Sky Accountants Podcast
A Podcast focusing on the issues that affect business owners in Australia. From the latest tax changes, to finance and developments in employment law and HR, the Sky team bring you all the latest on the most topical issues that Australian business owners need to be across.
Sky Accountants Podcast
Employees Versus Contractors
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Jamie Johns (CEO) and Ashley Carmichael (CTO) of Sky Accountants talk about the latest guidance from the ATO on the always challenging contractor v employee issues faced by businesses.
ABOUT SKY ACCOUNTANTS PODCAST:
A Podcast focusing on the issues that affect business owners in Australia.
From the latest tax changes, to finance and developments in employment law and HR, the Sky team bring you all the latest on the most topical issues that Australian business owners need to be across.
Jamie Johns 00:18
Hi there everyone. It's Jamie Johns here from Sky Accountants. I'm the CEO and in today's podcast I've got with me Ashley Carmichael who is a director and a senior client manager at Sky and also our Chief Technical Officer. Welcome Ash, how are you today?
Ashley Carmichael 00:38
Hi Jamie, I'm good. Good to be here. How are you going?
Jamie Johns 00:44
Yeah, going really well Ash and I'm pretty interested to hear about this long-term
topic in today's podcast that's been around for quite some years as long as I've been a tax accountant anyway and the topic today that we're going to talk about is "Employees Versus Contractors". How long has this topic been around you think Ash?
Ashley Carmichael 01:07
Ahhhh! It's been around forever. I can't remember a time where it wasn't an issue and it only seems to get more complicated the more the time wears on.
Jamie Johns 01:21
Yeah, absolutely. I remember when I started as an accountant and advising clients it seemed to be a topic and it had all types of connotations around entitlements and how taxes treated and that type of thing. And recently Ash, it's really become a highlight again in the news or with the ATO. Could you explain a little bit around the recent guidance if you like and what the tax officer is looking at at the moment?
Ashley Carmichael 01:56
Yeah, look that's right. The ATO just before Christmas in December they've issued some draft documents. One is a Tax Ruling which is TR 2022/D3...
Jamie Johns 02:09
Yeah!
Ashley Carmichael 02:10
- and also a Practical Compliance Guide which is PCG 2022/D5. And so they're just open for consultation at the moment. It's not the final position of the ATO but these things don't tend to change too much.
Jamie Johns 02:33
Hmmm...
Ashley Carmichael 02:34
But look essentially what's happened they have a or had a document of tax ruling from 2005 that they've sort of updated piecemeal along the way. But back in February 2022, so a year ago, there were a couple of fairly important high court decisions. They weren't actually tax decisions. They were about industrial relations issues, fair work.
Jamie Johns 03:05
Yeah!
Ashley Carmichael 03:06
Those were the CFMEU versus personal contracting and there was another one ZG Operations via Jamsek.
Jamie Johns 03:15
Ash, just to stop you there, it's just to sort of give our audience context if you like. But at a basic level, why is it important to distinguish people from being a contractor to an employee? Like what's the real deal?
Ashley Carmichael 03:35
You know, that's a really good question and look, there's a number of different areas where this comes into play. So...
Jamie Johns 03:44
Hmmm...
Ashley Carmichael 03:45
- these documents from the ATO, their focus is mainly on when they're an employee and they're at PAYG with holding obligations.
Jamie Johns 03:51
Yeah!
Ashley Carmichael 03:52
But it impacts super guarantee...
Jamie Johns 03:57
Yeah!
Ashley Carmichael 03:58
- it impacts work cover, it impacts payroll tax.
Jamie Johns 04:01
Yes!
Ashley Carmichael 04:01
And then there's also all the fair work issues around, you know, do these people need to be paid award rates?
Jamie Johns 04:10
I see.
Ashley Carmichael 04:01
Do they have to pay for entitlements like holidays? You know...
Jamie Johns 04:13
Hehe...
Ashley Carmichael 04:14
It's a myriad of different things.
Jamie Johns 04:15
So it has massive impact then if someone's classified as an employee as the half a dozen points that you've pointed out versus being a contractor...
Ashley Carmichael 04:24
Hmmm..
Jamie Johns 04:25
- and the business owner's obligations around the difference. So yeah!
Ashley Carmichael 04:30
That's right. And from a business perspective...
Jamie Johns 04:34
Yeah!
Ashley Carmichael 04:35
- the risk, you know, fairly and squarely resides with the business.
Jamie Johns 04:41
The small business.
Ashley Carmichael 04:42
They are the ones who cop the penalties and...
Jamie Johns 04:47
Yeah!
Ashley Carmichael 04:48
- lots of stuff if they get it wrong. And the other sort of issue that's emerging now is that we're seeing in this space is the sort of reputational damages that the businesses can suffer...
