One of the most controversial and confusing issues for tax and labour law over the last 50 years is whether a worker is an employee or self-employed.
In February 2022, the Australian High Court released a ruling that establishes major clarity in the law on this issue. We referenced and summarised the ‘Personnel’ decision in August 2022. We included links for SEA members to:
- A layperson’s explanation.
- Key excerpts from the judgment.
- The judgment itself, with important parts highlighted.
New ATO rulings
Now the Australian Taxation Office has released new rulings (just before Christmas 2022) on the employee vs self-employed issue, based on the clarity established by the High Court in ‘Personnel.’ We consider the ATO rulings to be outstanding, providing explanation in clear lay language.
We think the ATO rulings are necessary reading for accountants, human resources and industrial relations managers, lawyers (yes!) and anyone needing clarity on worker status in Australia. This particularly includes self-employed people. There are two rulings:
The rulings we supply (for members) include highlights to assist understanding.
Employee or self-employed – Overview of ATO Ruling D3
We will provide a summary/commentary on the employee or self-employed (D3) ruling shortly. But in brief:
- If a written contract is comprehensive and clear, it stands as the determinator of worker status.
- If there is no written contract, or a contract is unclear etc., the standard ‘multifactorial’ test applies with the ‘totality’ of the relationship providing the answer.
Worker status – compliance with obligations – Overview of ATO Ruling D5
The ATO has a need to define worker status to ensure community compliance with:
- PAYG – that is, determining who has responsibility to send income tax withholding payments to the ATO – the worker or the engaging entity?
- Superannuation – that is, whether an engaging entity must make superannuation payments for a worker.
The ruling on this sets up a simple matrix which explains when the ATO will investigate. This depends on whether the compliance behaviour of the parties is deemed to be very low, low, medium or high-risk. These are explained clearly in the (D5) ruling.
Frankly, we think that anyone who allows their business to fall into the medium or high-risk areas is foolish and asking for trouble.
Non ATO tax issues – helpful but some caution needed
Even though the D3 ruling (employee or self-employed) is ATO-specific, it has strong practical application to other areas, such as definitions for workplace relations. (Note. The ATO is careful to state that the ruling is ATO/Tax/Super-specific only)
However, the law that the ATO must apply on PAYG/Superannuation is exactly the same law (at first instance) that applies to workplace relations—that is, the ‘standard’ or ‘common law’ definitions as declared by the High Court. Given that, in our view, the ATO ruling (D3) is so clearly written in layperson’s language, it is likely to prove very helpful for other areas such as workplace relations.
Even though the same helpfulness applies for workers’ compensation, OHS and payroll tax (all state issues), considerable care should be taken where these laws extend their reach to some types of independent contractors/self-employed. These ‘extension’ laws vary from state to state and are not the same as the ATO’s ‘extension’ laws.
Conclusion – Congratulations to the ATO
We consider these ATO rulings to be a major step forward. The best tax systems maximise voluntary compliance by taxpayers. This cannot occur where the rules are confused or badly explained. On this issue the ATO rulings generate considerable clarity. We recommend that our SEA members take the time to read these rulings. They are not onerous reading and quite clear.