An issue that never seems to go away is determining whether an individual working for a business is engaged as an employee or as an individual contractor. The distinction is very important because a number of tax obligations hinge on the decision.
The Tax Office has had its say on the issue with two important documents: Taxation Ruling TR 2023/4 and the Practical Compliance Guideline PCG 2023/2.
To be clear, this article refers to cases where an individual works for an organisation in their own right, not through an entity they control such as a partnership, trust, or company.
ATO expectations under the Practical Compliance Guideline
The taxation ruling provides the tax theory. But for most business owners, the Practical Compliance Guideline (PCG) will be more relevant. This document outlines the ATO’s compliance approach and whether it will investigate your business based on how you engage workers.
If your business engages individuals as independent contractors rather than employees, it’s important to be across the detail in PCG 2023/2. The guideline is complex, but our team can help you break it down and work with you to apply it correctly to your specific arrangements.
Meeting the ‘very low risk’ classification
The Practical Compliance Guideline outlines how to classify workers in a way that falls within the ATO’s “very low risk” category. For any individual you want to treat as an independent contractor, you must:
- Have evidence that both you and the worker intended the classification (as either employee or contractor) to be the same
- Have a comprehensive written agreement governing the relationship
- Ensure both parties understand the tax and superannuation implications of the classification
- Avoid significant deviations from the agreed contractual rights and obligations
- Meet all relevant tax and super obligations and report them accurately to the ATO
- Obtain specific advice supporting the correct classification
- Obtain specific advice confirming whether the broader definition of “employee” under the Superannuation Guarantee Administration Act applies
Why the Practical Compliance Guideline matters for small business
This list of requirements is extensive, and many small and medium businesses are not fully complying with them. Independent contractor arrangements are common in the Australian economy, but without meeting the expectations outlined in the Practical Compliance Guideline, your business could face ATO scrutiny.
Get support with contractor arrangements and ATO compliance
If you engage contractors and are unsure whether your arrangements align with the ATO’s expectations, the experienced team at MacMillan Cowan & Co can help. We’ll walk you through your responsibilities under the Practical Compliance Guideline, clarify worker classifications, and assist with tax and super compliance.
Contact our Geelong accounting team today for practical guidance tailored to your business.