The Australian Taxation Office (ATO) has recently provided new guidance that redefines how it identifies employee classifications and underscores the importance of written agreements to avoid PAYG or superannuation audits.
This development follows two significant High Court rulings last year (FMMEU v Personnel Contracting and ZG v Jamsek).
This updated guidance from the ATO signifies a departure from the previous “multi-factorial” analysis of parties’ conduct when determining worker classification. The ATO now aligns its approach with the High Court rulings, providing greater certainty in the classification process.
The ATO’s ruling and practical compliance guideline highlight the crucial role of written agreements that comprehensively outline how tasks are performed. Courts and tribunals will now primarily rely on the terms of the written agreement, departing from an emphasis on the conduct or behaviour of the parties unless the written agreement contradicts their actual practices. Determining worker classification as employees or contractors comes with various tax obligations for employers, including salary withholding under the PAYG system, payment of FBT on benefits, and making superannuation payments.
The ATO’s guidance, outlined in TR 2023/4, emphasises that assessing whether a worker is an employee is a factual question based on the parties’ relationship, legal rights, and obligations. Legal rights and obligations should be interpreted based on the employment contract, following established contractual interpretation principles.
The ATO’s risk assessment framework, detailed in PCG 2023/2, categorises arrangements into very low, low, medium, and high-risk zones.
| Criterion | Very low | Low | Medium | High |
| 1 | There is evidence that both parties intended for the worker to be classified in the same way, either as an employee or as an independent contractor. | There is evidence that both parties intended for the worker to be classified in the same way, either as an employee or as an independent contractor. | There is evidence that both parties intended for the worker to be classified in the same way, either as an employee or as an independent contractor. | Any arrangements that do not fall within the other 3 risks zones. |
| 2 | There is comprehensive written agreement that governs the entire relationship between the parties. | There is comprehensive written agreement that governs the entire relationship between the parties. | Not applicable. | Any arrangements that do not fall within the other 3 risks zones. |
| 3 | There is evidence to show that both parties understood what the worker’s classification meant, and what the tax and superannuation consequences of that classification would be. | Not applicable. | Not applicable. | Any arrangements that do not fall within the other 3 risks zones. |
| 4 | The performance of the arrangement has not significantly deviated from the contractual rights and obligations agreed to by the parties. | The performance of the arrangement has not significantly deviated from the contractual rights and obligations agreed to by the parties. | The performance of the arrangement has not significantly deviated from the contractual rights and obligations agreed to by the parties. | Any arrangements that do not fall within the other 3 risks zones. |
| 5 | The party relying on this guideline is meeting the correct tax and superannuation obligations that arise for their intended classification, and reporting appropriately. | The party relying on this guideline is meeting the correct tax and superannuation obligations that arise for their intended classification, and reporting appropriately. | The party relying on this guideline is meeting the correct tax and superannuation obligations that arise for their intended classification, and reporting appropriately. | Any arrangements that do not fall within the other 3 risks zones. |
| 6 | The party relying on this guideline obtained specific advice confirming the classification was correct. | The party relying on this guideline obtained specific advice confirming the classification was correct. | Not applicable. | Any arrangements that do not fall within the other 3 risks zones. |
| 7 | An engaging business relying on this guideline also obtained specific advice confirming the application of the extended meaning of employee under the SGAA, and communicated this outcome to the worker. | Not applicable. | Not applicable. | Any arrangements that do not fall within the other 3 risks zones. |
Factors such as the existence of a comprehensive written agreement and the consistency of parties’ conduct with the agreement are crucial in determining risk classification. A comprehensive, signed agreement reflecting how work is performed is highlighted as a key mitigating factor against the risk of an ATO audit. PCG 2023/2 clarifies the ATO’s approach to investigations and audits, incorporating an updated risk assessment framework. The ATO may initiate reviews into PAYG or superannuation obligations through proactive case selection or complaints from workers suspecting underpayment due to misclassification.
Businesses are strongly encouraged to assess their risk against the ATO’s framework, ensuring comprehensive written agreements that align with actual practices to mitigate the risk of audits and investigations. Understanding the implications of the ATO’s guidance is crucial for businesses aiming to ensure compliance with their employment classifications.
If you are uncertain about your employee classifications, speak with one of our trusted business adviser.
