What’s emerging? ATO releases refreshed guidance on worker classification

What’s Emerging: ATO releases guidance on worker classification 

16 December 2022

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Following the High Court decisions in CFMEU & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek) earlier this year, the Australian Taxation Office (ATO) has released updated guidance to assist organisations evaluate Pay As You Go (PAYG) Withholding and Superannuation Guarantee (SG) obligations when engaging workers. 

This guidance is intended to refresh the Commissioner of Taxation’s (Commissioner’s) previous views on worker classification, having regard to developments arising from recent case law. It also offers practical guidance for organisations to consider, with respect to the degree of risk associated with contracting arrangements. Specifically, two draft publications have been released:

  • Draft Taxation Ruling 2022/D3 Income tax: pay as you go withholding – who is an employee? (TR 2022/D3) which replaces Taxation Ruling 2005/16: Income tax: Pay As You Go - withholding from payments to employees which has now been withdrawn (TR 2005/16W); and
  • Draft Practical Compliance Guideline PCG 2022/D5: Classifying workers as employees or independent contractors – ATO compliance approach (PCG 2022/D5).

TR 2022/D3 provides the Commissioner’s current interpretation of the ordinary meaning of ‘employee’ for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 and subsection 12(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA). These provisions are of relevance to PAYG Withholding and SG obligations, respectively. It is important to note that TR 2022/D3 is not legally binding on the Commissioner for SG purposes. 

PCG 2022/D5 outlines the Commissioner's proposed compliance approach in relation to contractor arrangements. 

Relevantly, the Commissioner notes that the PCG is not intended to provide a definitive answer to the employee versus contractor determination; rather, it offers a framework against which the ATO can assess its allocation of compliance resources using a risk-based methodology. This in turn, may assist organisations to understand the likelihood of the ATO dedicating compliance resources to their contracting arrangements, and to identify governance measures which could reduce an engaging party’s contractor-related ATO risk profile. 

Importantly, the publications consider superannuation implications in the context of the common law / ordinary meaning of ‘employee’. With respect to subsection 12(3) of the SGAA, which expands the meaning of employee for SG purposes, Superannuation Guarantee Ruling SGR 2005/1 Superannuation guarantee: who is an employee? (SGR 2005/1) will be updated following the upcoming decision of the Full Federal Court in the matter of Jamsek, which had been remitted by the High Court to address the extended definition of ‘employee’. 

Further insight on TR 2022/D3 and PCG 2022/D5 is set out below. 

TR 2022/D3 - Key points of note

Consistent with the High Court decisions, TR 2022/D3 reiterates the focus on contractual rights and obligations as being relevant in determining whether the worker is an employee of an engaging entity. The draft ruling provides that the central question in assessment is whether the worker is working in the business of the engaging entity, based on examining the ‘totality of the relationship’ from construction of the terms of contract. 

Importantly, despite the contractual focus, the draft ruling reiterates the judicial outline that contractual labels (whether written or otherwise) are not determinative of, or necessarily relevant to, that characterisation. It is also noted that a ticks and crosses checklist should not be the basis of assessment. 

Whilst reiterating the High Court’s outline that, where a comprehensively written contract exists, the nature of the relationship between the parties is to be solely determined by the legal rights and obligations as expressed in the contract, the draft ruling expands on instances where the contract can be departed from, including circumstances of variation/waiver/discharge, sham arrangements and situations where equitable remedies are sought.

In relation to the variation, waiver or discharge, the Commissioner provides that this may be in writing or may occur by implication where the parties conduct themselves in a manner inconsistent with the contract. With respect to the concept of a ‘sham’ arrangement, the draft ruling focuses on a contract that does not represent a legitimate record of the intended legal relationship. Finally, it is also noted that conduct could reveal evidence of facts relevant to rectification, estoppel or any other legal, equitable or statutory rights or remedies. 

