On February 9, 2022 the High Court handed down decisions, which have impacted the ATO’s advice and guidance in relation to classifying workers.
The Practical Compliance Guideline PCG 2023/2, initially presented as a draft under PCG 2022/D5, outlines the Australian Taxation Office’s (ATO) strategy for ensuring compliance among businesses involved in worker engagement and the distinction between employee and independent contractor classifications. This guideline sets out how the ATO allocates compliance resources, considering the associated risk related to worker classification.
This guideline will note how to determine whether a worker is an employee or an independent contractor. This is essential to guarantee that both the business and the worker can fulfill their obligations regarding tax, superannuation, ABN registration, and reporting.
The classification of a worker is established by the totality of the contractual arrangement between the involved parties, which includes any implied or verbal terms. The characterisation of their relationship relies on whether a worker is actively contributing to the engaging entity’s business, as opposed to operating an independent business of their own.
The guideline outlines the ATO’s risk framework concerning worker classification arrangements, which is derived from the actions taken by the involved parties when entering the arrangement. Parties have the option to conduct a self-assessment using this risk framework, providing them with an understanding of the likelihood of the ATO utilising compliance resources to examine their arrangement.
When the arrangement unmistakably falls under either employment or independent contracting, the parties may choose not to depend on the guideline. Instead, they can choose to self-assess based on their confidence in applying the correct classification.
The risk framework comprises of four zones: (A) very low risk, (b) low risk, (c) medium risk, and (d) high risk. In addition, the guideline specifies seven criteria that must be met for an arrangement to be categorised into one of these risk zones. The criteria relate to the parties’ arrangement, intention and understanding between the parties.
If there is a change in the operation of an arrangement between a worker and an engaging entity, a re-evaluation of their risk rating may be necessary. The guideline becomes applicable starting from December 6, 2023.
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