On 15 December 2023, the ATO released the following two draft publications for public comment:

• Draft TR 2022/D3 – Income Tax – PAYG withholding – Who is an employee
• Draft PCG 2022/D5 – Classifying workers as employees or independent contractors – ATO compliance approach.

Draft TR 2022/D3 replaces TR 2005/16 from 15 December 2022 and has mainly been updated to reflect recent court cases.

Key features of ATO draft publications

A business’ employment tax obligations can vary based on how a worker is classified. Correct classification is important to ensure that both the business and the worker satisfy their tax and superannuation obligations correctly.

TR 2022/D3 – Who is an employee?

The draft TR 2022/D3 explains the meaning of “employee” for PAYG withholding purposes. In accordance with the earlier High Courts cases, the Commissioner states:

• the totality of the contractual arrangement between parties will determine the classification of the worker, and
• the substance of the contractual arrangement, rather than the labels used in it, will be of primary importance.

The Commissioner has emphasised that even if a worker is an independent contractor, Superannuation Guarantee (SG) may be payable if the worker satisfies the extended definition of an employee under SG rules.

PCG 2022/D5 – Classification of workers

The draft compliance guide PCG 2022/D3, provides the Commissioner’s approach to audit activity based on a business’s risk profile, where he believes that the classification of workers is not being applied correctly. The key components considered by the Commissioner when determining the risk profile are:

Very Low risk – arrangements that satisfy all the following criteria will be considered low risk and will not attract ATO compliance activity:

• the parties agree on and understand the intended classification
• the substance of the arrangement agrees to the contractual terms
• the classification has been supported by advice from a qualified professional.

It will also be considered very low risk when an employer decides to voluntarily treat all workers as employees.

Low risk – Arrangements that satisfy all the following criteria will be considered low risk and will not attract ATO compliance activity:

• The parties agree on the intended classification.
• The substance of the arrangement agrees to the contractual terms.
• The classification has been supported by advice from a qualified professional.

Medium risk – Arrangements that satisfy the following criteria will be considered medium risk

• The parties agree on the intended outcome.
• The classification has been supported by advice from a qualified professional.

High risk – All arrangements that do not satisfy very low, low or medium risk criteria will be considered high risk. They will also be considered high risk if one of the parties coerced the other to accept the arrangement or one of the parties made false or misleading representations to the other party.

Key takeaways to minimise risk of ATO review

1. It is important for businesses to discuss the tax implications of being an independent contractor with the worker.
2. Obtain professional advice to support the position adopted for the class of workers.
3. When an arrangement with a worker changes, businesses should re-assess their classification.
4. Where disgruntled worker lodge an unpaid superannuation query and the ATO determines that the arrangement is considered:
   • very low risk – they will advise the worker accordingly and not take any further action
   • low risk – the ATO will apply compliance resources to test if that worker satisfied the definition of an employee
   • medium risk – the ATO will apply compliance resources to an arrangement (e.g. for a group of workers)
   • high risk – Compliance resources will be given the highest priority to an arrangement (e.g. for a group of workers) and businesses may be subject to higher penalties.
5. This PCG does not provide employers protection from payroll tax and workcover classification of workers.

How SW can help

Reach out to your SW contact or our team to assist in ensuring your employees are classified correctly to minimise the risk of an ATO review.

Contributors

Rahul Sanghani

Sabrina Camilleri

The post Employees vs Contractor ATO risk ratings now out appeared first on SW Accountants & Advisors.

This has highlighted a shift away from the checklist type multi-factorial test, where a valid agreement exists. The High Court found that where parties have entered into a valid and comprehensive written agreement, the terms within the agreement establish the legal character of their relationship.

Below are summaries of the two High Court decisions.

ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors

This High Court case was an appeal from a judgment of the Full Federal Court of Australia.

Mr Jamsek and Mr Whitby were initially employed as drivers by ZG Operations Australia Pty Ltd. In 1985 or 1986 both the individuals set up partnerships, purchased their trucks and signed written agreements with ZG Operations to deliver goods.

The agreements stipulated that Mr Jamsek and Mr Whitby were to be at the exclusive disposal of ZG Operations for 9 hours a day, 5 days a week. The men drove trucks with the company logo and wore ZG branded clothing. They provided invoices to ZG Operations which were then paid to their respective partnerships.

The Full Federal Court of Australia found Mr Jamsek and Mr Whitby were employees of ZG Operations, given the level of control exerted by ZG Operations over the men and the requirement they be at the company’s disposal 9 hours a day, 5 days a week.

The High Court overturned the Full Federal Court decision and found that given neither party questioned the validity of the principal/contractor agreement or regarded it as a sham, the agreement was valid and determined the legal character of the relationship, being that of a principal and independent contractor.

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd

This case concerned Mr McCourt, a British backpacker who had travelled, resided, and worked in Australia temporarily on a working visa.

Mr McCourt signed a contract with a labour-hire company, Personnel Contracting Pty Ltd, trading as Construct, which described his position as a contractor. Mr McCourt was assigned to two construction sites owned by Hanssen, a client of Construct. During the assignment, he was under the direction of Hanssen employees, although there was no contractual relationship between Hanssen and Mr McCourt. Mr McCourt supplied basic equipment, had recurring patterns of work and set start/finish times.

After his engagement with Construct concluded, Mr McCourt, with the Construction, Forestry, Maritime, Mining and Energy Union, brought an action against Construct seeking compensation and penalties for alleged breaches of the Fair Work Act 2009, on the basis that Mr McCourt was an employee of Construct.

The matter was heard by the Federal Court and later the Full Federal Court where it was decided that Mr McCourt was a contractor based on the multi-factorial test.

On appeal, the High Court unanimously overturned the Full Federal Court’s decision and held that Mr McCourt was an employee of Construct. The High Court found that the multifactorial test approach taken by both the Federal Courts was problematic as it is impressionistic and can lead to inconsistency and considerable uncertainty.

The High Court suggested the characterisation of whether a person is an employee or an independent contractor is determined by reference to a consideration of the legal rights and obligations of the parties under the contract.

The High Court found:

• Construct retained a right of control over Mr McCourt, which was fundamental to Construct’s business as a labour-hire agency
• Construct was entitled to determine for whom Mr McCourt would work and, once assigned, he was required to supply his labour to the client
• Mr McCourt had no right to exercise any control over what work he was to perform or how it was carried out
• The description of Mr McCourt as a ‘self-employed contractor’ was not determinative and did not change the character of the relationship created.

In both cases, the High Court highlighted the importance of applying the terms of the agreement where a valid agreement exists in assessing whether a worker is a contractor or an employee. Merely describing an individual as a contractor in the agreement is not sufficient to support an independent contractor relationship. The contract will need to be considered in its entirety to determine the relationship.

How SW can assist

These cases demonstrate the need to review contractual arrangements you have on foot and seek appropriate tax advice. We can assist in ensuring you remain compliant and make suitable disclosures regarding employment taxes. Please get in touch with your SW contact if you would like to discuss what these decisions mean for your business.

Contributors

Rahul Sanghani

E rsanghani@sw-au.com

Tom Warrington

E twarrington@sw-au.com

The post Employee or contractor? High Court decisions appeared first on SW Accountants & Advisors.