At a glance
- New guidance clarifies the difference between employee and contractor status.
- Contracts are now at the centre of worker classification.
- Contractors may still trigger super obligations.
For small business owners, correctly classifying workers as employees or contractors has significant tax, superannuation and compliance implications. Following pivotal High Court decisions, the Australian Tax Office’s (ATO) Taxation Ruling TR 2023/4 has fundamentally changed how these classifications are determined. The guidance shifts focus from how working relationships function in practice to the terms set out in contracts.
As small businesses grapple with the practical impacts of this new approach, practitioners have a key opportunity to offer clarity and guide clients through potential compliance risks.
How High Court rulings changed the landscape
Two significant High Court cases in 2022 fundamentally altered how worker classifications are determined in Australia.
Dhanushka Jayawardena, Tax Partner at Holding Redlich, says in both CFMEU v Personnel Contracting and ZG Operations v Jamsek, the Court shifted away from the longstanding multifactorial assessment approach.
“A series of appellate decisions handed down in 2022 and 2023 have shifted the longstanding common law approach in Australia of determining whether a person is an employee from an application of the multifactorial test to one centred on contractual construction,” he says.
Before these rulings, classification meant weighing up multiple aspects of the working relationship, such as control, risk and payment structure. Thomas Linnane, lawyer at LegalVision, says the focus has narrowed considerably.
“These cases have changed how we determine if a worker is a contractor or an employee for tax purposes. Before, the written contract was just one of several factors considered,” he says. “Now, where there is a written contract (and unless the contract is clearly a sham)…the contract’s terms will be the only factor used in making that decision.”
This marks a return to a more traditional legal approach that prioritises the rights and obligations included in contracts over the day-to-day reality of how the relationship plays out. While this may offer more clarity in theory, it also raises the stakes for small businesses. Getting contracts right from the beginning has never been more important.
Reviewing client contracts
While legal drafting may sit with lawyers, you may be the first to spot red flags in tax treatment, super obligations and payroll reporting. Reviewing contracts has become a valuable touchpoint for offering proactive, risk-aware advice.
Linnane says the key is to check that client contracts reflect the true nature of the working arrangement.
“The contract should accurately reflect the reality of the working relationship. If it doesn’t, it could be seen as a sham and thus unreliable,” he says.
These five key areas help clients avoid issues.
Control arrangements
Examine whether the contract gives the business the right to dictate how, when and where work is performed. More control typically indicates an employment relationship.
Delegation rights
“The right to delegate or subcontract carries significant weight,” says Jayawardena. Contracts allowing workers to freely assign tasks to others generally support contractor status.
Payment structure
Is the worker paid by the hour or for achieving specific results? Results-based payment models typically align with contractor arrangements.
Equipment provision
Requiring workers to provide expensive or specialised equipment strengthens the contractor classification.
Risk allocation
Does the worker bear commercial risk for defects or injury? Limited risk exposure often suggests an employment relationship.
Superannuation implications
Even with properly drafted contracts, superannuation obligations remain a significant risk because they operate under different legal tests than those applied for general tax.
Linnane says businesses face a dual compliance challenge, with the Superannuation Guarantee (Administration) Act expanding the definition of “employee” to include certain contractors.
“There are extended definitions that capture individuals as employees for superannuation even if they are not ordinarily considered an ’employee’ for tax purposes,” he says. “These…include workers who provide skills or labour to an employer, entertainers, artists, musicians, sportspersons, or promoters.”
“These cases have changed how we determine if a worker is a contractor or an employee for tax purposes.”
Thomas Linnane, Lawyer, LegalVision
The ATO’s guidance confirms a contractor for tax purposes may still trigger superannuation obligations under the broader superannuation definition. Linnane says the consequences of getting classification wrong are substantial.
“Significant penalties apply if an employer does not pay superannuation into the workers’ superannuation fund on time or if the relevant statements are not made on time,” he says. “Penalties can include a maximum penalty of up to 200% of the superannuation amount that was due, plus an administrative penalty and general interest charge.”
For existing arrangements, a thorough review is essential rather than simply updating future contracts. Linnane recommends seeking professional advice for past arrangements.
“Businesses should get advice on past arrangements, as future compliance does not affect past non-compliance,” he says. “A tax advisor can help identify available options, such as engaging with the ATO early or submitting a voluntary disclosure.”
However, legal input may be needed.
“If an accountant has already advised on how the contract should be written, a lawyer can create a strong contractor agreement based on those recommendations,” Linnane says. “A lawyer can also review the arrangement to determine the risk levels of a worker/contractor being deemed an employee for superannuation purposes.”
The ATO’s Practical Compliance Guideline 2023/2 offers a useful framework to assess which client arrangements might attract scrutiny, allowing you to identify high-risk contractor relationships before they trigger compliance action.
The IPA’s Management & Professional Skills Competency Bundle – ON-DEMAND session focuses on current, practical and tangible management and professional skills. Find more information here.