TR 2022/D3 outlines that a ‘totality of the relationship’ approach involving the familiar multifactorial indicia remains relevant, but only for the purpose of assessing the contractual rights and obligations of the parties. In this regard, we set out below the Commissioner’s key observations: 

  • Control: Consistent with the High Court decisions, the draft ruling highlights control as being the key indicator of employment, noting that the assessment relates to the contractual right to exercise control, rather than the actual exercise of control itself. 
  • Results: Acknowledging that results-based contracts are a strong indicator of an independent contractor relationship, the Commissioner provides that consideration for a result is often a fixed sum basis rather than by reference to hours worked, activities completed, etc. Additional commentary has been provided for ‘piece-rate’ or ‘output-based’ payment models that can still persist in an employment context. 
  • Tools and Equipment: The draft ruling re-emphasises the Jamsek outline, which provided that the weight ascribed to this factor is dependent on the nature, scale and cost of the tools and equipment - where these are significant or require the exercise of occupational skill, it is likely to be indicative of an independent contractor relationship. 
  • Risk: The Commissioner notes that where a worker bears little or no risk, they are more likely to be an employee, however, the draft ruling emphasises that a contractual clause requiring the obtaining of insurances is unlikely to hold weight where other facts support an employment conclusion. 
  • Generation of goodwill: Whilst noting that, if an independent contractor performs services in the course of their own business, it would be common for the contractor to be able to generate goodwill, the draft ruling also references the Jamsek conclusion that not all businesses will necessarily generate goodwill. 

Finally, the draft ruling broadly maintains the Commissioner’s current approach in relation to arrangements between a principal and an interposed entity, which involves generally accepting that, under such circumstances, an employment relationship would not exist. It should not be overlooked that the Commissioner notes that a different conclusion may be reached if the worker is also directly a party to the contract. 

PCG 2022/D5 - Key points of note

The draft guideline outlines the Commissioner’s risk framework (see Table 1) for worker classification arrangements, providing that parties can self-assess against this framework to understand the likelihood of the ATO applying compliance resources to review the arrangement.

To assist parties with identifying the likelihood of the ATO focussing compliance resources towards contracting arrangements, four risk zones are provided, with a distinction drawn for proactive case selections by the ATO versus review as a result of an employee/contractor complaint:

Table 1: ATO’s approach to risk

ATO approach
Risk zone Unpaid superannuation query Proactive case selection
Very low No further compliance resources will be applied.
Low Compliance resources will be applied to test whether the worker meets the extended definition of employee under the SGAA. No further compliance resources will be applied.
Medium Compliance resources will be applied to test the correct worker classification (including SGAA extended definition) for the arrangement but will be given lower priority than arrangements that are rated high risk.

Compliance resources will be applied to test the correct worker classification (including SGAA extended definition) for the arrangement and will be given the highest priority resourcing.

Businesses may be subject to higher penalties if it is found they failed to correctly classify their workers.

For the purpose of identifying the risk zone that an engaging entity’s contracting arrangements are likely to fall into, guidance is provided which serves also to identify the measures an entity may choose to implement in order to influence its contractor-related risk profile with the ATO. At a high level, the risk classification for various criteria is summarised in Table 2.

Table 2: Classifying risk zones

Criteria Very low Low Medium High
Evidence the parties both agreed the contractor classification x x x






Arrangement does not fall in the very low, low or medium-risk categories

Evidence the parties both intended and understood the tax and superannuation consequences (including the extended 'employee' definition under the SGAA) x    
Engaging party obtained professional advice (in-house counsel, solicitor or tax professional, administrative body or ATO) x x x
Performance of the arrangement has not deviated significantly from the contractual rights and obligations x x  
Engaging party is meeting applicable tax, superannuation and reporting obligations, as relevant  x x  

Pertinently, the draft guideline notes that, where a party has self-assessed a risk category when an arrangement was entered into, should circumstances materially change, the risk rating will need reassessment. 

For clarity, this draft guideline does not assist with the classification of a worker, nor is it indicative of the view that would be adopted by the ATO (or any other regulator, court or tribunal) in the event of a review. Organisations should be cognisant of the potential for their contracting arrangements to carry differing risk profiles across different obligations.

Key Takeaways

The Commissioner’s refreshed views recognise the key principles coming out of the High Court in the matters of Jamsek and Personnel Contracting, by outlining a shift away from a ‘substance over form’ approach to evaluating the nature of a relationship, towards an assessment which focuses on the contractual terms agreed between the parties. 

