Employment Relationships - Operation Of The Contractor Provisions

Revenue Ruling
Public Ruling

Ruling Number:	PUB-PT-2002-13
Title:	Employment Relationships - Operation Of The Contractor Provisions
Tax Line:	Pay-roll Tax
Legislative Reference:	Pay-roll Tax Act 1971
Previous Ruling:
Date of Ruling:	07/11/2002
Attachments:

Introduction

The purpose of this ruling is to provide information about employment relationships to assist employers and principals in determining whether services provided to them by another person are provided by that other person in the capacity of an employee or as a contractor.

Payments made under a contract of service or to an employee, under an employer/employee relationship and payments made under a contract for service which is not an employer/employee contract that falls within the definition of a relevant contract under Section 3A of the Pay-roll Tax Act 1971 ("the Act") are subject to pay-roll tax.

The relationship between an employer and an employee is a contractual one and is referred to as a contract of service. In general terms, a contract of service is an arrangement whereby an employee contracts to provide his/her labour for and as part of the employer’s business. In contrast, an independent contractor works in his/her independent business and in the course of that business contracts to achieve a result for the principal (a contract for service).

The term ‘principal’ refers to a person engaging a contractor to perform work, whereas the term ‘employer’ refers to the person who employs a worker in a common law employer/employee relationship. Even in the absence of an employer/employee relationship, the payments may still be subject to pay-roll tax under the contractor provisions.

Legal precedents have established a set of indicators for determining whether an employment relationship exists. As the legal principles applied by the Courts require that all circumstances of the parties’ relationship must be taken into account when determining whether or not an employment relationship exists, each case must be considered on its own facts.

Employee or Contractor?
For the purposes of the the Act, the definition of “wages” includes:
“any wages, salary, bonuses, commission, fringe benefits or allowances paid or payable…..to or in relation to an employee as such…”
and any such payments made to an employee (whether permanent, casual or temporary) will be liable to pay-roll tax.

The definition of wages also includes “any amount paid or payable under a relevant contract payment”. Contracts which attract a liability are referred to as ‘relevant contracts’ (refer section 3A of the Act). Pay-roll tax is payable on the labour component of contracts when:

the contractor or subcontractor works exclusively or primarily for one person or business, and
the object of the contract is to obtain the services of the contractor or subcontractor.

Pay-roll tax is payable whether the work is done by the contractor in-house, or goods are given out to a contractor who performs the work and re-supplies the goods and whether the contractor is an individual, a company, a trust or a partnership.

Particular note should be made of the general anti-avoidance provision contained in section 3D of the Act which enables the Commissioner to disregard a contract where payment for the services of a natural person is made to another person related to or connected with the natural person and has the effect of reducing or avoiding the liability to tax. The Commissioner may determine that any party to the contract is an employer and that any payment is wages.

As explained above, payments made for contract labour are generally classified as wages, on which pay-roll tax is payable, with the person paying for the labour being regarded as the employer and liable to pay the tax. However, as the Act excludes some relevant contracts from pay-roll tax obligations (ie payments for the services are not considered to be wages), the components of all contractual arrangements that fall within the definition of ‘relevant contract’ should be carefully examined to ascertain whether any of the exclusions (from the contractor provisions) contained in section 3A(3)(4)(4A)&(5) apply. Refer Ruling PUB-PT-2002-14 on Contractors Provisions - Exclusions

Note: the exclusion provisions relating to relevant contracts do not apply where an employer/employee relationship exists.

When deciding whether payments for human services are being made to an employee or to a contractor within the meaning of the Act, there are two main questions to address:

are the payments made for the supply of human services within the meaning of wages under the Act?
do the payments made for services by a contractor fall within the extended meaning of wages under the Act?

To answer these questions it is necessary to identify:

the relationship between the person paying for human services (the employer/principal) and the person who provides the services (the worker); and
how the arrangement for the supply of services actually operates.

In most cases distinguishing between an employee and an independent contractor will be relatively simple. However, changes in work practices have, in some instances, tended to blur the traditional distinctions between the two.

