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.