While accountants and bookkeepers were busy celebrating the end of 2023/24, the ATO quietly released a draft update on Friday that outlined proposed changes to the vexed matter of whether a contractor is an employee or not an employee for super guarantee purposes.

No-one at their EOFY soiree had to worry about the impact the ATO draft update had on this year’s Federal Budget, which in many ways was symptomatic of the financial year that was, with better times being promised somewhere on the horizon, starting on the first day of the next financial year. The two headline announcements from the Budget were the Stage III tax cuts, originally promised by the previous government, and energy bill relief for all Australian households without exception.

There is nothing in the Budget that will assist the arts industries in any meaningful way, other than an extension of the instant asset write-off measure for small business for another year. Judging by the collapse of specialist artwork finance house Art Money less than a month after the Budget was brought down, there has been a less than enthusiastic response by consumers to this announcement.

The Stage III tax cuts lower income tax by broadening the tax tables for residents as follows:

The above rates do not include the Medicare levy of 2%.

No effort has been made to rectify inconsistencies in the tax system, such as the very low threshold of $40,000 to exempt artist businesses making losses, that has not changed in 25 years.

Welcome Budget measures include:

• $300 energy bill relief for all Australian households and $325 for eligible small businesses – applied as an automatic quarterly credit;
• Student HELP debts will be cut by changing the way indexation is calculated. From 1 June 2023, it will be the lower of the CPI or the Wage Price Index (WPI), reducing the debt accumulated by more than 3 million Australians when the CPI spiked to 7.1%; and
• Increase to the Commonwealth rent assistance maximum rates by 10% from 20 September 2024.

The ATO’s proposed changes to TR 2023/4, which deals with the issue of who is an employee for super guarantee purposes, followed recent developments in case law.

The draft ruling noted that the term ’employee’ is not defined in the Taxation Administration Act 1953 and therefore has an ordinary meaning.

“In most cases, it will be self-evident whether an employer and employee, or principal and independent contractor, relationship exists,” the appendix to the draft ruling stated.

“However, it is sometimes difficult to discern the true character of the relationship as the contract or contracts between the parties may be unclear or ambiguous, or because the terms are disputed by the parties or are otherwise in apparent conflict.”

Due to these difficulties, the ATO said the ordinary meaning of employee has been the subject of a significant amount of judicial consideration.

The draft guidance explained that the relationship between a worker and an engaging entity will generally be either:

– a relationship of employment, often referred to as a contract of service, or

– a principal and independent contractor relationship, referred to as a contract for services.

“The courts have considered these relationships in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee,” it said.

“The leading decision is Personnel Contracting. In that case, the majority of the High Court confirmed that in determining whether a relationship between a worker and engaging entity is one of employment, an examination of the totality of the relationship must be undertaken by reference solely to the legal rights and obligations which constitute that relationship.

“This examination of the established contractual relationship is undertaken through the focusing question of whether the worker is working in the business of the engaging entity.”

The draft guidance said while no factor will be determinative, the more control the engaging entity can exercise over how, when and where the worker personally performs their work under the contract, the more likely the worker is to be an employee of the engaging entity.

“This is because the ability to exercise control demonstrates the subservient and dependent nature of the work of the worker to the business of the engaging entity,” the draft guidance said.

“With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it.”

The ATO is currently seeking comments on the draft ruling with consultation closing on 9 August.