Private ruling: Business expenses
Date of advice: 24 August 2018
Published: October 2018
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you an independent contractor? | A1: Yes | Q2: Are you entitled to deduct the interest expenses incurred on borrowings used to pay PAYG instalments tax obligations and/or your year-end tax liability? | A2: Yes

Relevant facts and circumstances: You are a general practitioner (GP) who operates as a sole trader. You provide GP services in a medical practice (MP). You secured your placement with MP after answering an advertisement. The practice owners agreed that you would provide GP services at the MP. You do not have a written agreement but you operate under an oral agreement/arrangement. You advised that the intention of the oral agreement is that you are an independent contractor. Under the agreement: ● You work a number of days a week. ● You are not restricted from working anywhere else. ● You are required to maintain your own medical indemnity insurance. ● You invoice the MP fortnightly. ● You are paid a percentage of your total billings with the remainder going to the MP as a service fee plus GST. ● The MP generally makes appointments but a third party website also provides appointments and you occasionally make appointments yourself. ● You generally do not fill in for other GPs in the practice as there is no requirement for you to do so, but from time to time you will. If someone is away the GPs are notified by the practice Manager and choose to work extra days/sessions if they wish. ● You can delegate your work to other GPs within MP but you are limited in delegating to those outside of the practice due to Medicare requirements. ● In the situation that you are unable to attend due to illness or other commitments the MP organises for other GPs to see your patients. ● You are not required to work specific hours. ● You are not entitled to any leave or superannuation payments. ● You are not required to wear a uniform or identify yourself as a representative of the MP. ● You are able to terminate your relationship with MP without notice. ● You charge GST when required. ● You operate within the PAYG instalments regime. ● MP does not have a written service agreement but the service fee covers the cost of a room, receptionists, nurses and consumables (syringes, dressings, swabs, etc.) ● You provide your own portable doctor's bag including other small medical devices (you are also starting to do clinical photography for skin cancer management and will supply the equipment for this as well) ● As you are a member of the medical profession the MP cannot prescribe in detail how you perform your services. You plan to borrow money in order to pay your PAYG instalments and/or year-end tax liability related to your activities as a sole trader. You will incur an interest expense on the borrowings.

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Section 25-5 of the Income Tax Assessment Act 1997 | Section 12-35 of the Tax Administration Act 1953

