuse appointments at their convenience and can come and go as they please within the opening hours of the salon. They can also employ their own support staff to help them grow their business. Although, subcontracting is not a common practice, the applicant has stated that the individual operators will be able to subcontract if it is deemed legal and proper. In consideration of the above it does not appear that the individual operators are contractors but rather independent business operators who only lease work space from the landlord. | Detailed Reasoning - Commercial risk: The fifth consideration is the issue of risk. Paragraph 44 of TR 2005/16 states: Where a worker bears little or no risk for the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of their work. This means that an independent contractor will often carry their own insurance and indemnity policies. The individual operators run their own business and are responsible for all work performed by them. They will possess all relevant insurances such as public liability, workers compensation (if necessary) and personal accident and sickness insurance. If a customer is dissatisfied with the result, the individual operators are the one who bears the responsibility and costs. The commercial risk is borne by the individual operator, and as such is a similar situation to a sole trader carrying on their own business. | Detailed Reasoning - Tools and equipment: The sixth consideration is whether the worker provides their own tools and equipment. It has been held in a variety of cases that the provision of assets, equipment and tools by an individual is an indicator that the individual is an independent contractor (Paragraph 45 of TR 2005/16). In Stevens v Brodribb Sawmilling Company Pty Ltd (1986) CLR 16, the High Court observed that working on one's own account (as an independent contractor) often involves: The provision by him of his own place of work or of his equipment, the creation by him of goodwill or saleable assets in the course of his work, he payment by him from his remuneration of business expenses of any significant proportion… The individual operators provide their own tools and products for their use while performing their services, and provide their own cash register, drawer or computer to account for their cash flow. The only equipment that is not supplied by the individual operators are certain equipment and facilities such as power, water, and furniture. The provision of tools and products by the individual operators, other than building fittings and fixtures, signifies that this situation is similar to that of an independent business operator and not an employee. | Detailed Reasoning - Payment of expenses and benefits: The provision of allowances, reimbursement of expenses and other benefits are often indicative of an employee/employer relationship rather than an independent contractor arrangement. On the other hand, the incurring of expenses and other overheads by an individual is generally an indicator that the individual is an independent contractor. The individual operator is responsible for all expenditure incurred in the earning of their income through the provision of their services. They do not receive a reimbursement or allowance from the landlord for these expenses. This is an indication of the individual operators being independent business operators. | Detailed Reasoning - Other considerations: The other indicators suggesting an employer/employee relationship include the right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of benefits such as annual, sick and long service leave and the provision of other benefits prescribed under an award to employees. However, the fact that a contract does not contain provisions for annual or sick leave along does not indicate an independent contractor arrangement. The fact that an individual has an Australian Business Number (ABN) does not prevent that individual from also being engaged as an employee in another role. The fact that an ABN is provided during or at completion of a contract is an indicator that must be examined with consideration of the overall contractual arrangement. The contract between the company and individual operator is exclusively for the leasing of the company's premises and does not provide any other entitlements. The individual operators are registered with an ABN, and if applicable, for GST. They are also responsible ensuring for their own taxation and superannuation obligations are met. | Detailed Reasoning - Lease/Bailment: Paragraph 53 and 54 of TR 2005/16 provides that in some circumstances, a person is neither an employee nor an independent contractor: 53. There are circumstances in which the relationship between a person who engages another to perform work and the person engaged does not give rise to a payment for services rendered or provision of labour but rather a payment for something entirely different, such as a lease or 'bailment'. In these circumstances, a person enters into a lease or bailment for the use of property owned by another person, and the payments are made from the lessee or bailee to the lessor or bailor. Consequently, the lessee or bailee, rather than being a provider of services to the owner of the asset, acquires a right to exploit that asset for their own benefit in return for a 'rental' payment to the owner. 54. A common form of bailment relationship is that of owner and taxi driver. In the taxi industry, some taxi drivers who operate under a bailment arrangement make a payment to the owner allowing them to use the taxi to drive. These payments may take the form of lease payments or a percentage of shift takings. In FC of T v. De Luxe Red and Yellow Cabs Co-operative (Trading) Society Ltd & Ors , the Full Federal Court held that a taxi licence owner and taxi drivers were not in a relationship of employer and employee. The relationship was rather one of 'bailment', even though the licence owner had a degree of control over the drivers' work. In this case, no payment of money is made from the company to the individual operators, as they collect their own fees directly from their customers. A periodic payment or percentage of takings, as defined in the proposed agreement, is paid by the individual operators to occupy the company's premises. It is considered that this arrangement is similar to that of a landlord/tenant, the individual operators acquiring the right to use the premises in return for making rental payments. | Detailed Reasoning - Conclusion: Upon consideration of the above indicators and the facts provided, it is clear that an employee/employer relationship does not exist under section 12-35 of the TAA, rather the individual operators are independent business operators who are only leasing the company's premises to conduct their own business.