RULING

Background to determination of employer/employee relationships

The Courts have established a number of tests that can assist in determining whether an employer/employee relationship exists, but have made it clear that no single test can be relied upon. It is the totality of the relationship that must be considered in reaching a determination.

The interpretation of a contract of service is based on the principles of common law. If an employer/employee relationship exists there is a contract of service and the recipient is an “employee as such” for the purposes of the definition of wages under the Act.

The primary test for an employer/employee relationship is that of ‘control’. The power or right to control and direct how, where, when and who is to perform the work in question is a strong indication of an employer/employee relationship and would, prima facie, indicate a contract of service.

Where the result of the ‘control test’ is inconclusive, then the degree of integration will be considered. The ‘integration test’ may be used to determine whether the worker providing the services is conducting a business or is merely part of the operations of the employer/principal.

If the worker is an integral part of the principal’s business ( the type of services provided are ordinarily required by the business), then this is indicative of an employer/employee relationship. Likewise, if the worker is required to work in conjunction with other employees and the engagement is for a lengthy period.

Any written contractual agreement evidencing the terms and conditions under which the work is performed may be taken into consideration in determining if an employer/employee relationship exists. A declaration in the contract as to the nature of the relationship between the parties will not, however, be conclusive of the actual relationship. Where the relationship does not operate in accordance with the written contract, those terms and conditions will not be taken into account.

In summary, the following factors are among those the Commissioner considers indicative that a worker is providing services as an employee:

the person receiving the services exercises control over the manner in which the work is to be performed
there is an agreement for employment or appointment to staff, or the worker is called an employee
other workers doing the same job are treated as employees
work hours are defined
the worker providing the services is engaged on a continuing basis
the worker is paid regularly or periodically (rather than on a per job or a results basis)
the person receiving the services supplies the materials, equipment and tools to the worker performing the work
the worker’s PAYG income tax or sick leave, holiday pay, superannuation, workers compensation or other benefits are paid by the person receiving the services (for example, on the basis of the period worked)
the worker is required to perform the work personally and is unable to provide the services by employing or subcontracting another person to do the work
the services are integral to the business conducted by the person receiving those services

Existence of all or most of the above factors would strongly indicate that the person providing the services is an employee and payments made to that person are subject to pay-roll tax.

Factors that indicate that a worker may be providing services as a contractor:

the worker is engaged to produce a specific result
the worker is not subject to control or direction by the person receiving the service
the worker conducts an independent business and suffers all losses that may result from the provision of services
the worker provides all equipment and materials and personally suffers the loss if they are stolen or damaged
the worker carries his/her own risk of injury, sickness etc
the person receiving the services contracts with a company or trust which engages the worker

Where these factors exist, the person receiving the services will then be required to consider the relevant contract provisions contained in section 3A of the Act and, in particular, whether any of the exemptions provided under that section apply to exclude payments made under those arrangements from liability to pay-roll tax.

The liability flowchart attached to this Ruling illustrates the process and the questions to be answered by the employer or principal for the purpose of ascertaining potential tax liability arising under certain arrangements under which services are provided.

Liability to tax of payments to on-hired workers.

Payments by employment agencies to on-hired workers need to be considered under the specific employment agency provisions introduced into the Act from 1 July 2000.

In the absence of an employer/employee relationship, but where an employment agency contract exists, the provisions of section 2AB of the Act deem an agent to be the employer and the contract worker to be the employee of the employment agent.

Any payments made by the employment agent to the contract worker by way of remuneration, including amounts representing fringe benefits and/or superannuation, are deemed to be wages for the purposes of the Act and subject to tax.

Enquiries in relation to this Revenue Ruling should be directed to the Revenue Advice and Audit Section on telephone (03) 6233 5438 or e-mail at audithelp@treasury.tas.gov.au. Copies of this ruling may be obtained from our Web site at www.treasury.tas.gov.au/tax and follow the "Revenue Rulings" link.

All rulings must be read subject to Revenue Ruling PUB-GEN-2001-1.

Peter Coe
COMMISSIONER OF STATE REVENUE