Employee or contractor? Common ATO myths – part 10

The common myths

The following is a list of common myths highlighted by the ATO on their updated webpage:

· If a worker has an ABN they’re an independent contractor.

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· Everyone in my industry takes on workers as independent contractors, so my business should too.

· Employees can’t be used for short jobs or to get extra work done during busy periods.

· A worker can’t work more than 80% of their time for one business if they want to be considered an independent contractor.

· My business has always used independent contractors, so we don’t need to check whether new workers are employees or independent contractors.

· If a worker has a registered business name, they’re an independent contractor.

· If a worker is an independent contractor for one job, they will be an independent contractor for all jobs.

· My business should only take on independent contractors so we don’t have to worry about super.

· Workers used for their specialist skills or qualifications should be engaged as independent contractors.

· My worker wants to be an independent contractor, so my business should treat them as one.

· If a worker submits an invoice for their work, they’re an independent contractor.

· If a worker’s contract has a section that says they are an independent contractor, then legally they’re an independent contractor.

It should come as no surprise that each of the above myths is false or misleading in being able to determine whether a person is an employee or independent contractor of the engaging entity.

Although the ATO webpage may highlight some common pitfalls and assumptions regarding the employee versus contractor distinction, there are over 16 different definitions of employee or contractor that may apply depending on the legislative framework being considered, for example:

· the Taxation Administration Act 1953 (Cth) in relation to Pay as you go (PAYG) withholding;

· the Superannuation Guarantee (Administration) Act 1992 (Cth) for superannuation guarantee (SG) purposes; and

· the Fair Work Act 2009 (Cth) (FWA) for rights and entitlements guaranteed under the FWA regime (refer to our part 7 article below for an overview of recent changes to the FWA).

Updated penalty information

The ATO has also recently updated its webpage (QC 33198) concerning penalties for incorrectly treating an employee as an independent contractor. The webpage can be found here. Some of the penalties that can apply include:

· PAYG withholding penalty – for failing to deduct tax from worker payments;

· a SG charge, consisting of:

o SG shortfall amounts (ie, the amount of super contributions that should have been paid into a complying fund);

o interest charges; and

o an administration fee.

· an additional SG charge of up to 200%.

We note that these penalties may be revised with the proposed introduction of PayDay Super from 1 July 2026. Broadly, PayDay Super will require employers to make SG contributions at the same time that salary and wages are paid.

Importance of obtaining specific legal and tax advice

Given the significant penalties that can apply for the incorrect treatment of an employee as an independent contractor, it is important that engaging entities obtain appropriately qualified advice in accordance with the ATO’s guidance in Practical Compliance Guideline (PCG) 2023/2.

In particular, PCG 2023/2 makes it clear that a failure to obtain specific advice in relation to worker classification will automatically place an entity in the high-risk category in terms of how the ATO will dedicate its compliance resources (refer to our part 6 article below for more information on this aspect).

Some points that the ATO consider important in classifying a worker as either an employee or contractor include:

· that there is a comprehensive written agreement that reflects the relationship between the parties and is consistent with applicable law;

· ensuring the correct tax, superannuation and reporting obligations are applied based on the classification; and

· obtaining appropriately qualified advice, see paragraph 41 of PCG 2023/2, which states:

41. To satisfy this criterion the advice must be prepared by an appropriately qualified professional. This may be from the entity’s own in-house counsel, a third party such as a solicitor or tax professional, an administrative body, or client specific advice from the ATO.

Conclusions

Deciding the correct classification of whether a worker falls under the ‘employee’ or ‘contractor’ relationship in the first place is often a complex decision that requires expert commercial, tax, superannuation and legal input. Preparing a comprehensive written agreement also requires careful drafting to ensure the various definitions of contractor under the various tests are satisfied. An appropriate written agreement can provide clarity and evidence of the relationship.

Naturally, expert advice should be obtained if there is any doubt.