Employee or Independent Contractor? The ATO’s Clarification and Compliance Approach
The Australian Taxation Office (ATO) has published updated guidance to assist organisations in understanding whether a worker is an ‘employee’ having regard to the recent findings of the High Court of Australia.
The updated guidance is intended to assist organisations in evaluating Pay As You Go Withholding and Superannuate Guarantee obligations pursuant to the Taxation Administration Act 1953 (TAA) and the Superannuation Guarantee (Administration) Act 1992 (SGA Act).
The ATO Publications
In 2022, the High Court of Australia published the decisions of CFMEU & Anor v Personnel Contracting Pty Ltd  HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors  HCA 2 (Jamsek). Both Personnel Contracting and Jamsek clarified when a worker is an ‘employee’ or an ‘independent contractor’. A summary of these decisions can be found here.
Following from the High Court of Australia’s decisions, the ATO has issued two draft publications:
- Draft Taxation Ruling 2022/D3 Income tax: pay as you go withholding – who is an employee? (TR 2022/D3) (Draft Taxation Ruling) which replaces Taxation Ruling 2005/16: Income tax: Pay As You Go - withholding from payments to employees which has now been withdrawn (TR 2005/16W); and
- Draft Practical Compliance Guideline PCG 2022/D5: Classifying workers as employees or independent contractors – ATO compliance approach (PCG 2022/D5) (Draft Compliance Guideline).
(collectively, the ATO Publications)
The Draft Taxation Ruling explains the Commissioner for Taxation’s interpretation of the meaning of ‘employee’. In short, consistent with Personnel Contracting and Jamsek, the Draft Taxation Ruling reiterates that primacy of contractual obligations prescribed in the written agreement between the engaging entity and the worker and the shift from ‘substance over form’.
The Draft Compliance Guideline outlines the Commissioner for Taxation’s risk framework for worker classification arrangements with practical administration to assist those parties to understand when and how the ATO will use its compliance resources towards contracting arrangements. The ATO’s approach utilises a risk-based methodology set out in four ‘risk zones’ ranging from very low to high. An engaging entity can determine which ‘risk zone’ its contracting arrangements will likely fall into by refence to the specific criteria.
The ATO Publications are still, as the name of each publication suggests, in the ‘draft’ stage and are yet to be finalised and implemented. The ATO Publications remain open for public consultation until Friday, 17 February 2023.
Independent contractors may still require superannuation contributions
Notably, the Draft Taxation Ruling is not binding on the Commissioner for Taxation for superannuation purposes and does not clarify the extended definition of employee prescribed in the SGA Act which includes, amongst other things, that a person working a contract wholly or principally for their labour will be classified as an employee.
Accordingly, whilst it may be the case that a worker will not be deemed an employee for the purpose of the Pay As You Go Withholding obligations or other entitlements under the Fair Work legislation, they may still be deemed an employee for the purpose of Superannuation Guarantee payments.
The Commissioner for Taxation is still reviewing its guidance with respect to the SGA Act as a result of an unresolved issue following the decision in Jamsek. In that case, the workers entered into contracts with ZG Operations Pty Ltd in their capacity as a partnership and not as an individual.
Whilst there has previously been a view that contractors who operate through a corporate entity will not fall within the common law or extended definition of an employee, the courts have more recently considered that a person contracting as an incorporated entity may not be sufficient to take a worker outside the scope of the SGA Act where the substance of the relationship is one of employment.
As the Commissioner for Taxation was not a party to the High Court matters, this issue was remitted back to the Federal Court and judgment has not yet been handed down.
Take Home Messages
The ATO’s recognition and application of the High Court of Australia’s findings in Personnel Contracting and Jamsek reiterates the approach to assessing a relationship between an engaging entity and a worker. In practice, the ATO Publications should assist organisations in demystifying these arrangements with confidence with the view to mitigate any requirement for the ATO to utilise its compliance resources.
The ATO’s Publications also serve as a timely reminder for businesses to review existing agreements with its workers to ensure it is correctly classifying those workers.to avoid ‘sham’ contracting and to be mindful of the extended definitions under the SGA Act.
This is especially the case for those engaged in ‘tripartite’ arrangements where there are contractual working arrangements involving three or more parties. This could include a franchisor, franchisee and a worker, and within the labour hire and health services industries where it is crucial to determine whether a legal relationship exists for the performance of work and with who.
To learn more about the ATO Publications or should you have a query regarding the engagement of your organisation’s workers, , please Lincoln Smith on +61 8 8210 1203 or email@example.com, Marissa Mackie on +61 8 8217 1361 or firstname.lastname@example.org, or Thomas Tagirara on +61 8 8217 1337 or email@example.com.