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There have been two recent decisions in which taxpayers have won the independent contractor argument in the Administrative Appeals Tribunal (AAT).
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Independent contractor wins against the ATO
05 June 2014
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Naturally, if the contractor is an employee, then the PAYGo withholding and superannuation guarantee obligations fall on the employer (head contractor). Moreover, other obligations such as those under state and territory legislation such as workcover and payroll tax issues may also arise together with significant
penalties.
These two most recent decisions fall on their own specific facts following the application of the ‘totality’ of different factors that are applied to discern whether the relationship is one of employment or independent contractor. Thus, other taxpayers need to be mindful that these decisions may not provide support for their particular facts.
Dominic B Fishing Pty Ltd and Commissioner of Taxation [2014] AATA 205
This case examined whether crew members on a commercial fishing vessel operated by the Dominic B Fishing Pty Ltd (Taxpayer) were employees for the purposes of s 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA). This section provides that in addition to a common law employee: if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.
The vessel, which was usually captained by a director of the Taxpayer, would be away at sea for an average of 10 days at a time. The captain was joined on each voyage by up to four experienced fishermen. The crew members were engaged for each voyage. The vessel would anchor at a central spot each day and the fishermen would each board a small motorised vessels called ‘dories’. The dories would head off to remote locations where the crew members would
spend all or part of the day fishing.
Usually the end of the day the dories would return to the vessel, which acted as a ‘mother ship’. Each fisherman would unload his catch. At the end of the voyage, when the vessel returned to port, the catch would be unloaded and delivered to a wholesaler or processor under the terms of a contract with the Taxpayer. The Taxpayer would pay the individual fisherman under the terms of the separate agreement between the Taxpayer and each fisherman.
Once the crew was gathered, they would set about the task of preparing the vessel for sea. Mr Hemingway (a fisherman witness) said he could bring his own equipment, or equipment would be supplied. He said the dories were allocated at the start of the voyage and crew members knew they were responsible for cleaning all of their gear and the dory they had used. Both the skipper and fisherman agreed the captain of the vessel was ultimately responsible for
the safety of the vessel, but they also insisted decisions about where to fish and other operational matters were made jointly amongst the skipper and his crew.
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Each crew member operated independently, according to Mr Hemingway. He was not obliged to fish anywhere in particular, and he did not take instruction from the skipper or his crewmates as to how or where he should fish. He said each dory might travel several miles from the mother ship, and be gone all day. The Tribunal member (Senior Member Bernard J McCabe) said he had no reason to doubt the individual crew members enjoyed significant autonomy in the conduct of their fishing operation.
Each fisherman had to sign a ‘Joint Fishing Adventure’ agreement (Agreement) prior to going on a voyage which covered:
• The cost of maintaining the vessel during the voyage was the responsibility of the Taxpayer, but all of the parties would make a contribution towards the operating costs of the vessel subject to a maximum amount. The Agreement split the costs in fixed shares, with the Taxpayer and the skipper shouldering bigger shares than the crew.
• The fish would be sold to a buyer at the conclusion of the voyage. Each of the parties to the Agreement was entitled to a share of the gross proceeds of the catch in accordance with the schedule.
• Each party was required to bear the costs of sickness and accident insurance, and it was agreed ‘no party is liable for any accident or mishap that occurs during the voyage.’ The remuneration arrangements for crew members. These were not clearly provided for in the Agreement. It was agreed that a fixed amount would be deducted by the Taxpayer from the price of the fish that were caught to cover operating costs. Each fisherman would then be paid around
30 per cent of the market value of the fish he caught.
The Tribunal held that:
• The terms of the agreement between the parties contemplates them operating as joint venturers – independent business people who are cooperating for the limited purpose of catching and ultimately selling fish. Individual crew members brought their skills and preferred equipment to the venture, and they could exit the arrangement if they wished ...
• The contract is not wholly or principally for the labour of the crew member. ... It is true the agreement contemplates the crew members contributing labour, in particular, but they are remunerated on the basis of an outcome. If there was no outcome – if they did not catch any fish – the director said in his evidence there would be no remuneration.
