The Australian Taxation Office (ATO) has released new guidelines for determining the difference between employees and independent contractors, following two landmark judgments delivered by the High Court in February 2022. Here's what employers need to know.

New Guidelines Based on Contractual Terms

Under the updated ATO guidelines, the relationship between an employer and an individual engaged to work will be based on the contractual terms of the agreement. This means that businesses can more easily determine the nature of the relationship, provided all relevant information is included in the agreement. If the ATO finds evidence that the contract is not being carried out as per the agreement, other factors may come into consideration, such as the date the contract was established, contractual terms, subsequent agreements, or whether the contract was a sham.

Factors Considered by ATO

To determine whether a worker is an employee or independent contractor, the ATO will assess factors such as the worker's ability to delegate, level of control, tools and equipment used, level of risk, and ability to generate goodwill. The ATO will also consider whether the worker serves in the business and as a representative of the business or acts as an independent contractor providing services.

Reviewing Contractor Agreements

Employers must review their contractor agreements and ensure that all terms and conditions are outlined in writing. Avoid using a checklist to classify workers and instead undertake a review of the proposed or current relationship between the worker and the business. If uncertain, employers are recommended to engage a professional to ensure compliance with the legislation.

Tax and Accounting Implications

The ATO's updated guidelines for differentiating between employees and independent contractors can have a significant impact on businesses from an accounting perspective.

If a worker is classified as an employee, the business will be responsible for withholding and remitting Pay-As-You-Go (PAYG) withholding tax on their behalf. Employers must also pay Superannuation Guarantee (SG) contributions and may be liable for other employment-related expenses, such as leave entitlements and workers' compensation insurance.

On the other hand, if a worker is classified as an independent contractor, the business will not be required to withhold PAYG withholding tax, pay SG contributions or provide other employment-related entitlements. However, the contractor may be required to pay their own tax and insurance obligations.

Therefore, it's crucial for businesses to correctly classify their workers to avoid potential tax liabilities and penalties. With the ATO's updated guidelines based on the contractual terms of the agreement, businesses need to ensure that their contractor agreements accurately reflect the nature of the relationship between the business and the worker. It's recommended that businesses seek professional advice to ensure compliance with the legislation and avoid any potential tax implications.

ASK A QUESTION