Private ruling: Whether there is an obligation to withhold from payments made to educators
Published: February 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Is there an obligation on the entity to withhold from payments made 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: Based on the information you have provided, the Commissioner considers that there is no requirement to withhold from payments made to contracted entities under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) as the contracted entities are not employees. | Detailed Reasoning - Detailed reasoning: 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 - 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. In this case the contracted entity is not subject to any direction or control by the entity on how they provide their services, they are free to set their own fees for the services they provide, can refuse to provide services for any reason and can delegate contracted work to another person. There is also no restraint of trade covering the contracted entity such that they can work for another entity. Despite the detailed contractual obligations the entity does not exercise control over the contracted entity such that they are considered an employee of the entity. This is because it is accepted that contracts for services can contain a high degree of direction in relation to how services are to be delivered. | 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 contracted entity can operate separately from the entity. The contracted entity is not integrated into the entity's business as they operate their own businesses. | 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 contracted entities are free to employ their own means to provide services. | 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 contracted entity may delegate their services to others. The contracted entities are free to arrange others to perform all or some of the work to another service provider, when this occurs the contracted entity is responsible for remunerating the replacement worker/service provider. | 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. In this case the contracted entity bears all commercial risk whilst doing their activities under the Agreement. This is because the Agreement requires the contracted entity to provide a large amount of resources at its own expense. The contracted entity cannot claim these costs from the entity and bears the risk that the remuneration it receives under the Agreement will cover these costs. The contracted entity is also required under the Agreement to take our various insurances to cover its services. This includes workplace injury insurance, personal injury insurance, public liability insurance, professional indemnity insurance, motor vehicle insurance and workers compensation insurance (Workcover). | 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, under the Agreement, the contracted entity must provide a significant amount of resources, at their own cost. The contracted entity is not reimbursed for any of these expenses by the entity. | Detailed Reasoning - 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 the contracted entities as they are not employees.

Relevant facts: An entity received funds from Government bodies to pay separate entities for services provided. | The facts surrounding the entity's specific arrangement with other entities are as follows: | 1. the entity contracts with other entities (usually with ABNs) to provide specific services; | 2. the contracted entities advertise their offering to the general public but they do not have to advertise that they are associated with the entity; | 3. the contracted entities are not required to wear the entity's uniforms or have the entity's signage outside their places of business; | The entity requires certain suitability requirements. | The contracted entities must provide the services, in accordance with an Agreement. | the contracted entity can set their own fees but is bound to charge within a range set by the entity and must comply with the entity's record-keeping requirements. | The contracted entity must provide all resources necessary to provide the agreed services at their own cost. | The contracted entity must maintain at their own cost all licences, accreditation etc. necessary to provide the contracted services. | The contracted entity is not subject to any direction or control by the entity on how they provide their services, except to the extent necessary to ensure compliance with the legislation. | A contracted entity may refuse to provide services for any reason. | The contracted entity may delegate the provision of services provided the delegation is approved by the entity. | The contracted entity must maintain workplace injury insurance, personal injury insurance, public liability insurance, professional indemnity insurance, motor vehicle insurance and workers compensation insurance (Workcover). | The entity does not impose any restraint of trade on its contracted entities as they are free to work with other entities other than the entity. | The entity is ultimately responsible for the quality of services provided through its network of contracted entities. | The Agreement outlines record keeping and reporting obligations on the contracted entities. | The contracted entities set their own fees, within a range set by the entity in its fee schedule and fee charging policy. | If delegation is allowed by the entity and a contracted entity engages another person to assist them in providing the services, then the other person is paid by the contracted entity. | Under the agreement contacted entities are not eligible for any employee entitlements from the entity, such as annual leave, long service leave and paid public holidays. | Contracted entities do not get reimbursed for the expenses they incur in providing services such as fuel or running costs of vehicles, wear and tear of tools and equipment or additional travel and food costs when providing services.