Private ruling: Pay as you go (PAYG) withholding - employer/employee
Published: September 2014
Ruling period: Income year ending 30 June 2015
Date scheme commenced: The scheme has not yet commenced.

Ruling: Q1: Does an employer/employee relationship exist in the proposed arrangement, for the purposes of PAYG withholding under section 12-35 of Schedule 1 to the Tax Administration Act 1953 ('TAA 1953')? | A1: No.

Relevant facts and circumstances: The following arrangement is proposed: • A sub-lease agreement will be made between the business owner and each of the individual operators for the use of the business premises and non-removable equipment. • The business owner will charge and collect a percentage of each operator's revenue or a flat month fee (or a combination of the both, depending on what is negotiated upfront). Each individual operator will: • provide their own: • cash register/cash drawer/computer to collect moneys directly from customers; • work-related tools and supplies and related product, including for retail purposes; • book their own appointments, being free to accept and refuse work as they see fit; • be able to contract others to assist in their business, though they may need to discuss this with the business owner prior, as it may require an increase in the rental amount and consideration of the space limitations; • operate their business from more than one premise, including their home, without being required to seek your permission; • set their own hours; • fully control the quality of their work and how it is performed; • have their own key to the building; • come and go as they see fit. In regards to conducting their business operations, each individual operator will: • trade as either a sole trader, partnership, trust or company; • have a tax file number; • be registered for an Australian Business Number and goods and services tax, if required; • complete and lodge all business activity statements, if required; • pay all income tax, fringe benefits tax, and any other tax commitments payable by the business and themselves; • make all PAYG instalments, if required; • be response for their own superannuation contributions; • make claims for deductions for business expenses; • comply with regulations set by the Australian Securities and Investment Commission, if required; • comply with all applicable local, state and federal government licenses; • comply with all applicable local, state and federal government Industry Awards; • freely advertise, market and manage their own business within more than one premises; • comply with all government or landlord insurance requirements and regulations. The individual operators will not be required by the business owner to wear a uniform or adhere to a code of dress. Each individual operator will be able to have their own signage and advertise on their own accord. Joint advertising could occur, such as a letterbox drop, where a flyer would be designed to allocate space for each of the individual operators to advertise their own specials alongside the businesses specials. The business owner will not make any payments to the individual operators, except for commission if they sell retail product of the business owner. However, as the individual operators are required to provide their own product for retail sale, this would only happen in the unlikely event that they had run out of their own stock.