• I understand many people within the commercial fishing industry are interested in the outcome of this case. Fishermen and their advisers expect the decision will have implications for how they conduct their operations and engage their workforce. If they are looking for authoritative guidance, they will be disappointed. Each case turns on its own peculiar set of facts. One must examine the precise details of the engagement in each case in order to characterise it. Generalisations – whether by the industry and its advisers, or by the Commissioner – are impossible, which is as it should be.
• The crew members in this case were not employees within the meaning of the Act during the period under review. It follows the objection decision should be set aside.
XVQY and Commissioner of Taxation [2014] AATA 319
The AAT has held that two licensed plumbing subcontractors (Workers) engaged by Enterprise Pty Ltd (Taxpayer; the principal subcontractor) to carry out maintenance jobs under a sub-contract from a government housing authority were not employees but independent contractors.
Accordingly, the Taxpayer was held not to have a superannuation guarantee shortfall. The ATO's objection decisions was therefore set aside.
The Taxpayer’s first witness was Chester Pty Ltd which is the trustee of the XVQY Family Trust (Chester). Mr Ashley was the director of Chester. The Taxpayer’s second witness was Mr Buckley, a sole proprietor plumbing contractor who has his own ABN.
The ATO relied on s 14ZZK of the Taxation Administration Act 1953 (TAA) that puts the onus on the Taxpayer to prove all facts on which it seeks to rely to discharge its burden in establishing that the assessments are excessive. The ATO referred to Bromberg J’s comments in On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366 (‘On Call’) at [221]-[222]:
It was for On Call to adduce sufficient evidence to discharge its onus. In relation to each of the panel interpreters utilised by On Call during the relevant period, it was necessary for On Call to establish that the person was not an employee ...but was instead an independent contractor. In the application of the totality test, that onus called upon On Call to establish that each relevant interpreter owned and operated a business.
The Taxpayer accepted this onus. Note, this can prove a difficult hurdle for many taxpayers to succeed on and the Taxpayer managed to adduce sufficient evidence to win this case. Broadly, the two Workers would typically go into the Taxpayer’s office each morning and take a list of the jobs. There were no set times or instructions on how to handle them. Each Worker had to undertake any repair job in their own time. There were no hourly rates and each item had a fixed price. Workers would get a share of profit less the cost of Taxpayer’s materials used.
The other factors considered by the Tribunal included:
There is a massive discount on bulk buying available to the Taxpayer on items such as pipes, tap wear, tap fittings and washers. Workers were charged for the actual materials used by them.
- The Workers decide for whom they wish to work. Workers regularly declined to accept work from the Taxpayer on the basis that they have their own jobs to do.
- The Workers knew they had to pay their own superannuation and were not entitled to leave payments. Moreover, the Workers had public liability insurance and their own Workcover to protect their earnings.
- A tenant of a government house would not know any name in the chain of contractors apart from that of the government authority. The Workers did not have any signage, did not wear a uniform or have any business cards.
- The Workers could delegate all or part of the job. How they choose to finish a job is up to them.
- Workers would provide all their tools. They have drain machines, drain cleaning equipment, oxy acetylene, and gas.
The Hon R Nicholson (Deputy President) of the AAT stated:
- As Bromberg J stated on a specific issue in On Call at [220], the task to be undertaken is not be performed mechanically by checking off against a list of indicia and without recognising that different significance may attach to the same indicators in different cases. The critical task is to weigh the overall effect of the evidence on whether the worker concerned was in a relationship of employment or was an independent contractor.
- Having regard in particular to the evidence in relation to control, to the non-representation of the employer by the worker, to the results character of the oral contract for engagement of the worker, to the capacity of a worker to delegate, to the assumption of risk by the worker and to the significant ownership by the worker of tools and equipment I conclude that the workers were not employees within the usual meaning of that word.
Conclusions
Both these decisions fall on the particular facts of each case. Indeed, the Tribunal in the first decision confirmed that each case turns on its own peculiar set of facts. One must examine the precise details of the engagement in each case in order to characterise it. Generalisations – whether by the industry and its advisers, or by the Commissioner – are impossible, which is as it should be. Employers and principals should review every contractor arrangement to determine
whether any are at risk of constituting an employment relationship with consequential follow on obligations such as PAYGo, superannuation guarantee and state/territory obligations.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
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