Private ruling: Is there an obligation on the entity to withhold from payments to workers under PAYG Withholding legislation
Date of advice: 29 January 2016
Published: March 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | This scheme commenced on: | 1 July 2015

Ruling: Q1: Is there an obligation on the entity to withhold from payments made to resident and non-resident workers under Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)? | A1: No


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

Reasons for decision: Summary: Section 12-35 of Sch 1 to 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 provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA. The term 'employee' is not defined in the TAA. For the purposes of withholding under section 12-35 the word 'employee' has its ordinary meaning. Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. TR 2005/16 also 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, otherwise the contractor is free to exercise their own discretion, because they work for themselves. 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. 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. 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. 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. 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 asks workers to perform various tasks but does not dictate how they are to be done. Workers are independent of the entity. Workers have a high degree of independence, discretion and flexibility in how the tasks are performed. Workers are paid per task not on a time basis i.e. hourly. Workers are used for their knowledge of the subject matter of the particular task. No specific assets, tools or equipment are required to perform the tasks. Workers are not reimbursed for any expenses incurred they are only paid a set fee, for each task performed. None of the workers enter into employment contracts with the entity. The entity is under no legal obligation to pay the workers. Considering the facts against the above factors It is considered that workers are not employees of the entity therefore there is no obligation to withhold from payments made to the workers under section 12-35 of Sch 1 to the TAA.

Relevant facts: As part of the entity's operations it invites workers to perform tasks. | Comprehensive selection criteria are used when selecting these workers which include: | • workers being available at an anticipated time and also being available to do the tasks within a certain period of time | • None of the workers are employees of the entity (they do not sign employment contracts with the entity). The entity is under no legal obligation to pay the workers | Additional information is as follows: | • Workers do not need to travel to the entity to perform the tasks and incur no expenses in performing the tasks | • Workers may elect to not receive payment for performing the tasks | • Workers may be terminated if they do not provide the entity with the completed tasks in a timely manner or do not respond to email reminders, They may also be replaced and told their services are no longer required | • No training is provided | • It is at the worker's discretion how long they spend on doing the tasks. There are no set hours or hour requirements | • Workers are not required to attend any meetings | • The workers are not supervised | • It is up to the workers as to whether they wish to take on a task | • The worker does not need to seek permission or provide any prior notice to take time off | • The worker is able to provide their services to other payers | • Workers are not required to train, supervise or assess the work of other employees/workers | • Workers submit an invoice and another form once the task is completed | • Workers are not paid an allowance, any form of expense payment, holiday or sick pay, nor are they paid superannuation | • Amounts are currently being held from payments to workers who do not supply an ABN | • Workers have no capacity to delegate the marking to anyone else | • The entity does not provide any equipment to the workers nor does it reimburse them for the use of their assets, equipment or tools | The workers receive set amounts for certain tasks. | Workers are not able to negotiate their rate of pay as the above fees are set by a third party