Inside this month, we explore the changes on the way the employer versus contractor relationship is defined, the updates on interest on early payments (IEP), and an important reminder to apply for a DIN if you haven’t already. Let us know how we can support you with these updates.
Are Your Contractors Really Employees?
Two landmark cases before the High Court highlight the problem of identifying whether a worker is an independent contractor or employee for tax and superannuation purposes.
Many business owners assume that if they hire independent contractors they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations. However, each set of rules operates a bit differently and in some cases genuine contractors can be treated as if they were employees. Also, correctly classifying the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong.
Two cases handed down by the High Court late last month clarify the way the courts determine whether a worker is an employee or an independent contractor. The High Court confirmed that it is necessary to look at the totality of the relationship and use a ‘multifactorial approach’ in determining whether a worker is an employee. That is, if it walks like a duck and quacks like a duck, it’s probably a duck, even if on paper, you call it a chicken.
In CFMMEU v Personnel Contracting and ZG Operations Australia v Jamse, the court placed a significant amount of weight on the terms of the written contract that the parties had entered into. The court took the approach that if the written agreement was not a sham and not in dispute, then the terms of the agreement could be relied on to determine the relationship. However, this does not mean that simply calling a worker an independent contractor in an agreement classifies them as a contractor. In this case, a labour hire contractor was determined to be an employee despite the contract stating he was an independent contractor.
In this case, Personnel Contracting offered the labourer a role with the labour hire company. The labourer, a backpacker with some but limited experience on construction sites, signed an Administrative Services Agreement (ASA) which described him as a “self-employed contractor.” The labourer was offered work the next day on a construction site run by a client of Personnel Contracting, performing labouring tasks at the direction of a supervisor employed by the client. The labourer worked on the site for several months before leaving the state. Some months later, he returned and started work at another site of the Personnel Contracting’s same client. The question before the court was whether the labourer was an employee.
Overturning a previous decision by the Full Federal Court, the High Court held that despite the contract stating the labourer was an independent contractor, under the terms of the contract, the labourer was required to work as directed by the company and its client. In return, he was entitled to be paid for the work he performed. In effect, the contract with the client was a “contract of service rather than a contract for services”, as such the labourer was an employee.
The second case, ZG Operations Australia v Jamse produced a different result.
In this case, two truck drivers were employed by ZG Operations for nearly 40 years. In the mid-1980’s, the company insisted that it would no longer employ the drivers, and would continue to use their services only if they purchased their trucks and entered into contracts to carry goods for the company. The respondents agreed to the new arrangement and Mr Jamsek and Mr Whitby each set up a partnership with their wife. Each partnership executed a written contract with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for its delivery services, and was paid by the company for those services. The income from the work was declared as partnership income for tax purposes and split between each individual and their wife.
Overturning a previous decision in the Full Federal Court, the High Court held that the drivers were not employees of the company.
Consistent with the decision in the Personnel Contracting case, a majority of the court held that where parties have comprehensively committed the terms of their relationship to a written contract (and this is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute), the characterisation of the relationship must be determined with reference to the rights and obligations of the parties under that contract.
After 1985 or 1986, the contracting parties were the partnerships and the company. The contracts between the partnerships and the company involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. This relationship was not an employment relationship. In this case the fact that the workers owned and maintained significant assets that were used in carrying out the work carried a significant amount of weight.
For employers struggling to work out if they have correctly classified their contractors as employees, it will be important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement. Merely labelling a worker as an independent contractor is not enough if the rights and obligations under the agreement are not consistent with the label. The High Court stated, “To say that the legal character of a relationship between persons is to be determined by the rights and obligations which are established by the parties’ written contract is distinctly not to say that the “label” which the parties may have chosen to describe their relationship is determinative of, or even relevant to, that characterisation.”
A genuine independent contractor who is providing personal services will typically be:
- Autonomous rather than subservient in their decision-making;
- Financially self-reliant rather than economically dependent upon the business of another; and,
- Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.
Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time. Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.
Interest on Early Payments
From March 2022, ATO will automatically identify, calculate, and pay your interest on early payments (IEP) directly into your nominated bank account. This process applies to eligible early payments made from 1 July 2021.
Interest on early payments (IEP) is interest ATO pays when you make a payment towards certain tax liabilities more than 14 days before the due date. Interest you receive on early payments is assessable income, so this is included in your tax return.
Payments eligible for IEP
You may receive IEP when you make payments towards any of the following liabilities more than 14 days before the due date:
- income tax (including Medicare levy and Medicare levy surcharge)
- compulsory Higher Education Loan Program (HELP) repayments
- compulsory Vocational Education and Training Student Loan (VETSL) repayments
- Student Financial Supplement Scheme (SFSS) assessment debts
- compulsory Student Start-up Loan (SSL) repayments
- compulsory ABSTUDY Student Start-up Loan (SSL) repayments
- compulsory Trade Support Loan (TSL) debt repayments
- interest on distributions from non-resident trust estates
- shortfall interest charge (SIC).
Payments not eligible for IEP
The following payments are not eligible for IEP:
- pay as you go (PAYG) withholding amounts including
- amounts withheld from interest, dividends and royalties
- amounts withheld by payers (including those withheld for the purpose of repaying contributions or debts for HELP, VETSL SFSS, TSL, SSL or ABSTUDY SSL)
- PAYG instalments
- any part of a payment that exceeds the amount that is due and payable.
How to calculate the IEP payable
Interest is payable on the amount of the early payments you make. The period for which the interest is payable is worked out according to your circumstances.
For individuals and trusts, interest is payable:
- from the later of
- the date of issue on your notice setting out the amount of tax, debt or interest you need to pay
- the date you make the payment
- until and including the payment due date.
For companies and super funds, interest is payable from the date you make the payment up to and including the due date for payment.
Interest on early payments is not payable:
- on amounts that exceed the value of your tax debt
- for any period after we refund your early payment.
Payment of IEP
For eligible payments made:
- after 13 March 2022, ATO are paying IEP entitlements generally within two weeks of the due date of the liability
- between 1 July 2021 and 13 March 2022, they are paying IEP entitlements from 14 March 2022.
If you have nominated your personal bank account for the payment of ATO refunds:
- your IEP entitlement will be paid directly into your nominated bank account
If your have nominated our trust account for the payment of ATO refunds:
- your IEP entitlement will be paid into our trust account
If you have an existing tax debt, your IEP entitlement will be offset against the debt and any excess IEP amount will be paid to your nominated bank account and you will receive a statement of account.
Interest on early payments is assessable income and needs to be included in your tax return in either the:
- income year you receives the interest
- income year it is offset against your tax debt.
For individuals, IEP amounts will be prefilled in their income tax returns and shown in the Income Tax Prefill Reports.
Apply for a DIN now!
As part of new recent laws for Directors, you need need to apply for a director identification number (director ID) if you are a company director.
It should only take you less than 10 minutes to do this.
Just click here and follow the instructions.
To complete the Director ID, you will need to have ready:
- your tax file number (TFN)
- your residential address as held by the ATO
- information from two documents to verify your identity.
Examples of the documents you can use include:
- bank account details
- an ATO notice of assessment
- super account details
- a dividend statement
- a Centrelink payment summary
- a PAYG payment summary (this is different to your income statement, and/or your PAYG instalment activity statement).
Once you have the Director ID, please provide it to us.
Should you have any further queries with regards to this matter, please do not hesitate to contact our office.
