Australia | Employment Tax | Guidance on contractors now finalised

In early 2023 we examined a draft ruling and guideline published by the Australian Taxation Office (ATO) on worker classification. The ATO has now officially finalised this guidance through the following:

• Taxation Ruling (TR) 2023/4 Income tax: pay as you go withholding – who is an employee
• Practical Compliance Guideline (“PCG”) 2023/2 Classifying workers as employees or independent contractors – ATO compliance approach

The finalised documents are geared towards educating stakeholders on worker classification intricacies whilst offering essential governance measures in the accompanying guidance for employers to adopt.

The recently finalised ruling aids in understanding the ordinary meaning of an “employee” for the purposes of subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA). Similar to our commentary on the draft rulings, the finalised rulings still do not provide a definitive answer to the question “is my worker an employee or a contractor?”. Despite that, the finalised guidance released by the ATO offers information for consideration and a compliance framework that organisations can incorporate into their worker classification process.

TR 2023/4 reaffirms several general principles published in the initial draft document. However, notable changes have been introduced in the finalised version, reflecting consideration of numerous submissions received by the ATO and recent case law developments in the field of worker classification. Employers should particularly take note of the following:

• The ATO has outlined a structured approach to assist employers with identifying the totality of the relationship. The initial step involves determining the identity of the contract between the parties followed by identifying the terms of the contract whether written, verbal or a combination. Once these terms have been established, it is these terms alone that are relevant to a determination of the nature of the worker relationship. In some cases, evidence surrounding a contract’s formation or how a contract is performed, may be taken into account to demonstrate variations, waivers, discharges of the original agreement, or whether the contract is a sham.
• The ATO also discusses the idea of the “right of control” where it notes that the ‘the importance of control in this context lies not in its actual exercise, but rather in the contractual right of the employer to exercise such control’. While no single factor definitively indicates an employment relationship, the ATO does place importance on determining who holds the right to control a worker’s actions. The ATO’s view is that when an employer holds the right to control how, where and when a job should be performed, it is more likely an employer/employee arrangement rather than a contractor arrangement. The ATO also acknowledges that an employer may not always retain a right to control all aspects of how, when and where work is performed.
• The updated ruling provides a more detailed explanation and consideration of the ability to delegate, subcontract or assign the work, taking into account the Full Federal Court decision in JMC Pty Ltd v Commissioner of Taxation [2023].  Similar to other countries, the right to delegate, subcontract or assign work to another person, is generally viewed as inconsistent with an employee relationship. The ATO explores this topic and whilst this indicia is not a determinative factor, it should be viewed in totality, with the other terms of a contract. As an example of this, the ATO states that where the right to delegate is fettered, the degree of inconsistency between terms relating to delegation and other terms of a contract needs to be considered.

The ATO has complemented the taxation ruling with the PCG offering insights as it outlines a risk framework for employers to adopt ensuring compliance. Whilst the PCG closely aligns with its draft version, the ATO has added additional guidance to assist employers in their worker classification governance framework. In our previous reporting, we outlined five criteria for employers to assess their worker classification risk. Notably, in the updated finalised documents, two new risk criteria have been introduced, being the requirement for a comprehensive written contract and the consideration of the extended definition of “employee per SGR 2005/1”. Organisations therefore need to satisfy all seven of the criteria for an arrangement to be considered very low risk.

The table below, summarised from PCG 2023/2, provides an overview of the risk levels and criteria for employers to evaluate their risk ratings, noting that if the circumstances surrounding the formation of the contract do not fall in the below risk categories, then it will be considered high-risk.

It is worth noting that despite its title as “Classifying workers as employees or independent contractors”, the ATO reaffirms that the criteria in this guidance is not to be used to determine if a worker is an employee or a contractor. Rather, the finalised guideline outlines the ATO’s compliance approach for businesses that engage workers. Importantly, this provides a framework that employers can use to mitigate their risk of a wrong worker classification as it sets out how the ATO will allocate compliance resources, based on the risks associated with the classification.

The primary challenge for employers continues to lie in confirming worker classification under both the common law and extended definition of employee per SGAA. The finalised taxation ruling confirms the significance of the written contract when evaluating the nature of a relationship.

However, it is also important to note that the employment law landscape is evolving with the enactment of the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023.  Contrary to the guidance provided in Jamsek, Personnel Contracting and TR 2023/4, the Closing Loopholes Bill proposed to reinstate the multifactorial test as the correct approach to characterise a relationship as one of either employment or contractor for Fair Work purposes.  Whilst the Bill did receive royal assent, the originally proposed measures in relation to the definition of “employee”, have been deferred for consideration by Parliament in 2024.

The disparity between the ATO’s view in TR 2023/4 (which applies for tax and superannuation purposes) and the proposed definition in the Closing Loopholes Bill (which applies for Fair Work purposes) emphasises the importance for employers to correctly classify workers as either employees or contractors. If these measures pass, this may create an administrative and payroll burden for employers, as they now have to navigate two separate definitions of employee versus contractor for different employer obligations.

We recommend employers follow the ATO guidance and ensure that:

• There is a comprehensive written contract between both parties
• The totality of the working relationship is evaluated with reference to the legal rights and obligations stipulated in the contract
• Employers have confirmed their worker classification under both the common law definition of employee using TR 2022/D3 and the extended definition of employee under subsection 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) using SGR 2005/1
• The worker understands their classification and the taxation and superannuation implications of the classification
• The contractual rights and obligations agreed by the parties reflect the changes in the working arrangement
• Where necessary, specific advice is sought by either the in-house counsel or an appropriately qualified third party, such as a tax professional or a private ruling by the ATO

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Maria Ravese
Partner

Kristy Whitnell
Director

Further information on Vialto Partners can be found on our website: www.vialtopartners.com

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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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Further information on Vialto Partners can be found here: www.vialtopartners.com

Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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