ATO guidance on employee vs contractor debate updated

Updated ATO guidance means you need to understand whether your contract for services are to an employee or an independent contractor. Getting it right can save you significant hassles and penalties.

Recently, the ATO has released Taxation ruling (TR 2023/4) and Practical compliance guideline (PCG 2023/2), which provide further guidance in relation to making the correct distinction between an employee and an independent contractor.

The guidance has been updated as a result of two major High Court of Australia cases in 2022 that changed the way we should look at contracts between a business and a worker. The guidance also provides you with a clear understanding about when the ATO will apply compliance resources to specific arrangements. This generally means undertaking a review or audit.

It is important that a review is conducted for arrangements that you have in place with independent contractors, as there are several differences in reporting obligations and additional amounts may need to be withheld from a payment to a worker by you.

Why the change?

The change has occurred due to two High Court of Australia cases that were handed down in 2022. It changed the way the ATO is required to administer the law as the High Court judges stated that the contract between the business and the worker is the sole source of information that is used when determining whether a worker is an employee or an independent contractor.

The ATO has updated their guidance in line with the judges’ decisions, but also added a caveat that there must be evidence to show that the contract agreed to between a business and the independent contractor is actually being performed according to the contract. AND pcg

What do you need to do?

It is recommended that any relationship that you have with an independent contractor that could be considered to be an employee and employer relationship be reviewed by us in order to determine whether the agreement is high risk with the ATO compliance team.

If you do nothing, and it is found that some of your independent contractors are in fact employees, you may be liable for backdated withholding on their wages, as well as outstanding superannuation.

If you wish to engage us with taking a look at some of your agreements with these contractors, please contact our office and we will get this review started.