Tourism service providers' payments made to tour guides or drivers - the income tax liability of those parties and the tour operator employing the guide or driver

Income Tax Act 1994 and Income Tax (Withholding Payments) Regulations 1979

We have been asked about the tax implications of payments made by tourism service providers (those selling services or goods to tourists) to those employed in the tourism industry, such as coach drivers and tour escorts, to encourage the taking of passengers or clients to those particular tourism service providers.  The payments are colloquially known as "commissions". 

This item considers the application of the Income Tax Act 1994 to each of the following parties:

• The tour operator - the business principal (e.g. a company or partnership) providing the service of tours.  The tour operator is generally the employer of the tour guide or coach driver who receives the payments.  References to the tour operator in this item are references to this entity.
• The tourism service provider - the entity making the payments.  The person in the business of providing goods or services to tourists, e.g. tourist attractions or activities, motels, and tearooms.  In this item the tourism service provider is referred to as the payer.
• The tour guides, tour escorts, or coach drivers - mostly individuals employed by the tour operators - referred to as the payee in this item.  It is the payee who receives payment from the tourism service provider.  Occasionally, a business entity, rather than an individual, may contract with the tour operator to provide tour escort or driving services. 

This item assumes that no employment relationship exists between the payer and the payee.  It is further assumed that no arrangement exists between the tour operator and the payer, e.g. a tour operator instructs the payee to favour a particular tourism service provider who will provide payments.

Application of the legislation

The tour operator's position

Sections BE 1(1) and NC 2(1) require PAYE to be deducted where an employee receives a source deduction payment from an employer.

"Source deduction payment" is defined in section OB 2(1) as:

... a payment by way of salary or wages, an extra emolument, a payment made to a specified office holder in respect of the activities of a specified office, or a withholding payment. [Emphasis added.]

The tour operators have no PAYE liability in respect of these payments under sections BE 1(1) and NC 2(1).  Firstly, given the assumption above that no relationship exists between the payer and the tour operator, the payments are not from the tour operators.  Secondly, the payments are not made in respect of or in relation to employment.  Case law shows that the employment must give rise to the payment, rather than simply being the context or setting for it.  Although the payee would not receive the payment but for being an employee, the "but for" test is not the test applied by the courts.  The payee does not receive the payment in respect of or in relation to his or her job, as the payment is premised on the payee doing something more than his or her job entails, namely choosing where to go on the basis of the payment.

Accordingly, the tour operator has no tax obligations in respect of the payments.

The payer's position

If the payments are made to New Zealand residents no obligation to deduct PAYE arises for the payer unless the payee is an employee of the tourism service provider.  It has been assumed for the purposes of this item that no such employment relationship exists.  Therefore, the payments are not "in respect of or in relation to employment" and no PAYE need be deducted.

Where the payments are made to non-residents there is an obligation on the payer, subject to the payee having a certificate of exemption, to make withholding deductions as the payments are within Schedule E (contract payments made to a non-resident contractor) of the Income Tax (Withholding Payments) Regulations 1979.

In relation to deductibility to the payer, while the matter will depend on the circumstances of the case, assuming the making of the payments to the payees can be substantiated, the Commissioner's practice is that these payments will generally be deductible.

The payee's position

The payments are not assessable as monetary remuneration under section CH 3 as, for the reasons stated above, they are not "in respect of or in relation to" employment.  However, the payee remains assessable under section CD 5 as the payments are income according to ordinary concepts.  This is because the receipts in question have the hallmarks of income (refer Reid v CIR (1985) 7 NZTC 5,176).  In terms of the payment's quality in the hands of the recipient, it is clearly a payment received for doing something.  Even if paid in advance, the payments are premised on the payee eventually bringing in clients.  Thus they are payments made in respect of services.  The payments are made for services rather than being gifts, because they are made in the context of business dealings. 

In some instances, instead of a cash sum, the payee may receive goods or services.

In those circumstances, the convertibility principle (Tennant v Smith [1892] AC 150 (HL), Dawson v CIR [1978] ATC 6,012) will operate to include as income benefits received that can be converted into money.  However, not all benefits will be income as income does not include what is saved from going out.  So, for example, clothing or passes to an attraction would be income as they could be sold by the recipient; but a free meal received by a coach driver every time he or she brought in tourists would not be.

Some payees will be assessable as New Zealand tax residents as they will satisfy the tests for residency in sections OE 1 and OE 2.  However, subject to any relevant Double Taxation Agreement, non-residents remain assessable as the income is deemed to be derived in New Zealand by section OE 4(l)(q) - income derived from contracts made or wholly or partly performed in New Zealand, or section OE 4(1)(u) - income derived directly or indirectly from any other source in New Zealand.  As noted above, there may be an obligation on the payer to deduct withholding deductions when the payments are to non-residents.

 A payee may be a business entity that, as part of its business, contracts services to the tour operator.   In this event, the payments will be gross income under section CD 3 as amounts derived from a business, or under section CD 5 for the reasons stated earlier. 

The tour operator has no tax obligations in respect of the payments as the payments are not from the tour operators, nor received in respect of or in relation to the employment of the payee.  Where the payments are made to New Zealand tax residents, the payer has no tax obligations.  Where the payments are made to non-residents, the payer has, subject to the payee having a certificate of exemption, an obligation to deduct withholding deductions.  A payee is liable, subject to the provisions of any relevant Double Taxation Agreement, to pay tax on the payments regardless of the outcome of the residence tests in sections OE 1 and OE 2, as the income is deemed to be derived in New Zealand under section OE 4(1)(q) or section OE 4(1)(u).  If the payee receives the payment in the course of the payee's business, the payment is gross income under section CD 3.  In other situations, the payments will be gross income under section CD 5.