What’s Emerging: ATO draft guidance on extended definition of “employee” for Superannuation Guarantee

Following recent superior court decisions on the extended definition of an “employee” for Superannuation Guarantee (SG) purposes, the Australian Taxation Office (ATO) has released a draft update to Taxation Ruling TR 2023/4 Income tax and superannuation guarantee: who is an employee? (TR 2023/4DC1). The draft ruling seeks to consolidate guidance on the extended SG meaning of “employee” together with the existent ATO publication on the common law interpretation of “employee”, creating one comprehensive ruling (with the previous Superannuation Guarantee Ruling SGR 2005/1 now withdrawn). 

The new Appendix 2 of TR 2023/4DC1 provides guidance on the extended meaning of an “employee” under sections 12(2) to 12(11) of the Superannuation Guarantee (Administration) Act 1992 (SGAA). The key changes from SGR 2005/1 relate primarily to the following extended “employee” definitions: 

• contracts wholly or principally for the labour of the person (section 12(3)); 
• entertainers, artists, musicians, sportspersons, promoters and similar (section 12(8)); and 
  
• the exclusion relating to work wholly or principally of a domestic or private nature (section 12(11)). 
  

Relevantly, the existent ATO guidance for the common law interpretation of “employee” remains unchanged from the earlier iteration of TR 2023/4 (see our article here for the key takeaways from that original version). 

The expansion proposed by TR 2023/4DC1 follows the ATO’s recently published Decision Impact Statements (released in May 2024) in response to JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76 (see JMC Statement) and Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (see Jamsek statement) which both clarified aspects of the application section 12(3).

Contracts wholly or principally for the labour of the person

One of the most significant changes in the draft ruling is the clarification of the criteria for applying section 12(3) of the SGAA, which deems an independent contractor to be an “employee” if they work under a contract that is wholly or principally for the labour of the person. 

The draft ruling replicates the three criteria established from the Full Federal Court’s decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet), which is a departure from the criteria in SGR 2005/1, as follows: 

1. There must be a contract: The draft ruling provides that a contract must exist, being a bilateral exchange of promises, of labour on one side and of payment on the other. Notably, the draft ruling also provides that this exchange of promises can be bilateral notwithstanding that there are more than two parties to the contract. That is, the superannuation regime cannot be circumvented by the simple device of forming a contract which names more than two parties; 
2. The person must work under the contract: Importantly, the draft ruling specifies that this only includes natural persons. That is, independent contractor engaged through interposed entity structures (such as partnerships, personal services trusts, companies, etc.) cannot be an “employee” for SG purposes; and 
   
3. The contract must be wholly or principally for the labour of the person: The draft ruling provides that this is not the case where: 
   

i) There is a right to delegate, subcontract or assign the work under the contract; 

ii) The contract is for a result; or 

iii) The contract is principally for the provision of equipment or other non-labour components. 

The expanded guidance for each of the criterion is reflective of recent superior court decisions, particularly Moffet, Jamsek and JMC. Of note: 

• The draft ruling emphasises that the existence of a contractual right to delegate, subcontract, or assign work is relevant, as against the exercise of that right. However, the contractual right must not be viewed as a sham, limited in scope or legally incapable of exercise. This view is echoed in the ATO’s Decision Impact statement for JMC, whereby it was noted that a hollow or empty right to delegation may be relevant for an argument about sham. As such, organisations should critically assess delegation clauses in agreements in the context of each particular contractor engagement, as against relying on these as a default conclusion for the non-application of superannuation.
• The draft ruling, in assessing whether a contract is for a result, refers back to the existent common law guidance of what is considered a “results based” contract. This is an area that we see organisations grapple with, particularly for non-hourly remuneration models, but also if/when an hourly remuneration model may constitute a results contract. Relevantly, in relation to the latter, the ATO’s Decision Impact statement for JMC notes that the Full Federal Court found that “being paid an hourly rate, while not strongly indicative either way, inclined towards an independent contractor relationship.” However, the ATO appears to caution against relying on this commentary more broadly, pointing to the specific facts of the case for other relevant factors assessed by the Court. 
  
