Classifying Workers As Employees Or Independent Contractors

Posted 14 Mar

Classifying Workers As Employees Or Independent Contractors - ATO Compliance Approach

Practical Compliance Guideline PCG 2023/2 (previously issued in draft form as PCG 2022/ D5) outlines the ATO's compliance approach for businesses that engage workers and classify them as either employees or independent contractors.

It sets out how the ATO allocates its compliance resources, based on the risks associated with the classification.

The guideline notes that correctly determining whether a worker is an employee or independent contractor is important to ensure that both the business and the worker get their tax, superannuation, ABN registration and reporting obligations right.

A worker’s classification is determined by the totality of the contractual arrangement between the parties (including any implied or oral terms). The characterisation of the parties’ relationship will generally be guided by the question of whether a worker is serving in the business of the engaging entity, as distinct from conducting an independent business of their own.

The guideline outlines the ATO’s risk framework for worker classification arrangements, based on the actions taken by the parties when entering into the arrangement. Parties can self-assess against this risk framework to understand the likelihood of the ATO applying compliance resources to review their arrangement.

The guideline will be most relevant for situations where a worker’s correct classification is less obvious and the engaging entity or worker (or both) want to understand how the ATO will allocate its compliance resources in such circumstances. If the arrangement is clearly one of employment or independent contracting, the parties may choose not to rely on the guideline but self-assess based on their confidence that the correct classification has been applied.

The risk framework is made up of four zones: (a) very low risk, (b) low risk, (c) medium risk, and (d) high risk. The guideline also outlines the seven criteria that must be satisfied in order for an arrangement to fall into one of the risk zones. The criteria relate to the parties' arrangement, intentions and understanding, the conduct of the parties, and the advice received.

If there is a change in the operation of an arrangement between a worker and an engaging entity, they may need to re-assess their risk rating.

The guideline applies from 6 December 2023.

For more information, visit the Australian Government ATO website.

At Trinity Advisory, we specialise in tax accounting, business advisory and coaching services for small businesses located in and around Cairns (116 Mulgrave Road, Parramatta Park QLD 4870) and the Sunshine Coast (2/8 Maroochydore Road, Maroochydore QLD 4558).

Should you need any taxation or accounting advice for your business, get in touch with Trinity Advisory today. Our team of expert Business Accountants, Advisors and Coaches are here to help!

Ref: NTAA January/February 2024 Newsletter and ATO website, Practice Compliance Guideline, Legal Database.


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