Employee or Contractor? Be sure to get the tax treatment correct

From time to time a New Zealand business will seek what is called a Binding Ruling from Inland Revenue. These tend to relate to ‘grey’ areas of tax law where the taxpayer wants to be certain of their tax treatment of a transaction or practice.

Essentially the taxpayer will provide the facts and ask Inland Revenue to tell them the correct tax treatment, which they can then rely on and not be worried about getting it wrong. Because they are quite expensive ($5,000 - $45,000 in Inland Revenue filing fees), they are generally only sought by larger companies. The good thing for the rest of us though is that the rulings are published and become a handy resource for tax advisors.

An interesting binding ruling was released in September relating to the distinction between employees and contractors. It was sought by Restaurant Brands which runs fast food brands such as KFC and Pizza Hut. Restaurant Brands was seeking certainty over whether their delivery drivers were indeed contractors rather than employees.

The question boils down to the degree of control the principal (E.g. Restaurant Brands) has over the individual (E.g. the delivery driver). In this case there was some control such as dress code, delivery method and other rules the drivers must follow. However, other factors outweighed these including the fact delivery drivers operated their own vehicles, could decide their own working hours, and could find their own replacement drivers. In the end it was determined that the delivery drivers were indeed independent contractors for tax purposes rather than employees.

This is a common grey area and your business engages employees or contractors (or if you are one yourself) and there could be some doubt about the tax treatment, there is quite a bit of guidance and commentary available on this point, including this latest Binding Ruling. If you need help please get in touch.


Brett Crombie

021 301 022 brett.crombie@straightedge.nz

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