Knowing whether the ATO regards people who work for you as employees or independent contractors can have serious implications for your business, particularly if you are in the construction industry. But the question is equally important in relation to matters as diverse as public liability insurance, workers compensation, industrial relations, trade practices and consumer law, discrimination issues and payroll tax. Because there are different considerations in each, it is possible for a person to be considered a contractor in one of these areas, but an employee in another.
The only guidance the courts have given is to answer the question in specific circumstances by weighing various factors – called “indicia” – against each other. But how exactly do you do this? Do you simply favour the outcome that is supported by the greater number of indicia? Or will some indicia carry more weight than other indicia?
While it might be in many cases as simple as saying (as is often said) that “if it looks like a duck and walks like a duck then it is a duck”, that kind of simplistic approach can be dangerous. Each set of commercial circumstances needs to be carefully assessed and they can be open to alternate conclusions.
In this environment it is tempting to just rely on what appears to be the clearest “official” guidance and at the moment that emerges from the ATO guidelines. However it can be dangerous to only rely on a taxation analysis of the question for all purposes.
For taxation purposes, the Federal Commissioner of Taxation has gone some way towards resolving this confusion by:
(a) making rulings, which have the force of law unless and until they are successfully challenged in the Federal or High Court of Australia; and
(b) releasing two “employee/contractor decision tools” – one for general use and one tailored to the building and construction industry – which are online questionnaires that will say whether a person is an employee or independent contractor based on the answers you give to specific questions about that person.
You can access the general Tax Ruling on employees and independent contractors online at: http://law.ato.gov.au/atolaw/view.htm?Docid=TXR/TR200516/NAT/ATO/00001&PiT=99991231235958.
You can access the Tax Ruling about whether superannuation is payable on behalf of a particular individual under the Superannuation Guarantee Act 1991 online at: http://law.ato.gov.au/atolaw/view.htm?Docid=SGR/SGR20051/NAT/ATO/00001&PiT=99991231235958.
As useful as these tools are, just be mindful that they are designed specifically to help you work out whether you have certain tax liabilities and whether you have to pay superannuation. They are not designed to be used for a purpose unrelated to tax liability. Also remember that they are based on Tax Rulings which only have the force of law for as long as they are not successfully challenged in a court. For further advice about how to decide if someone is an independent contractor or employee for purposes unrelated to tax or about how to challenge the applicable Tax Rulings, you need expert legal advice which weighs all of the issues, not just those in the taxation environment.