Insights | 12 Feb 2024

Employee or Contractor? It’s all in the Agreement.

Does your business juggle both contractors and employees? Do you have written employment agreements in place for all workers? The contract details are now more important than ever.

The Australian Taxation Office (ATO) has recently issued Taxation Ruling 2023/4, replacing the outdated ruling 2005/16. This ruling marks a significant change in how the ATO approaches the issue of a worker’s status for tax purposes. The ruling has been influenced by recent decisions made by the High Court.

How does this affect my business?

When you hire an employee, the business is required to pay PAYG Withholding, Superannuation and potentially also Payroll Tax. The business must also comply with the Fringe Benefits Tax (FBT) rules and Single Touch Payroll (STP) requirements. The business may also be required to take out workers’ compensation insurance. This is not the case for contractors (although superannuation and payroll tax may still apply in some circumstances).

Although a business may treat a particular worker as a contractor, PAYG Withholding and many of these other requirements will apply if the individual is found to be an “employee” within the ordinary meaning.

What’s changed?

Previously, the ATO relied on a “multi-factorial” analysis and checklist style approach. Departing from this method, TR 2023/4 emphasises a more holistic evaluation of the relationship between the individual performing the work and the business. No single factor will confirm an employment relationship, rather the ATO will examine the entire working relationship. This new ruling reflects a more flexible and context-dependent approach.

The new ruling has a stronger reliance on the contractual interpretation of the employment relationship. The determination is now based on an objective assessment of the contractual terms and the actual conduct of the parties. Where a contract is seen to be a “sham”, the provisions of the contract will be less relevant than the actual conduct of the parties.

Who is an Employee?

A high level of control exercised over a worker typically supports the existence of an employment relationship. Another indication may be the calculation of the worker’s remuneration based on the number of hours worked.

The mere fact a worker may be conducting their own business with an Australian Business Number (ABN), is not determinative. Additionally, the “label” by which the parties categorise the relationship (e.g. contractor) is also not determinative.

Who is a Contractor?

A contractor relationship is more likely to exist where a worker is paid a negotiated amount based on achieving a specific result (as opposed to hours worked), provides their own equipment/tools, and/or can delegate or subcontract the work to others.

What to consider when engaging workers as Contractors

It is essential for the parties to have an effective agreement, accurately characterising the arrangement. The absence of an agreement significantly increases the risk that the ATO will deem there to be an employment relationship.

It is important to note the new ruling is not binding in relation to superannuation law (only PAYG Withholding). Additionally, payments to individual contractors may still be subject to superannuation and payroll tax for some businesses, even where a worker is not deemed to be an employee under the ordinary definition.

Contact Pilot

If you would like assistance to ensure that you are meeting your tax obligations for contractors, contact Kristy Baxter or Angela Stavropoulos on or  07 3023 1300.

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