Nick Bruining: ATO super ruling set to shake up subcontractor arrangements across multiple industries

Subcontractors and those working in the entertainment industry or providing domestic services could be entitled to compulsory superannuation payments following the release of a draft ruling from the Australian Taxation Office.

The “ruling addendum” — along with another tax ruling published last month — could mean thousands of people are eligible to receive millions of dollars in missed super payments.

They set out when the ATO is likely to accept that a subcontractor arrangement is legitimate and not just a sham for businesses trying to dodge employee on-costs.

Those costs include pay-as-you-go withholding tax, compulsory super payments and, in most cases, payroll tax and workers’ compensation insurance premiums.

Tax rulings are interpretations of tax law issued by the Commissioner for Taxation and are binding on the ATO. Tax rulings often apply retrospectively and not just from the date of issue.

The ATO previously said it had spotted issues arising across multiple industries including construction, education, transport and healthcare.

Greg Kent, an employment taxes partner with international accounting firm PwC, said the addendum provides extended employee provisions for superannuation guarantee that are designed to protect the retirement savings of individuals.

“Superannuation guarantee contributions can apply despite a worker clearly being an independent contractor and often not working in an ‘employee-like’ manner,” Mr Kent said.

The ATO ignores titles and labels used and instead looks to the actual work arrangements.

In the June ruling, the ATO stated that, at its core, the distinction between an employee and an independent contractor is that an employee serves in the business of an employer, performing their work as a part of that business.

An independent contractor, on the other hand, provides services to a principal’s business, but the contractor does so in furthering their own business enterprise. They carry out the work as principal of their own business, not part of another.

The same applies when someone has an Australian Business Number. Holding an ABN doesn’t guarantee that the arrangement is an independent contracting one, rather than employment.

In the June ruling, the ATO used examples of independent contracting arrangements which should have been classified as employee arrangements and, therefore, entitled to compulsory superannuation guarantee payments.

The list included: land salespeople, who were engaged by a firm of land agents to find purchasers who were remunerated by commission only; bicycle couriers paid a flag fall rate per delivery; fruit pickers paid daily per bin of fruit picked; and interviewers, who were only paid a fixed rate on the completion of each assignment.

The ruling addendum expands the examples to include those in the entertainment industry.

“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 or provide services in connection with the making of any film, tape, disc, or broadcast,” Mr Kent said.

“While it’s doesn’t specifically deal with the issue, it raises questions about other creative activities such as social media engagement, promotional activities and even speaking at conferences.”

The ruling also deals with people employed to perform domestic duties.

It sets out the type of work it regards as domestic in nature, including cooking, cleaning, shopping, assisting with shopping, showering, dressing and general household duties. It also includes the minding of children, the making of repairs or maintenance on a home, or residential gardening.

The ATO makes the point that only when total hours worked are less than 30 hours a week does compulsory super not apply. The rate of payment is irrelevant.

The exemption only applies when the employment arrangement is a private one, typically between individuals. It does not apply, for example, to a retirement village that employs a domestic cleaner.

And once the cat is out of the bag, employers using contractors that are reclassified as employees need to be aware that it doesn’t stop with super.

“Payroll tax and workers’ compensation also needs to be considered, even if the independent contractor engaged is an entity,” Mr Kent said. “These on-costs often come as a surprise to businesses.”

The ATO can apply reclassification retrospectively where it identifies a long-term issue, recovering unpaid PAYG tax and super payments dating back many years.

In some cases, this has seen some small businesses forced into bankruptcy.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association