Private ruling: PAYG Withholding - Employee Vs Contractor
Date of advice: 8 April 2016
Published: June 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the workers engaged by the entity to provide services considered to be employees for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)? | A1: No

Relevant facts and circumstances: The entity operates a business in the building industry. The majority of work performed by the entity is sourced from two other organisations. When there is more work than one person can complete, or there is work in multiple locations simultaneously, the entity will contact other workers. The company will usually contact two sole traders and ask if they are interested in the work. If they accept the request, the entity will pass on the job request from the other organisations and they will complete the work accordingly. The sole traders will then invoice the entity and the entity will in turn invoice the supplier for all work completed. Invoicing of completed work by all parties is done by hours worked, as it is difficult to quote on work due to each client having different requirements.. Quoting is possible, however variations in the amount of work required by the customers, issues with supply of products, or modifications in order to fit supplied products to individual client measurements mean that quotes will highly likely involve invoking variation clauses relating to extra time or extra materials. Critical features of the engagement are as follows: • Work is provided to the entity and the entity then contracts out the work where required This may be if the entity cannot perform the work as it is across several locations at the same time, or is in need of a second worker or specialist worker to complete the task. • When additional work comes in, the entity will contact the workers to ask if they are able to take on the job, and if they accept, they provide them with the appropriate information form the client in order to complete the job. • The information may be in the form of plans or specific repair request. • The workers can decide how and when they want the work to be done within the specifications required by the client (i.e. the client may request that the work be completed before a particular date, or outside trading hours) and is free to exercise their discretion in completing the work. • The client has to be satisfied that the job is completed according to their specifications before the job is listed as completed. • If the entity has a series of tasks to be done and they are completed by different workers, they will indicate that a task is to be done in a particular order. • Outside of those conditions, the worker is free to complete tasks at their own discretion. • The workers used by the entity run their own businesses and are able to take work from other companies, and take other work at their discretion. • If the workers are engaged with other work when a job request comes from then entity, they are under no obligation to accept the work. • There is an agreed understanding that the entity is not responsible for finding and allocating work to the workers, and that they are free to take work from others. • A lot of work in the industry is passed on by word of mouth and advertising is not necessarily required in order to gain work. • The workers are not required to wear or identify themselves with the entities' logo. • The workers are free to wear the logos of their own business names, or whatever safety clothing they choose. • The entity and the workers invoice on an hourly rate as it is usually not known to a reasonable degree of accuracy exactly what the job will cost in terms of time and materials. • Hours are worked to achieve a specific result such as to fix a specific issue for a specific location. • Each job is treated as a separate and specific task, and invoiced accordingly, and itemised where on the same invoice number. • Where a job may take more than a week to complete, progress payments may be paid to the workers in order to maintain the cash flow of the entity and to be fair to the workers who need to maintain their own cash flow. • In the industry, quoting a job and expecting the quote to be accurate at the completion of a job is a very difficult and unlikely concept. • The jobs are often urgent requests, and clients are keen to get the work completed as fast as possible to ensure that their business continues to run. • Where significant works are required, a quote is more likely to be prepared. This work is generally already quoted by the larger organisations and then the details are provided to the entity. • Due to the unknown nature much of the work, the industry workers work by an hourly rate, and extra material costs or supplies required to complete the job are part of the workers' costs. • No specific instructions are given as to whether the worker has to complete the work personally. • The workers are more likely to turn down the work rather than engage someone else on their behalf. • If they do take on the work, they are able to delegate work to others on site if required. • The workers engaged on jobs for the entity are required to correct any defect in their work in their own time. • Where workers are responsible for the ordering and fitting of materials and have made errors in their own work, they are required to rectify those errors in their own time and at their own expense. • Workers engaged by the entity are required to provide their own equipment, tools and vehicles for transport. • If a specific tool is required to complete a job, the purchase or hire of the tool is at the discretion of the worker. • Where a worker is required to purchase tools and equipment, the cost is not reimbursed by the entity, however, where a tool is required in one location , and is also used by the entity, it may be hired by the entity directly.

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

Reasons for decision: Summary: 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, so that outside the contractor is free to exercise their own discretion, because they work for themselves. In this case, the worker is contacted by the entity and offered the work, and the worker will accept depending on their availability. The entity provides the location of the task and the task specification. The worker is free to conduct the task any way they see fit provided it is within the specifications. If the entity has a series of tasks to be done at a particular location and they are completed by different workers, they will indicate that a task is to be done in a particular order. Outside of those conditions, the worker is free to complete tasks at their own discretion. | 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 workers used by the entity run their own businesses and are able to take work from other companies, and take other work at their discretion. They also have no obligation to work for the entity and are free to work for other organisations. They are also able to reject work offered to them by the entity. The entity is not responsible for finding and allocating work to the workers. The workers are not required to wear or identify themselves with the entities' logo. They are free to wear the logos of their own business names, or whatever safety equipment is appropriate. | 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 shopfitters/installers are rarely asked to specify, or be held to a quoted price, due to the unknown number of variables in each job. The entity and the workers invoice on an hourly rate as it is usually not known to a reasonable degree of accuracy exactly what the job will cost in terms of time and materials. Hours are worked to achieve a specific result such as to install specified fixtures, or to fix a specific issue for a specific location. Each shop and location are treated as a separate and specific task, and invoiced accordingly, and itemised when on the same invoice number. The nature of the industry is that the quotes are in reference to hours worked. However, as the quote is for an agreed or predetermined result, which is the installation, it appears that the relationship is that of a contractor rather than an employee | 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 workers are not given specific instructions about whether the worker has to complete the work personally. The workers are more likely to turn down the work rather than engage someone else on their behalf. If they do take on the work, the workers are able to delegate work to others on site if required. | 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 worker bears the risk and responsibility of liability. The workers engaged on jobs for the entity are required to correct any defect in their work in their own time. Where the workers are responsible for the ordering and fitting of materials and have made errors in their own work, they are required to rectify those errors in their own time and at their own expense. | 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 workers engaged by the entity are required to provide their own equipment, tools and vehicles for transport. If a specific tool is required to complete a job, the purchase or hire of the tool is at the discretion of the worker. Where a worker is required to purchase tools and equipment, the cost is not reimbursed by the entity. | Detailed Reasoning - Conclusion: After assessing the facts against the indicators in TR 2005/16, it is considered that the workers are contractors, and there is no obligation on the entity to withhold from payments made to the workers.