A ruling issued by the ATO in December last year explains when an individual is an ‘employee’ for PAYG withholding (PAYGW) purposes.
In 2022, the High Court handed down two important ‘worker classification’ decisions, i.e. about how to decide if an individual is an employee or an independent contractor. The ATO’s ruling considers the cases and comes to various conclusions:
- for PAYGW purposes, the term ‘employee’ has its ordinary meaning;
- whether a worker is an ‘employee’ of an entity under the term’s ordinary meaning is a question of fact to be determined by reference to the legal rights and obligations that constitute the relationship between the parties;
- if the parties have comprehensively committed the terms of their relationship to a written contract (and its validity is not challenged or its terms are not varied or waived), it is the legal rights and obligations in the contract alone that are relevant in determining if the worker is an employee or an independent contractor;
- the traditional factors that determine whether a worker is an employee or independent contractor (e.g. control, specified result, risk and delegation) are still relevant, but only in respect of the legal rights and obligations between the parties;
- a ‘useful approach’ for establishing whether a worker is an employee is to consider whether the worker is working in the entity’s business, based on the construction of the terms of the contract.
ATO’s compliance approach
The ATO has also published its compliance approach for businesses that engage workers and classify them as either employees or independent contractors. Specifically, it includes a risk framework for ‘worker classification’ arrangements, based on the actions taken by the parties when entering into such arrangements. The risk framework comprises four risk zones, ranging from very low risk (white) to high risk (red).
Tip! Please feel free to contact us if you are uncertain if an individual providing services to your business is an employee or an independent contractor. The tax and superannuation implications can be significant if you get it wrong.