Edited version of private advice

Authorisation Number: 1052060644806

Date of advice: 28 November 2022

Ruling

Subject: PAYG withholding - payments to amateur players

Question

Does the recreational obligation have an obligation to withhold from payments made to amateur players under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Amateur players who are part of the recreational organisation represented the state in the game of rugby union during the 20XX season.

The amateur players:

•         are non-professional players who train and take part in games

•         have careers away from the game, and

•         do not have employment contracts, only insurance cover letters.

As a non-professional team, the amateur players do not generate any business revenue. All funding occurs via donations or grants.

Training is local but games are played throughout Australia. Training occurs after business hours. Players are at times required to take leave from their main income employment.

The recreational organisation pays all training expenses with regards to providing coaches and equipment as well as travel, meals and incidental costs for match days.

Costs related to travel to and from training (i.e. non-match days), the majority of meal expenses and training time (i.e. loss of revenue from not working) as well as some training gear (such as shoes, shorts and t-shirts) are paid for by the players themselves.

It is the intention of the recreational organisation to pay the amateur players a fixed amount of $X for the 20XX season to cover out-of-pocket expenses incurred by these players. The recreational organisation had made no commitment prior to the season commencing or during the season to compensate the amateur players for their out-of-pocket expenses.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Question

Summary

The recreational organisation is not required to withhold pay as you go (PAYG) withholding amounts from payments made to amateur players in accordance with section 12-35 of Schedule 1 to the TAA.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA requires an entity to '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 provision only applies where a payment is made as a consequence of their employment. The withheld amount is referred to as 'PAYG withholding'.

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees (TR 2005/16) discusses the Commissioner's view on whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA.

Paragraph 14 of TR 2005/16 states that there must be:

1. an employee
2. a payment of salary, wages etc to an employee
3. a payment made as a consequence of his/her employment, and
4. a payment made by an 'entity'.

In terms of the first condition, it is necessary to determine whether or not the amateur players are employees of the recreational organisation.

The term 'employee' is not defined in the TAA. For the purposes of withholding under section 12-35 of Schedule 1 to the TAA, the word 'employee' has its ordinary meaning.

In some cases, it is self-evident whether an employee and employer relationship exists. In other cases, it can be difficult to discern the true character of the relationship.

There is no single factor which is determinative of a contractual relationship. The totality of the relationship must be considered to determine whether, on balance, an individual is an employee.

The Courts have considered the common law relationship between parties in many situations, and a substantial and well-established body of case law has developed on the issue, from which a range of indicia has arisen.

Paragraphs 26 to 52 of TR 2005/16 sets out 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 are:

• 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?

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.

However, while control is important, it is not the sole indicator of whether or not a relationship is one of employment.

In the current circumstances, the amateur players agree to perform to the best of their ability and comply with all relevant rules and regulations. The team is not a professional team and there is no contract of employment.

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 payer's business, but the work is not integrated into the business; rather, it is an accessory to it.

Paragraph 32 of TR 2005/16 quotes a statement made by Windeyer J in Marshall v Whittaker's Building Supply Co:

... 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 the current circumstances, it is considered that the amateur players do not operate on their own account, as they are a member of a team that is operated and managed by the recreational organisation.

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.

As per the Facts, there is no employment contract and no remuneration had been negotiated or paid to the amateur players before or during the 2022 season, and the recreational organisation made no commitment prior to the season commencing or during the season to compensate the amateur players for their out-of-pocket expenses. The amateur players played the entire 2022 season with no expectation of any form of payment. As such, there were no payments to achieve a specific result.

Delegation

The power to delegate or sub-contract 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 sub-contract 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 the current circumstances, the amateur players were selected by the recreational organisation to be members of the amateur players' team. Considering the nature of the agreement, it is considered that the work could not be delegated or sub-contracted.

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 the current circumstances, the amateur players are required to maintain their own health insurance. These amateur players will be unable to play if they become ill, injured or unfit. It is therefore considered that the amateur players bear significant risk of the costs arising out of injury or defect from playing rugby for the recreational organisation.

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, a significant portion of the relevant tools and equipment are provided by the recreational organisation, with costs related to some training gear (such as shoes, shorts and t-shirts) paid for by the amateur players themselves.

Therefore, upon weighing the facts in the current circumstances against the above indicators, it is considered that the amateur players are not employees of the recreational organisation.

As the amateur players are not employees of the recreational organisation, amounts paid to these amateur players to cover their out-of-pocket expenses are not paid as a consequence of employment with the recreational organisation. Therefore, the recreational organisation does not have an obligation to withhold from payments made to these amateur players under section 12-35 of Schedule 1 to the TAA.

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