It is so important for employers/principals to get the distinction between employee and contractor correct. Misclassifying a worker can have severe consequences, not least because if you get it wrong for one area (e.g. PAYG withholding) it is likely that you will be wrong for another (e.g. super guarantee or payroll tax).
However, each area of the law is a little different and it is important to look at each separately. That is what this article is about – a very brief look at the different and/or expanded definition of employee (compared to the common law meaning) under different state and federal taxes.
Starting Position – The Ordinary Meaning (Common Law Definition) of Employee
The key question is – is it a contract of services or a contract for services? The key factors to consider are;
These questions have been considered in numerous cases. However I would like to focus on other areas in this article.
PAYG withholding obligations extend to;
- Directors fees
- Payments to members of parliament, the defence or police forces
- Payments to religious practitioners
- Return to work payments
- Payments covered by voluntary agreements to withhold
- Payments to labour hire firms
If you’d like to go straight to the source and see the complete list, refer to Subdiv 12-B of Schedule 1 to the Taxation Administration Act 1953.
The expanded definition of employee for SGC purposes, found in section 12 of the SGAA 1992 expands the definition of employee to
- Members of parliament, local councils, the police or defence forces
- Performing artists
- A person who works under a contract that is wholly or principally for their labour
- Renumerated (wholly or principally) for their personal labour and skills
- Must perform the work personally (cannot delegate)
- Is not paid to achieve a result
Paragraph 15 of SGR 2005/1 (SGR is a superannuation ruling issued by the ATO) states “where an individual performs a work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party, either at common law or under the extended definition of employee”.
However, this isn’t necessarily the end of the matter. For example, in Roy Morgan Research some of the contractors were engaged through an interposed entity. This didn’t stop the court from determining that SG did apply to the workers. Another example is the AAT case of SR & K Hall Family Trust v FC of T.
The key issue is whether the business is engaging the individual or the interposed entity . If it is truly the individual that is being engaged then the fact that the payments are directed to the interposed entity may not be sufficient to prevent SG obligations from arising.
Payroll Tax (Victoria)
There are provisions in state and territory legislation which deem payments to certain contractors to be liable for payroll tax. Generally, the aim is to impose payroll tax where a contractor works exclusively or primarily for one business and the contract is for their labour.
In Victoria section 34 of the Payroll Tax Act 2007 says that a person who performs work under a ‘relevant contract’ is taken to be an employee. Section 32 defines relevant contracts widely. It includes a contract where a person, in the course of carrying on a business, supplies services for or in relation to the performance of work. However, there are numerous exceptions such as;
- Where the supply of services are ancillary to the supply of goods
- Where the contractor ordinarily provides the same services to the public generally and the services are not ordinarily required by the payer
- Where the services are ordinarily required for less than 180 days
- The services are provided for 90 days or less
- The Commissioner is satisfied that the services are performed by a person who ordinarily performs services of that kind to the public generally in that financial year.
Where an agreement is made with an interposed entity and the effect of the arrangement is to reduce or avoid payroll tax then the Commissioner has the power (in section 47) to disregard the agreement and determine that the payments made are taken to be wages.
Remember that whilst payroll tax legislation has been harmonised there are still differences between the states and these should not be forgotten.
Remuneration includes payments made to a natural person performing work which is not part of a business conducted by the person and a person supplying services, unless an exception applies. The exceptions are very similar to the payroll tax act.
There are special rules dealing with particular industries e.g. owner drivers, outworkers, municipal councillors, jockeys, taxi drivers, door to door salespeople, timber contractors, students on work experience, parliamentarians, judges and religious leaders.
For FBT to apply benefits must be provided to an employee or their associate. FBT does not have its own definition of employee, it refers you to the PAYG withholding rules.
Employees are not eligible for an ABN but independent contractors are. However, just because a worker has an ABN doesn’t mean they are an independent contractors.
Employees cannot be registered for GST but independent contractors may be.
Want to go deeper?
- TR 2005/16 for PAYGW
- SGR 2005/1 for SG
- Decision tool https://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/
- PTA-020 – 180-day exemption for contractors
- PTA-021 – Exemption for contractors ordinarily rendering services to the public
- PTA-022 – Contractor services not ordinarily required
- PTA-035 – 90 day exemption for contractors
- PTA-038 – Determining if a worker is an employee
Recent and important cases
- ACE Insurance Ltd v Trifunovski  FCAFC
- Dominic B Fishing Pty Ltd v Commissioner of Taxation  AATA 205
- FC of T v De Luxe Red and Yellow Cabs Co-Operative  FCAFC
- Floorplan Pty Ltd v Commissioner of Taxation  AATA 637
- Hollis v Vabu  HCA 44
- On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3)  FCA 366
- Roy Morgan Research Pty Ltd v Commissioner of Taxation  FCAFC 52
- Xvqy v Commissioner of Taxation  AATA 319