Employee or contractor | ATO Decision Impact Statement
14/06/2024
The ATO recently issued a Decision Impact Statement on the employee or contractor matter in the JMC case, clarifying the contractual elements necessary to distinguish between independent contractors and employees under the Superannuation Guarantee (Administration) Act 1992 (SGAA).
The ATO’s Decision Impact Statement regarding the Full Federal Court’s decision in JMC Pty Ltd v FC of T [2023] FCAFC 76 highlights the importance of including genuine rights to subcontract, delegate or assign services in contracts between independent contractors and engaging entities if this aligns with commercial objectives.
Employers should review current contractual arrangements to ensure certainty over the application of extended meaning of employee under section 12(3) of the SGAA.
The Commissioner stated that if a contract includes such a right, the contract is not considered to be wholly or principally for the labour of the worker. This is not within the extended definition of “employee” under section 12(3) of the SGAA provided the contractual right is not challenged as being a sham, having been varied by the parties or unenforceable. Where the contract does not make it clear the ATO will form its position based on the available evidence of the contractual arrangement.
While the ATO Decision Impact Statement does not have the same force of law as a public ruling, it marks the first time since the JMC Case that the ATO has stated explicitly that the existence of a right to delegate, subcontract or assign will exclude a worker from the extended definition of “employee” under section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGAA).
The JMC Pty Ltd Case
In this case the appellant (JMC), a provider of higher education programs, engaged Mr H under a number of short-term contracts between 1 April 2013 and 30 June 2016 as well as between 1 July 2017 and 31 March 2018 to provide teaching services.
The contracts between JMC and Mr H included the following terms and conditions:
- Mr H would be paid an hourly rate for delivering lectures and marking exams
- Mr H would submit invoices specifying the teaching services provided along with timesheets and signed weekly lesson plans
- JMC would have a degree of oversight / control over Mr H (through JMC’s managing academic officer)
- Mr H was given the ability to subcontract or assign performance of services under the contracts, subject to written approval from JMC and
- JMC would have a right to deduct costs associated with a failure to give a timetabled lecture.
The Full Federal Court held that Mr H was not an employee of JMC within the ordinary meaning of the term or the extended definition in section 12(3) of the SGAAon the basis that there was a real right to subcontract, delegate or assign performance of services under the contracts despite the fact that the right was subject to written consent.
The ATO’s View
The Commissioner stated that if a contract includes such a right, even subject to consent from the engaging entity, the contract will not be considered to be wholly or principally for the labour of the worker. Therefore, a worker in these circumstances would not fall within the extended definition of “employee” under section 12(3) of the SGAA provided the contractual right is not challenged as being a sham, having been varied by the parties or unenforceable.
The ATO has confirmed that where the contract does not make it clear whether the worker has a right to delegate, subcontract, or assign their work, or is found to be a sham, the ATO will form its position as to the application of section 12(3) of the SGAA 1992 based on the available evidence of the contractual arrangement.
How we can help
The ATO’s Decision Impact Statement on the JMC case highlights the importance of including genuine rights to subcontract, delegate or assign services in contracts between independent contractors and engaging entities if this aligns with commercial objectives.
We suggest employers review current contractual arrangements in place to ensure you have certainty over the application of extended meaning of employee under section 12(3) of the SGAA.
We can assist in ensuring you have appropriate measures in place and make suitable disclosures regarding employment tax obligations where necessary. Get in touch with your SW contact to discuss what this decision and subsequent ATO decision impact statement means for your business.
