Australian definition of a superannuation worker released

On 06 December 2023, with the release of Taxation Ruling 2023/4 and PCG 2023/2, the Australian Tax Office (ATO) finalised their guidance on who is identified as an employee for both superannuation and employee withholding tax. 

What are the critical tests for identifying an employee?

Identifying the contract

The ATO emphasises that the initial step in understanding the nature of a relationship involves identifying the contract. This contract could be entirely in writing, verbal, or a mix of written clauses, spoken terms, and conditions implied by actions. Crucially, the ATO believes it's relevant to consider “events, circumstances, and things outside the contract that are objective and known to both parties at the time of contracting” to discern the contract's purpose and terms.

This approach departs from the High Court's usual practice of treating written contracts as all-encompassing. 

Totality of the relationship

The Commissioner has clarified that the opinion in the High Court rulings (especially highlighted in CFMEU & Anor v Personnel Contracting Pty Ltd [2022] HCA 1) did not discourage the use of a “totality of the relationship” evaluation. Instead, it specified that such an assessment should concentrate solely on the involved parties’ legal (contractual) rights and obligations.

Control

The decision continues to advocate for a “holistic” method (that is, considering various factors to understand the “totality of the relationship”), with the Commissioner reiterating that the power to direct or control is frequently a significant sign of employment.

To further address discussions on the significance of the potential to direct, rather than the actual exertion of control, is crucial to the evaluation.

Hourly rate remuneration

The Commissioner maintains that payment based on an hourly rate often aligns with an employment relationship.

In this context, the JMC decision (though as a side note) suggested that hourly rate payment, in that case, was not a “strong indicator” of employment.

Ability to delegate

The updated final ruling incorporates insights from the JMC decision regarding the ability to delegate tasks. In the JMC case, it was determined that possessing the ability to subcontract or delegate tasks, even if restricted (for instance, by requiring the principal's prior written consent), “is still inconsistent with an employment relationship”.

Conclusion

Employers should be cautious and not assume a written contract is all-encompassing. Upon review, the ATO might examine factors beyond the contract if relevant. In turn, organisations should review implied and actual contract terms before finalising. 

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Ross Forrester is the director of Westcourt, an Australian accounting and tax structuring firm. He is the Chair of the GGI ITPG for Asia, and State Chair for The Taxation Institute of Australia.