Financial Services

PAYG Payment to Contractors or Individuals Policy

Further information

The Australian Taxation Office (ATO) provides various key indicators to assist in differentiating between services provided by contractors and employees.

Policy statement

Employee versus contractor

In essence, the ATO states that an employee works to provide his or her labour in the service of the employer (typically to enable the employer to achieve a result), while an independent contractor works in his or her own business (or on his or her own account). The University should examine each individual contract or arrangement in order to determine whether the person is engaged as an employee or as an independent contractor.

To determine whether someone is an employee under common law there is no exclusive measure. The totality of the relationship between the University and the individual must be considered. For example, a contract that purports to characterise the relationship as principal and independent contractor cannot be effective if it contradicts the effect of the agreement as a whole.

Key factors to be considered under common law to determine the nature of the relationship as employee or contractor are detailed below. Note that all factors must be considered and no one factor is determinative:

  • Control: an employer has lawful authority over the manner in which work is performed; a contractor works to achieve the result on his/her own account.
  • Results contracts: there is strong evidence of contracting where the substance of the contract is to achieve a specified result.
  • Power to delegate: a contractor will usually have ability to arrange his/her own personnel or subcontractors.
  • Risk: a contractor usually bears the risk of commercial loss, arising out of injury or defect of work.
  • Conditions of engagement: the payment of employment benefits such as annual leave; use of assets provided by payer and/or allowances or reimbursement of expenses for use of own materials or assets; discretion over task allocation and termination of engagement would usually indicate an employee relationship.
  • Integration test: a contractor would usually be seen to be carrying on business for themselves on their own account, an employee acts in the service of a superior.

Refer to the employee and contractor comparison, which sets out a summary of the key indicators and illustrates the different application of these indicators to an employee or contractor relationship. This attachment should be used by the Universities to assist in determining whether the payment is to an employee or a contractor.

Personal services income

Personal services income is income earned from the effort of an individual, such as their labour or skill. Income is still personal services income even if that income is paid or payable under a contract.

You have personal services income if:

  • you are an individual who earns income by providing your personal efforts or skills, or for producing a result from your personal efforts or skill
  • you are a company, partnership or trust and your income includes an individual's personal services income (personal services entity). If you have personal services income of more than one individual, each individual must be looked at separately.

Income is not personal services income if it is mainly:

  • for supplying or selling goods
  • for granting a right to use property
  • generated by an income-producing asset.

New measures were introduced in July 2000 to entities that earn personal services income and are not personal services businesses. The measures apply where personal services income is diverted to an entity (company, partnership or trust) and that entity is not carrying on a personal services business.

Where the measures apply they deem that the personal services income is earned by the individual performing the services and will be included as assessable income in the individual's tax return. The measures also limit the deductions available to the individual.

To determine whether an entity is conducting a personal service business, there are a number of tests and if the entity earns 80 per cent or more of its income from one source, a determination from the Commissioner of Taxation will determine if it is a personal service business. This is an issue for the contractor and the personal service entity.

It is important to note that these provisions do not affect the relationship that the University has with the entity. Therefore, if the University has a contract with the entity (company, partnership or trust), the University makes payments directly to the entity and the entity has provided its Australian Business Number ("ABN") then there is no requirement for the University to withhold from any payments made to the entity. This will be the case even where it is determined that the personal services income provisions apply to the entity.

Thesis examiners

If thesis examiners are independent contractors and are not able to provide an ABN number the University is obliged to withhold PAYG. The withholding will be for no ABN and will be at a rate of 46.5 per cent.

Where the thesis examiner is an employee of the University, the University will be required to withhold at the rates published by the ATO.

Scholarships

There is a general exemption for most scholarships, bursaries, or other educational allowances derived by a student (of any age) receiving full time education at a school, college or University. "Full-time education" in this context means a full-time course as opposed to a part-time course and does not preclude the student from holding a part-time job.

Payments received by a student "on the condition" that the student will (or will if required) become, or continue to be, an employee of the payer or enter into, or continue to be a party to a contract for labour with the payer are excluded from the exemption.

Reimbursements

Reimbursements that are not covered by allowances/per diems above may be subject to FBT.

Honorariums (gifts/voluntary payments)

Gifts or voluntary payments to a person as an individual, whether because of that person's personal qualities or needs (such as the recipient's dire financial circumstances) or as a token of gratitude for past personal advice or friendship are not income and are therefore not taxable. This is because the gift is not related in any way to the personal exertion of the individual.

If the gift is to the person as a product or incident of employment or a reward for services (including past services) it will be assessable income. Other factors taken into account to determine whether the payment is an honorarium and not taxable include the periodicity, recurrence or regularity of the payment.

The key conditions for a payment to be exempt from tax include:the payment does not represent direct payment for a service;

  • it is a once-off payment unlikely to be repeated
  • it is made voluntarily by the payer
  • the payee has no expectation of the payment and
  • the payee has no legal right to receive the payment.