13 January 2023
Employment Tax
Summary
After the notable High Court decisions regarding employees and contractors in CFMMEU & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2 (Personnel and Jamsek), the Australian Taxation Office (ATO) announced that they would be reviewing previously issued rulings related to the meaning of the term “employee”.
The ATO has now issued a draft ruling and accompanying guidelines:
● TR 2022/D3 Income tax: pay as you go withholding – who is an employee
● PCG 2022/D5 Classifying workers as employees or independent contractors – ATO compliance approach
The recently announced draft ruling also aids in understanding the ordinary meaning of an ‘employee’ for the purposes of subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA). However, the ruling and the accompanying guidelines do not provide a definitive answer to the question “Is my worker an employee or a contractor?”. It is important to note that the new draft ruling, TR 2022/D3 replaces TR 2005/16 Income tax: Pay As You Go – withholding from payments to employees. The draft publications shed light on worker classification and provide guidelines on how to classify workers and the ‘totality of the relationship’ by having regard to indicia of employment identified in case law.
The Detail
TR 2022/D3 re-affirms a number of general principles that employers have learnt in relation to worker classification since the High Court cases, namely:
● Evaluate the totality of the relationship by referencing solely the legal rights and obligations which constitute that relationship
● It is not acceptable to look into subsequent conduct and work practices of the relationship unless the validity of the contract has been challenged as being a sham, or the terms of the contract have been otherwise varied.
● Labelling a relationship as that of “contractor” or “employee” is not determinative of characterising a relationship.
Apart from the changes to ascertaining the ‘totality of the relationship’, it is worth noting that the various indicia of employment identified in case law remain unchanged, with the caveat being that they are to be considered only for the purpose of determining the contractual rights and obligations of the parties.
PCG 2022/D5 provides useful guidance to employers on the ATO’s compliance approach for businesses that engage workers. It is worth noting that despite its title as “Classifying workers as employees or independent contractors”, the guidance does not simplify the process of determining whether a worker is an employee or a contractor. Rather, PCG 2022/D5 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.
Essentially, the ATO compliance approach consists of four risk zones as shown below, noting that if the circumstances surrounding the formation of the contract does not fall in the below risk categories, then it will be considered high-risk.
|
Factors |
Risk Level | ||
|
Very Low | Low |
Medium | |
| There is evidence that both parties agreed to the worker classification | X | X | X |
| The employer has confirmed their classification by a qualified third party | X | X | X |
| The subsequent performance of the contract has not significantly changed | X | X | |
| The employer is meeting its reporting obligations that arise for that classification, including reporting under TPAR. | X | X | |
| There is evidence that both parties understood the tax and superannuation consequences of that classification | X | ||
What this means
Some of the key takeaways from TR 2022/D3 and PCG 2022/D5 to keep in mind as we head into the next quarter, as well as potential risk areas which employers should be aware of include:
● Evaluating the totality of the working relationship with reference to the legal rights and obligations stipulated in the contract.
● Ensuring that 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.
● Ensuring that the worker understands their classification and the taxation and superannuation implications of the classification.
● Ensuring the contractual rights and obligations agreed by the parties reflect the changes in the working arrangement.
● Ensure that 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.
Careful attention should be paid by employers to the above factors and ATO examples contained within PCG 2022/D5 to ensure that the working arrangements are appropriately classified for tax and superannuation purposes.
Next steps
The challenge for employers is primarily in confirming worker classification under both the common law and extended definition of employee. The ATO is correct in ensuring that employers seek out specific advice on whether their workers fit under the ‘extended’ definition as this is a potential risk area. Notably, this is highlighted in JMC Pty Limited v FC of T 2022 where the Commissioner argued that the worker at JMC Pty
Limited fell under both definitions of employee.
There are still a number of rulings that relate to employees which are still under review, notably Superannuation Guarantee Ruling SGR 2005/1: Superannuation guarantee: who is an employee? which shows the Commissioner’s view of who is an employee under the extended definition. While the ruling is still under review in light of the High Court decisions, SGR 2005/1 is still the Commissioner’s published view on the extended definition of employee.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
● Maria Ravese, Partner | maria.a.ravese@vialto.com
● Kristy Whitnell, Director | kristy.whitnell@vialto.com
Further information on Vialto Partners can be found here: www.vialtopartners.com
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