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

Reasons for decision: Summary: Section 12-35 of Schedule 1 to the TAA 1953 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). The TAA 1953 does not provide a definition of 'employee'. Thus, the ordinary meaning is used. Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees considers the various indicators considered by the courts in establishing whether a person is an employee within the common law meaning. TR 2005/16 highlights the following key indicators of whether an individual is an employee or an independent contractor: | Detailed Reasoning - Control: Paragraph 26 of TR 2005/16 states: 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 lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. A contract may specify in detail how the contracted services are to be performed, but this does not necessarily imply an employment relationship. The existence of a high degree of direction and control is not uncommon in contracts for services. However, such control would be expressed in terms of the contract. In this arrangement between the business owner and the individual operators, the operators will pay periodical rent to occupy the business owner's leased premises to perform services. Each individual operator will book their own appointments, being free to accept and refuse work as they see fit. They will be able to set their own work hours, and can freely come and go. This demonstrates that the individual operators have a high degree of control and discretion over when they work and how it is conducted. | Detailed Reasoning - Operating on own account: Paragraph 32 of TR 2005/16 refers to Hollis v. Vabu Pty Ltd (2001) 207 CLR 21; [2001] HCA 44; 2001 ATC 4508; (2001) 47 ATR 559 (' Hollis v. Vabu ') where, at paragraph 40, the majority of the High Court quoted the following statement made by Windeyer J in Marshall 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 collect their income directly from their customers and administer their own receipts by providing their own cash register, cash drawer or computer. Each of the individual operators will be free to run their business as they see fit. They will be responsible for complying with the relevant taxation and government obligations and regulations for their business. All work-related tools and supplies and products for use and retail sale must be supplied by each individual operator. These facts suggest that the individual operators will operate on their own account, keeping their business income and deductions separate to the business owner's accounting. | Detailed Reasoning - 'Results' contracts: TR 2005/16 also considers whether the substance of a contract is to achieve a specified result. A party may be engaged to perform a service for another entity, where they are free to employ their own means to achieve a contractually agreed upon outcome. The consideration is often a fixed sum on completion of the particular job. It is usually a negotiated contract price, as opposed to an hourly rate. Under this arrangement, each of the individual operators will receive payment directly from their customers on completion of services provided to the customer. Each individual operator will pay the business owner a periodic payment for rental of the premises and non-removable equipment, either as a flat monthly fee, or as a percentage of their revenue. This suggests that the services of the individual operators will be engaged directly by the customers. The contract between the business owner and each of the individual operators is not for their services, but rather, for the provision of the premises and non-removable equipment. | Detailed Reasoning - Power to delegate or subcontract: Paragraphs 41 and 42 of TR 2005/16 state: If a person is contractually required to personally perform the work, this is an indication that the person is an employee. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. Key to such delegation by an independent contractor is that they are the party responsible for remunerating the replacement worker. The arrangement allows the individual operators to contract their own staff with limited consultation with the business owner, suggesting that they have the power to delegate and subcontract their work to others, as they work in the capacity of their own business. | Detailed Reasoning - Risk: Paragraph 44 of TR 2005/16 discusses the differences in the risk carried by an employee and an independent contractor. It suggests: Where the worker bears little or no risks of 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 work. An independent contractor often carries their own insurance and indemnity policies. The arrangement requires each individual operator to comply with all government insurance requirements, including public liability, workers' compensation, personal accident and illness. The individual operator will have full control of the quality of their work and how it is performed. They are required to have insurance for product liability and faulty workmanship and professional indemnity, bearing the responsibility for any injury or defect in their work. As such, the individual operators will bear the risks associated with the performance of their work, suggesting they are not employees, but are independent contractors. | Detailed Reasoning - Tools and equipment and business expenses: Where an individual provides their own assets, equipment and tools and incurs their own expenses, paragraph 45 of TR 2005/16 suggests that this indicates that the individual is an independent contractor, rather than an employee. TR 2005/16 also refers to the case of Stevens v. Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16, 36-37, where the High Court observed that working on one's own account 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, the payment by him from his remuneration of business expenses of any significant proportion… Paragraph 48 of TR 2005/16 also considers the comments of the majority of the High Court in Hollis v. Vabu in suggesting that the provision and maintenance of tools and equipment and payment for business expenses should be significant for an individual to be considered an independent contractor. The individual operators will each provide their own work-related tools and supplies and all professional products, including retail products. They will also provide their own cash register, cash drawer or computer to collect money directly from customers. The business owner will supply non-removable equipment in the business. In return, the individual operators pay either a percentage of their earnings or a flat month fee to the business owner. The individual operators provide their own tools and equipment, and are responsible for the payment of their own business expenses. While they do not provide their own furnishings, they pay the business owner a periodic rental amount for the space and non-removable equipment. Provision of their own tools and equipment as described in the arrangement may not be significant enough for the individual operators to be considered independent contractors. However, they are responsible for the payment of the periodic rental of the premises and non-removable equipment, which could be regarded as a business expense. On the whole, the individual operators will be responsible for providing their own tools and equipment and payment of their business expenses, suggesting they are not employees of the business owner. | Detailed Reasoning - Other considerations: Paragraph 51 of TR 2005/16 lists other indicators that suggest an employer-employee relationship, including: • the right to suspend or dismiss the person engaged; • the right to the exclusive services of the person engaged; • the provision of benefits such as annual, sick and long service leave; and, • the provision of other benefits prescribed under an award from employees. The requirement that a worker wear a uniform is also considered in paragraph 52 of TR 2005/16 to be indicative of an employment relationship. Each individual operator will be able to operate their business from more than one premise, including their home, and so are not exclusively restricted to working at the business owner's premises. They would be required to comply with any applicable industry awards. They are also responsible for meeting their own taxation and superannuation obligations. The business owner has stated that the individual operators would not be required to wear any uniform. These other considerations demonstrate that the individual operators are not employees of the business owner, but rather, working in their own capacity. | Detailed Reasoning - Lease or bailment: Paragraph 8 of TR 2005/16 states that where an arrangement is structured in such a way that it does not give rise to a payment for services rendered, but rather a payment for something entirely different, such as a lease or a bailment, it does not give rise to an employer/employee relationship for the purposes of section 12-35 of Schedule 1 to the TAA 1953. The arrangement between the business owner and each of the individual operators will not result in any payment from the business owner to them for their services. No payment of money will be made from the business owner to the individual operators. They will collect their fees directly from their customers. The arrangement will be for the provision of business premises and non-removable equipment in return for payment from each of the individual operators, much like a lease. | Detailed Reasoning - Conclusion: Upon consideration of the above indicators and the facts provided about the arrangement, we do not consider that the individual operators will be employees of the business owner for the purposes of section 12-35 of Schedule 1 to the TAA 1953.