Late last year, the ATO released their new Taxation Ruling 2023/4 which sets out the ATO's view on whether a worker is an independent contractor or employee. The purpose of this ruling is to assist businesses – who employ independent contractors and employees – in determining whether they have to withhold amounts from a worker's salary, wages, commission bonuses or allowances in respect to their PAYG obligations. The ruling applies only to PAYG obligations under s12-35 of the Taxation Administration Act 1953, it may also assist with other laws administered by the Commissioner of Taxation such as Superannuation Guarantee, Fringe Benefits Tax and Single Touch Payroll Reporting, but note that those acts have differing provisions.

This ruling is notable for employers given that the penalty for failing to comply with PAYG obligations may be significant being the amount that would be withheld normally. Additionally, penalties for failing to comply with Superannuation Guarantee (as examined in our earlier article), FBT and Single Touch Payroll Reporting could also apply. Although the ruling was released on 6 December last year, it applies to both before and after the date of its issue.

Taxation Ruling 2023/4

As opposed to the past ruling which held that the totality of the relationship between the parties is relevant in determining whether a worker is an independent contractor or employee, the ambit of this consideration has been narrowed down with regard being had only to the legal rights and obligations which constitute that relationship and they have been guided by the Courts consideration of these issues.

This means that the contract of employment has taken a central role in ascertaining the relevant legal rights and obligations. Despite the fact that regard is only had to the legal rights and obligations forming the relationship, recourse may also be had to events, circumstances and things external to the contract which are objectively known to the parties at the time of entering into the contract which could assist with identifying the purpose or object of the contract.

The Courts have in separate considerations of employment contracts relating to restrictive covenants referred back to the validity and effect of these terms as at the date of the original contract. If the employee was a cleaner at the time of the contract the restrictive covenant will be read as such and not relating to the employees current role as for example manager.

Hence, assuming the contract is valid, evidence of how the contract was performed, including subsequent conduct and work practices are irrelevant considerations. Indeed, there are good reasons to not consider subsequent conduct and practices. As noted in CFMMEU v Personnel Contracting, the nature of the legal relationship may change with the unilateral conduct of one of the parties:

"on the day after a contract is formed, the parties may be in an employer/employee relationship, but six months or a year later, having regard to the parties' subsequent conduct, their relationship may have changed to one of principal/independent contractor"

Resultantly, as the nature of the legal relationship may change without the other party knowing, this would have consequences in the ways that they conduct their affairs.

Once the legal relationship has been construed, the Commissioner notes that the indicia presented in case law offers as useful approach in characterising the legal relationship. These indicia include whether:

  • the worker serves in the business of an employer as opposed to providing services to the business. An important question to ask here is whether the worker is working in the business or enterprise of the employer;
  • the employer has control and the right to control the actions of the worker. However the right to control must be viewed in the context of the relationship. In ZG Operations, the high Court found that a clause requiring carriage of goods as reasonably directed did not confer the necessary control for an employer/employee relationship to subsist;
  • the worker may delegate their work to others. Where the worker has an unfettered right to delegate their work to others, this is a strong indicator against them being an employee;
  • the substance of the contract was for an end result. Consideration paid for a specified job is often a fixed sum paid on completion of the particular job as opposed to an amount paid to an employee for their hours worked, activities performed or a commission;
  • the worker has to provide their own tools and equipment. This serves as an indication that the worker is an independent contractor ;
  • either party bears the risk or is solely responsible for the generation of goodwill. For example, if a contract prevents any goodwill from accruing for a worker's possible business, this may indicate that the worker is instead serving in the engaging entity's business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.