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.
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
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If Yes
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If no
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Evidence both parties intended the worker to be classified the same way
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Very Low – Medium Risk
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High Risk
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Comprehensive written agreement
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Very Low – Low risk
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High Risk
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Evidence the parties understood the tax and superannuation consequences of the worker's classification
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Low Risk
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High Risk
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No significant deviation in performance
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Very Low – Medium Risk
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High Risk
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Meeting the correct tax and superannuation obligations, and reporting appropriately
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Very Low – Medium Risk
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High Risk
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|
Obtaining specific advice
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Very Low – Low risk
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High Risk
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|
Treatment of the extended meaning of employee under the Superannuation Guarantee (Administration) Act 1992
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Low Risk
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High Risk
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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.
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