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ATO Guidance on Employee versus Contractor Status

As a result of two recent High Court cases in relation to employment law, the Australian Taxation Office (ATO) has released two documents to provide guidance on whether a worker engaged by a business is an employee or a contractor.

Taxation Ruling

The first document is taxation ruling TR 2023/4, which outlines the ATO’s view on when a worker is an employee for Pay as You Go Withholding Tax (PAYGWT) purposes. Historically courts would apply a “multifactorial” analysis to determine this, but the ruling states that a worker’s status will now be determined by assessing the totality of the relationship between the two parties as established in their contract.

The ruling does say, however, that when examining the contract these various factors should be considered. For example, contractual terms which provide the ability to delegate work, state that the worker will be paid for a result rather than their time, require the worker to use their own tools and equipment and result in the worker undertaking risk would indicate that the worker is a contractor rather than an employee.

It is also important that the contract is not a sham arrangement, and the legal rights and obligations must be comprehensively committed to by the business and the worker.

Practical Compliance Guideline

The second document is practical compliance guideline PCG 2023/2. This document explains the ATO’s compliance approach for businesses classifying workers as employees or contractors and is relevant for PAYGWT and superannuation purposes.

PCG 2023/2 outlines a risk zone framework, with the risk zones being very low, low, medium and high. The PCG details the criteria that must be satisfied for each risk classification. For example, the existence of a comprehensive written agreement is one criterion that is included in both of the very low risk and low risk categories.

Obtaining specific advice from an appropriately qualified professional is also a criterion that affects the risk classification. A business can only fall into the very low or low risk category if it has obtained specific advice confirming the classification as employee or contractor is correct.

How We Can Assist You

Saward Dawson is able to review your employee and contractor arrangements and provide the required advice. We also can advise on other issues associated with employer obligations, such as fringe benefits tax and Single Touch Payroll. Please contact us to obtain an assessment of the status of your workers.

Obtaining advice on the correct classification of your workers will assist you to fall within a low risk category and minimise the likelihood of a dispute with the ATO.

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