The guidance offers helpful insight into the identification of factors which will often be influential in the assessment of a contractual relationship, such as the presence of control within the contractual terms. Importantly, the guidance also serves to address the Commissioner’s views on circumstances under which the written terms of a contract may not be determinative. For example, the Commissioner observes the potential for contracts to be oral, or at least partly oral, and the guidance emphasises that subsequent conduct may be considered relevant when determining the potential existence of a variation to the contractual terms. 

Organisations should be cognisant of two potential limitations to TR 2022/D3, being that its guidance is not binding on the Commissioner for superannuation purposes, and that it does not clarify the Commissioner’s view on the extended definition of ‘employee’ under the SGAA - noting such guidance is expected to follow the upcoming decision of the Full Federal Court in the matter of Jamsek

With respect to PCG 2022/D5, the Commissioner has established a ‘risk zones’ framework which stands to reward good governance, through which organisations may access some degree of confidence, at least in relation to the ATO’s focus on SG and PAYG withholding obligations. It will be important for organisations to understand the limited role that a lower risk rating under the PCG plays in their overall organisational risk; namely, the implications of a contractor arrangement carrying a low risk profile (pursuant to the PCG) does not:

  • prevent an employment relationship being established; 
  • will not form a robust defence to a worker complaint regarding misclassification; and 
  • is unlikely to influence the compliance activity or views of other regulators such as the State Revenue authorities, or the courts and tribunals. 

We also observe a number of recent examples whereby an individual that had been engaged on a contracting basis, had claimed unpaid superannuation through means other than the ATO (for example, through the judiciary). Consequently, notwithstanding a lower ‘risk zone’ under the PCG, organisations may find a spectrum of risk profiles attached to a single contractor arrangement - each of which must be understood, in order to be adequately managed. 

Accordingly, while organisations may find that good governance can aid their ATO-related risk profile, it remains critical that they not lose sight of the need to focus on properly establishing, documenting and evaluating the contractual terms of an arrangement and understanding the taxation and superannuation consequences. 

Lastly, we are in an environment where there is significant scrutiny on organisational compliance with meeting worker entitlements, driven by the extent of underpayments reported in recent years, and amplified by the sharpening focus of government and regulators on matters considered to constitute ‘wage theft’. In addition, questions have been mounting around the accuracy of ATO guidance for some time, due to inconsistencies between historic ATO guidance on matters such as worker classification and the ordinary times earnings base, and more recent decisions of the courts. While TR 2022/D3 addresses one such inconsistency, the culmination of these factors has created a landscape in which a PCG on worker classification, which risks affording more protection to organisations than individuals, may be met with a degree of unease - or at least, may be perceived as standing in contrast to broader sentiment around worker entitlements. Nonetheless, such views may be offset to some degree by the PCG’s focus (combined with TR 2022/D3) on instilling measures seeking to align contract analysis to the recent High Court decisions, highlighting the need for governance in an area that, in many organisations, has been an area of underinvestment for some time. 

Ultimately, the ability of an independent contractor to challenge a technical position remains, including through means outside of the ATO. It comes down to the degree of focus given by the regulator - but we can understand the decision to 'prioritise' efforts (with limited resources, and lots to do) towards higher risk contracting arrangements.

Both TR 2022/D3 and PCG 2022/D5 are open for public consultation, with comments due by 17 February 2023. PwC will be making a submission. Should you have any comments that you would like us to include in our submission, please reach out to your PwC contact. 

Contact us

Greg Kent

Greg Kent

Partner, PwC Australia

Tel: +61 412 957 101

Anne Bailey

Anne Bailey

Partner, Workforce, PwC Australia

Tel: +61 407 204 193

Paula Shannon

Paula Shannon

Partner, Workforce, PwC Australia

Tel: +61 421 051 476

Shane Pinto

Shane Pinto

Director, Employment Taxes, PwC Australia

Tel: +61 423 679 958

Adam Nicholas

Adam Nicholas

Partner, Workforce, PwC Australia

Tel: +61 2 8266 8172

Norah Seddon

Norah Seddon

Partner, Tax, Asia Pacific Workforce Leader, PwC Australia

Tel: +61 2 8266 5864

Claire Plant

Claire Plant

Director, PwC Australia

Tel: +61 403 877 067