Reasons for decision: Summary: Summary On the balance of the tests as provided in Taxation Ruling TR 2005/16 – Income tax: Pay As You Go – withholding from payments to employees you are an independent contractor. You are/are not an independent contractor. Detailed reasoning The term 'employee' is not defined in the TAA 1953. 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. Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered ( Stevens v. Brodribb Sawmilling Company Pty Ltd (1986)160 CLR 16 ). Both Taxation Ruling TR 2005/16 and Superannuation Ruling SGR 2005/1 adopt this approach to the question of employee or contractor for PAYG withholding and Superannuation Guarantee purposes. Both rulings refer to a set of key indicators which can be used to help with developing an answer. These key indicators are: | Detailed Reasoning - Control: The degree of control which the service acquirer can exercise over the worker – including the ultimate control which means the ability to withdraw a worker from an assignment and/or terminate the relationship with the worker and day-to-day control which means the degree of actual control exercised in terms of how, when and what is to be done. | Detailed Reasoning - Integration: The nature of the services rendered by the worker and whether they are an integral part of the business activities carries on by the service acquirer or whether the worker operates on his or her own account. | Detailed Reasoning - Results: Whether or not the substance of the contract is for the service acquirer to pay the worker to achieve a specified result or to pay for the worker’s time in providing the services. | Detailed Reasoning - Delegation: Whether or not the worker has the power to engage and pay others to do the work. | Detailed Reasoning - Risk: Whether the worker or the service acquirer bears the risk for the costs arising out of injury or defect in carrying out the work. | Detailed Reasoning - Provision of tools and payment of business expenses: Whether the worker or service acquirer provides and maintains the necessary equipment and resources to perform the work The three indicators most influential when considering the question of employee or independent contractor are the Results, Risk, and Provision of Tools/Equipment indicators. No one indicator is indicative of an employer and employee or principal and independent contractor relationship. Terms and circumstances of engagement 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. However, if the effect of the agreement as a whole does not support the stated relationship, the parties cannot deem the relationship between them to be something that it is not. The circumstances surrounding the formation of the contract may assist in determining the true character of the contract. If a contract comes into existence because the contractor advertises their services to the public in the ordinary course of carrying on a business or as a result of a successful tender application, the existence of a principal/independent contractor relationship is more likely. If the contract is formed in response to a job advertisement or through the services of a placement agency, the existence of an employer and employee relationship is more likely. There is no formal contract in place between you and MP. You secured your placement with MP by answering a job advertisement for a doctor and coming to an agreement with the practice owners that you would provide GP services at MP. You have provided that the intention of the oral agreement between you and the MP is that of a principal/contractor relationship. Whilst the intention of the oral agreement between you and MP is intended to be that of an principal and contractor the fact that the job position was answered through a job advertisement is more indicative of an employer and employee. Control While the level of control exercised is an important factor to be considered, it is not the sole indicator of whether or not a relationship is one of employment. A common law employee is told not only what work is to be done, but how and where it is to be done. The High Court in Zuijis described the significance of control in the following way in the context of skilled employment where the nature of the work performed left little scope for detailed control: What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters. The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. The payer has a right to specify how the contracted services are to be performed, but such control must be expressed in the terms of the contract; otherwise the contractor is free to exercise their discretion (subject to any terms implied by law). This is because the contractor is working for themselves. In Hollis v Vabu, the fact that the couriers engaged by Vabu had little control over the manner of performing their work was an important factor leading to the Discussion that the bicycle courier in question was a common law employee of Vabu. Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ (at 44-45) observed that: Vabu’s whole business consisted of the delivery of documents and parcels by means of couriers. Vabu retained control of the allocation and direction of the various deliveries…Their work was allocated by Vabu’s fleet controller. They were to deliver goods in the manner in which Vabu directed. In this way, Vabu’s business involved the marshalling and direction of the labour of the couriers, whose efforts comprised the very essence of the public manifestation of Vabu’s business. You have provided that under the agreement that: ● you are not restricted from working for any other providers. ● you can make your own appointments, although the MP generally does this. ● you are not required to fill in for other GPs unless you wish to do so. ● you can delegate to other GPs but this is restricted due to Medicare requirements. ● you are not required to work specific hours. ● MP cannot prescribe in detail how you perform your services. As MP has little control over how your services are conducted, you are not required to work a specified period of time, and you are free to work where you please the facts point to a principal/contractor relationship under this indicator. Integration Integration is the test in which we consider the role of a worker as part of the principal’s business activities it is the question of “Does the worker run their own business or are they part of the principal’s?” There is a distinction between the interactions and representation of an employer compared to that of a contractor. Dixon J made this distinction between the two in Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd , at [48]. Here Dixon J provided that an independent contractor ‘carries out his work, not as a representative but as a principal’ whereas an employee is a ‘representative (of the employer) standing in his place and, therefore identified with him’. This was later consider in Vabu by the High Court majority at [40]: It indicates that employees and the independent contractors perform work for the benefit of their employers and principals respectively. Thus, by itself, the circumstances that the business enterprise of a party said to be an employer is benefited by the activities of the person in question cannot be a sufficient indication that this person is an employee. However, Dixon J fixed upon the absence of representation and of identification with the alleged employer as indicative of a relationship of principal and independent contractor. One of the factors indicating an employment relationship in Vabu was that they were not running their own business. The bicycle couriers were not providing skilled labour or labour that required special qualifications. A bicycle courier was unable to make an independent career as a freelancer or generate any ‘goodwill’ as a bicycle courier. You work as a GP for MP, you are not required to wear a uniform or identify yourself as a representative of MP. This is indicative of an independent contractor. Results Where the substance of a contract is to achieve a specified result there is a strong (but not conclusive) indication that the contract is one for services rather than one of service. The phrase '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. For a payment to be considered for a given result, it must be payable when, and only when, the contractual conditions have been fulfilled or at specified milestones. You provide medical practitioner services to MP, you do so on your own accord as PMC does not prescribe how you perform them. You are paid based on the number of patience that you see receiving percentage of total billings. You are not paid based on the hours that you work. As you are only paid on completion of providing medical services to a patient or on ‘the production of a given result’ this is indicative of a principal and contractor relationship. Delegation 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 contractor. 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. Under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). Unless the contract expressly requires the service provider personally to perform the contracted services, 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. You have advised that you have the ability to delegate work to other GPs within the MP but you are limited in delegating to others outside of the practice because of Medicare requirements. If you are ill or have other commitments then the MP will organise for other GPs to see your patients. As you are not able to delegate outside of the practice due to Medicare requirements you are frustrated from being able to meet the indicator requirements as outlined in TR 2005/16. Risk Where a worker bears little or no risk 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. You are required to maintain your own medical indemnity insurance. This is indicative of a principal and contractor relationship. Provision of tools and payments of business expenses It had been held that 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. As highlighted in Vabu , 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. 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. The weight given to this indicator depends on the particular circumstances and the context and nature of the contractual work. All other facts must be considered to determine the nature of the contractual relationship. As part of your service agreement with the MP the service fee you pay from your billings covers the cost of a room, receptionists, nurses and consumables (syringes, dressings, swabs, etc.). In addition to this you provide your own portable doctor's bag including other small medical devices. Based on the facts provided you provide your own equipment with only basic consumables being provided by MP for which are covered by the service fee you pay. These circumstances are indicative of a principal and contractor relationship. Conclusion Based on a consideration of all of the facts, you are an independent contractor. | Detailed Reasoning - Question 2: Summary As you are an independent contractor, you are conducting a business and the interest expense you incur in relation to the payment of your PAYG Instalment/Income tax will be deductible. Detailed reasoning Section 8-1 of the ITAA 1997 allows a deduction for expenses necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowable if the expense is of a private, domestic or capital nature. In general the character of interest is determined with reference to the use to which the borrowed funds are put ( Commissioner of Taxation v. Roberts; Commissioner of Taxation v. Smith (1992) 37 FCR 246; 92 ATC 4380; (1992) 23 ATR 494). Paragraph 25-5(2)(c) of the ITAA 1997 provides that expenditure on money borrowed to pay tax, including payments of interest, cannot be deducted as a tax related expense under subsection 25-5(1) of the ITAA 1997. However Taxation Ruling IT 2582 - Income tax: deductibility of interest incurred on moneys borrowed to pay income tax states that where a taxpayer carries on a business and, in connection with that business, borrows money to pay income tax, then it is considered that the interest incurred is a normal incident of conducting a business and is therefore deductible. While the taxation ruling has a reference to companies carrying on a business, the same approach is applicable to an individual carrying on a business as a sole trader. As discussed previously you are an independent contractor and thus are considered to be an individual carrying on a business as a sole trader. Given this the interest expense on the borrowings that you made in order to pay your PAYG Instalment/Income Tax related to your sole trader activities will be deductible.