• TR 2023/4DC1 also notes that determining whether labour is the principal benefit or component contracted for may, in some instances, require a qualitative analysis, rather than solely a quantitative valuation approach (as appeared to be the methodology put forward by the Court in Jamsek). Both TR 2023/4DC1 and the Jamsek Decision Impact statement also touch on instances where it may not be appropriate to split out the labour and non-labour components, where the contract is for one single integrated benefit (such as a delivery service). 

Entertainers, artists, musicians, sports persons, promoters, et cetera 

The draft ruling provides for a clearer distinction of where a payment would fall under the criteria of:

• section 12(8)(a) (being where an individual is an “employee” if they are paid to perform or present or participate in activities involving the exercise of personal skills, such as artistic, musical, sporting, or professional activities); and 
• section 12(8)(b) and (c) (being where an individual is an “employe” is they are paid to provide services in connection with the activities mentioned in section 12(8)(a), or provide services in or in connection with the making of any film, tape, disc, or broadcast). 

The draft ruling differs from the previous ruling SGR 2005/1 in several respects regarding section 12(8). Particular principles of note include the ATO’s outline that each payment must be separately examined (i.e. a payment-by-payment basis), and that the term “in connection with” must relate directly to the activity in question and be “bound up or involved in” that activity.

However, it should be observed that the ruling commentary applies a narrow focus in its explanation and examples to just entertainers, artists, musicians and sports persons and does not provide guidance on the full span of the section12(8) provision – this extends to display, promotional or similar activity (broadly described in the ruling as “professional activities”) which involving the exercise of intellectual, artistic, musical, physical or other personal skills. These types of activities may encompass numerous types that organisations solicit in the modern business landscape, such as those focused on promotion through social media engagement, external marketing campaigns or the hiring of speakers for conferences.

Work of a domestic or private nature

Whilst likely to have limited application, it is worth noting that section 12(11) excludes a person who is paid to do work wholly or principally of a domestic or private nature for 30 hours or less per week from being an “employee” in relation to that work.

TR 2023/4DC1 provides the Commissioner’s view on what is considered domestic or private work – which includes cooking, cleaning, shopping, assisting with shopping, showering, dressing and general household duties, minding of children, repairs or maintenance to residential house or garden. Further, the draft ruling specifies that section 12(11) only applies where there is a direct arrangement between the householder making the payment and the person carrying out the work of a domestic or private nature. 

Key takeaways

The draft ruling provides an important update on the Commissioner’s view of the extended meaning of ”employee” for SG purposes, as it reflects the developments in case law and clarifies the criteria for applying the relevant provisions of the SGAA.

The extended “employee” provisions were implemented to widen the scope and ensure protection of retirement savings for a broader range of workers. In that context, the Commissioner cautions against excluding workers under sections 12(2) to 12(10) on the basis that the services were not performed in an employment-like” setting; in other words, SG can apply despite a worker clearly being an independent contractor and not working in an “employee-like” manner. 

The draft ruling provides more guidance for organisations engaging workers, and for the workers themselves, on their SG obligations and entitlements, especially arrangements falling within the scope of sections 12(3) and 12(8), which, in our experience, are the most commonly applied provisions for determining extended employee status. 

Relevantly, with respect to the section 12(3) assessment (the wholly or principally for labour test), the Commissioner’s outline on assessing the depth/capacity of delegation clauses, and the utility of qualitative (rather than quantitative) analysis of contracts (regarding the principal benefit/component), serve somewhat as cautions against arbitrarily relying on delegation and/or non-labour contractual aspects as being the reasons for non-application of superannuation. Similarly, the clear outline of the breadth of section 12(8) highlights the ambit of SG coverage under that provision, including for emerging industries/workers such as those who participate in social media promotional activities.

Organisations should carefully review the draft ruling, including against its own current governance and controls (e.g. reviewing contractor agreements to understand the delegation/sub-contracting limitations (and relevance of those)) and ensure necessary updates to keep currency with the evolving landscape.

The draft ruling is open for public consultation until 31 August 2024. PwC will be making submission. If you have any issues relevant to a submission, please reach out to your PwC contact or one of the contacts listed below.