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Posted: May 26 2002 by ICA (Independent Contractors of Australia)
Independent Contractors and Tax (Update May 26 2002)
The ATO has released perhaps the first and most important fact sheet on the tax status of independent contractors since the resolution to the tax debate with PAYG and PSI legislation. (See the Tax Issues section of this web site)
The fact sheet states the ATO's position following the Vabu-Hollis High Court case (August 2001, see the Issues Library on this web site) and reinforces ICA's view that for practical purposes the common-law test for independent contracting is the principal determiner for access to business-type tax status. In other words, if you are clearly an independent contractor under common law, you have access to business type tax treatment.
The main excerpts from the 3-page fact sheet are included below. ICA comment follows the fact sheet excerpts.
Australian Taxation Office Fact Sheet
(Sourced May 2002)
'Bicycle Couriers- Implications of The High Court Decision In Hollis V Vabu Pty Ltd Fact Sheet.
Background
In 1996 the Court of Appeal in the Supreme Court of New South Wales held in Vabu Pty Ltd v Federal Commissioner of Taxation that the couriers engaged by Vabu were not employees for the purpose of the Superannuation Guarantee (Administration) Act of 1992 (SGAA). Since this decision, couriers have been treated for tax and superannuation purposes as independent contractors.
The High Court in the 'Hollis Case'
The Hollis case concerned the characterisation of contractual arrangements between the courier firm Vabu and its bicycle couriers. The majority of the High Court found that the bicycle couriers were common-law employees. The effect of the decision was to override the 1996 decision of the NSW Supreme Court.
In reaching its decision, the High Court applied long-established tests for deciding whether an employer/employee relationship exists. In particular, the High Court considered:
a ... the lack of discretion for couriers to accept or reject work
b ... the identification of the courier with the businesses of the courier's firm
c ... the administration of pay and conditions consistent within employer relationship
d ... the provision of necessary tools and equipment (that is, mode of transportation) by the couriers was not consistent with an employment relationship, and
e ... the considerable scope for the actual exercise of control by the courier firm over the performance of the couriers activities.
The Tax Office's position in light of the decision in the 'Hollis case'
Bicycle couriers who are engaged on similar terms to those bicycle couriers employed by Vabu are common-law employees. It follows that their 'employers' may have obligations under the pay as you go (PAYG) withholding system, the Fringe Benefits Tax Assessment Act 1986) (FBT) and the SGAA from the date of the High Court decision.'
The fact sheet explains that where bicycle courier companies are using contracts similar to those in the Hollis case, the employers must from 1 July 2002:
Withhold tax amounts from salaries or wages.
Pay FBT.
Self-assess on superannuation obligations which may require superannuation payments under superannuation guarantee obligations.
Further, bicycle couriers who are employees are not able to register for GST or hold an ABN
ICA Comment
The Hollis case involved a damages action against Vabu Pty Ltd when an unidentified bicycle courier wearing Vabu company insignia knocked over a pedestrian. The High Court only decided on the common-law status of the unidentified courier, finding that courier, and only that courier, to be an employee of Vabu. However, it is reasonable of the ATO to treat bicycle couriers as employees where they work under contracts similar to the particular Vabu employee contract in the Hollis case.
Likewise, it is important to note that where a contract varies from the Hollis contract, bicycle couriers may well be independent contractors. The two Vabu cases (SGAA and Hollis) demonstrate the importance of the totality of the relationship, the balance of evidence that the courts will consider, and how every case is individual under common law. (See 'Who is an independent contractor?' on this Website.)
The two Vabu cases and the treatment by the ATO demonstrate the importance for all independent contractors in all industries of ensuring strict operational adherence to common-law indicators if they wish to be certain of business-tax treatment by the ATO.
On PAYG issues, it needs to be noted that independent contractors are subject to withholding arrangements as are employees. However, the administrative processes are different to employee arrangements. For bicycle couriers affected by the Vabu case, changes in administration of PAYG withholding tax will be necessary. This may have some cash-flow implications for bicycle couriers.
In relation to Fringe Benefits Tax and superannuation, the Hollis case may affect cost structures in the bicycle courier industry. Hollis-style bicycle couriers may be unlikely to pass the results test under the Personal Services Income legislation.
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