Whether a worker is an employee or contractor for tax purposes is an area that the ATO has placed recent significant focus due to recent landmark High Court Decisions providing further judicial guidance requiring the ATO to update its public guidance on these matters. In addition, there is greater community sentiment that unpaid superannuation is effectively amounting to “wage theft” which impacts retirement outcomes.

On 15 December 2022, the ATO issued Draft Tax Ruling 2022/D3 and Draft Practical Guidance 2022/D5 to provide updated and new guidance on what constitutes an employee and the ATO’s compliance approach to assess the level of risk when reviewing such arrangements.

From our experience, there are instances where a worker lodges an unpaid super claim directly with the ATO against an engaging party and this often comes with surprise and angst to the engaging entity / purported employer due to for example, the arrangement being documented as a “contractor” relationship and the worker engaging through their own entity. It is clear from the ATO updated guidance these factors are only given minor weighting and the key issues relate to the broader contractual terms of the worker relationship and whether effectively the worker is working “in the business” of the engaging party.

Key Points

Whilst ultimately whether a worker is an employee or contractor for PAYG and superannuation purposes requires identifying the ‘totality of the relationship’ between the worker and the engaging entity, some of the key points that can be taken away from the updated ATO guidance is as follows:

  • The central question is whether the worker “is working in the business” of the engaging entity.
  • Where a clearly written contract exists between the worker and the engaging party, the legal rights and obligations of the written contract will form the basis of determining the relationship unless there are expressed variation / discharge or waivers of the contract or the contract is considered a sham.
  • The fact that a worker may be conducting their own business, including having an Australian Business Number, is not determinative. A person conducting their own business may separately be an employee in the business of another.
  • The ‘label’ which parties choose to describe their relationship, whether within a written contract or otherwise, is not determinative of, or even relevant to, the correct characterisation.
  • The level of control the engaging party will have over the worker is a key indicator.
  • Where a worker has the ability to delegate their duties, this will indicate an independent contractor relationship.
  • Results based contracts (e.g. paid a fixed sum for a specific outcome) is a strong indicator of an independent contractor relationship rather than being paid for hours worked.
  • The provision of tools and equipment by the worker is a factor to be considered but this needs to be considered in context of the work provided / industry.
  • Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee.
  • If an independent contractor performs services in the course of their own business, it would be common for the contractor to be able to generate goodwill for that business.
  • The ATO has continued its approach to provide a publicly available compliance framework that ATO Case Officers will use when reviewing these arrangements to allow taxpayers to assess their situation against the ATO risk framework. These risk areas are classed as “risk zones” and each category will determine the level of ATO review that will be undertaken.

Draft Tax Ruling 2022/D3 and Draft Practical Guidance 2022/D5 are currently in draft form for public comments and feedback by 17 February 2023.

Planning Considerations

As community expectations regarding unpaid superannuation as wage theft increases and the ATO is under pressure to increase recovery in this area, it is prudent for employers where applicable to revisit their current independent contractor relationships to determine the level of risk that may arise from incorrect classifications for tax purposes.

Whilst there may be time and costs involved, a review can provide assurance to the Board / owners on these matters and to quantify any necessary corrections which should be lower than if otherwise reviewed by the ATO and further penalties and interest are applied.

HLB Mann Judd has had recent relevant experience on these matters and can assist to review your matters and share our expertise to assist.