At the beginning of December, the ATO released TR 2023/4: “Income tax: pay as you go withholding – who is an employee?” to replace the outdated TR 2005/16, after recent developments in case law.
Contents

At the same time, PCG 2023/2: Classifying workers as employees or independent contractors – ATO compliance approach was released, to step through the ATO’s investigative procedures for such matters. 

Totality of the relationship

Consistent with recent case law, the ATO have emphasised the importance of focusing on the totality of the relationship between the engaging party and the contractor. This is relevant when making a determination as to whether the individual should be considered an employee or a contractor for the purposes of PAYG, FBT and Superannuation Guarantee. Overall, the key distinction is:

“An employee serves in the business of an employer, performing their work as a part of that business, whilst an independent contractor provides services to a principal's business, but the contractor does so in furthering their own business enterprise; they carry out the work as principal of their own business, not part of another.”

The ruling goes through a number of factors that should be considered and emphasises consistently with recent case law, that where these factors are comprehensively detailed in the contract, then it is the legal rights and obligations that are relevant to the determination and not any evidence as to how the contract was performed (unless, for instance, the contract was merely a sham). No one factor will irrefutably establish the correct characterisation of the relationship, although certain factors carry more weight than others.

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Contracts

The ATO confirms that contracts can be wholly or partially oral, but there should be evidence that supports agreement to any such terms between parties. The nature of the relationship between the engager and contractor will be determined in the context of both written and unwritten terms once established. 

Control

As commonly understood, control (over the way in which the services are performed) has been highlighted as one of the most significant factors. Importantly, the right to control is vastly more indicative than its actual exercise.

Delegation

Similar to control, the ATO has highlighted the ability to delegate as a significant indicator of the worker not being an employee. The ruling notes that arrangements in which a different person might perform work in the worker's place as a result of unwellness or inability to work, will not necessarily be delegation, particularly where the contractor is not responsible for paying for the replacement.

Tools & equipment

Historically, a contractor providing their own tools would be indicative of an independent contractor arrangement. However, the ATO has emphasised that this is not necessarily inconsistent with an employment relationship. Fundamentally, the nature, scale, cost and any specialist nature of any tools and equipment used should be considered to determine the weight this factor should play in an ultimate determination.

Risk

The party that carries the associated risk for work or services completed under a contract will assist in establishing the characterisation of the relationship. However, clauses requiring a contractor to have public liability or indemnity insurance will not, in their own right, be indicative.

Labels

Labelling a contractor as such within a written contract is not determinative of the characterisation of the relationship. However, it does give an indication of the intentions of the parties, which if consistent, are a relevant consideration.

Insights into ATO Investigations

The ATO have provided guidance as to how resources will be allocated to contractor related investigations. The below criteria will be evaluated, and in turn, the associated level of risk will drive the level of investigation that will be undertaken:

Criteria

If Yes

If no

Evidence both parties intended the worker to be classified the same way

Very Low – Medium Risk

High Risk

Comprehensive written agreement

Very Low – Low risk

High Risk

Evidence the parties understood the tax and superannuation consequences of the worker's classification

Low Risk

High Risk

No significant deviation in performance

Very Low – Medium Risk

High Risk

Meeting the correct tax and superannuation obligations, and reporting appropriately

Very Low – Medium Risk

High Risk

Obtaining specific advice

Very Low – Low risk

High Risk

Treatment of the extended meaning of employee under the Superannuation Guarantee (Administration) Act 1992

Low Risk

High Risk

Next steps

Get in touch with our Employment Solutions Team if you require assistance with understanding the employment tax obligations arising from your employee or contractor arrangements.

Learn more about how our Employment tax services can help you

Learn more about how our Employment tax services can help you

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