Jamie Johns 05:01
Oh!
Ashley Carmichael 05:02
- if they seem to be treating employees the right way.
Jamie Johns 05:06
Yeah!
Ashley Carmichael 05:07
It's the right way.
Jamie Johns 05:08
And as the tax office recently in those sort of updates that you mentioned earlier, have they really refined the criteria to help people, you know, determine whether someone is employed versus a contractor?
Ashley Carmichael 05:22
Well, yes and no. Hmmm... So those high court cases I mentioned and..
Jamie Johns 05:30
Hmmm...
Ashley Carmichael 05:31
--they're sort of the instigator of the ATO updating this ruling. And...
Jamie Johns 05:35
Yeah!
Ashley Carmichael 05:36
- what's not really changing is the indicia of when someone is an employee versus a contractor that's based on case law that's been around for a long time...
Jamie Johns 05:50
Hmmm...
Ashley Carmichael 05:51
- long, long time. But what those cases did was they clarified that what needs to be looked at when you're appraising those criteria.
Jamie Johns 06:05
Yes.
Ashley Carmichael 06:06
And so fundamentally, what they said is that where there's a written contract between the worker and the business, then you have to look only at that contract at the time that it was made. And that, you know, they use this terminology and an objective assessment of the contract.
Jamie Johns 06:30
Yes.
Ashley Carmichael 06:31
And, you know, they're looking at specifically the legal rights and obligations that are embodied by that contract and how that stacks up against the time-honoured criteria.
Jamie Johns 06:44
Yes.
Ashley Carmichael 06:45
And this has been a bit of a change because historically, there was this sort of look at the totality of the arrangement, not just the contract.
Jamie Johns 06:54
Ah! So, this... this is a...
Ashley Carmichael 06:55
But all these, you know...
Jamie Johns 06:56
Yeah!
Ashley Carmichael 06:57
- how things are done after the contract.
Jamie Johns 07:00
Yeah! Hehe... So this is more of a focus coming back to the contract at the time, right?
Ashley Carmichael 07:08
That's right. It's a fairly significant shift in terms of...
Jamie Johns 07:13
Yeah!
Ashley Carmichael 07:14
-how the stuff is looked at.
Jamie Johns 07:15
Yes!
Ashley Carmichael 07:14
And in a way, it narrows it down and deals just specifically with what are the rights and obligations in the contract and what do they suggest is the right classification for this worker.
Jamie Johns 07:32
So moving forward, Ash, does that affect small business historically, like someone who had a contract maybe, you know, five years ago? Or is it more forward-looking now or just everyone?
Ashley Carmichael 07:48
Look, it can go back.
Jamie Johns 07:51
Uh! Hmmm..
Ashley Carmichael 07:52
You know... So if you engage someone as a contractor a year ago, and...
Jamie Johns 07:57
Hmmm..
Ashley Carmichael 07:58
-that were to come into the spotlight and be reviewed now.
Jamie Johns 08:02
Yes.
Ashley Carmichael 08:03
- then it would be this criteria that we're looking at to work out whether or not...
Jamie Johns 08:08
Oh! Okay!
Ashley Carmichael 08:09
-a person is or isn't a contractor. You know, notwithstanding that at the time you started working with them, you know...
Jamie Johns 08:18
Yeah!
Ashley Carmichael 08:19
-the approach might have been a bit different.
Jamie Johns 08:20
Could you tell us a little bit more about that criteria maybe?
Ashley Carmichael 08:23
Well, look, the criteria that we're looking for when we're trying to work out whether someone is an employee versus a contractor...
Jamie Johns 08:32
Yes.
Ashley Carmichael 08:33
-at a high level... it's the, you know... the terminology we use is, is it a contract of service, i.e. an employee...
Jamie Johns 08:42
Yeah.
Ashley Carmichael 08:43
-versus a contract for service being a contractor...
Jamie Johns 08:47
Yeah.
Ashley Carmichael 08:48
-which is a bit of a subtlety. But essentially what you start doing is you start looking at some of these, what they call the indicia. And so whether or not there's control. So..
Jamie Johns 09:01
Yes.
Ashley Carmichael 09:02
-there's a high level of control that points more towards an employee.
Jamie Johns 09:04
Oh, yeah!
Ashley Carmichael 09:05
So, you know, that the business has a fair degree
Jamie Johns 09:08
Yeah!
Ashley Carmichael 09:09
- of control.
Jamie Johns 09:10
Yes!
Ashley Carmichael 09:11
Whether or not there's a right to delegate. So for example,..
Jamie Johns 09:14
Hmmm...
Ashley Carmichael 09:15
-if you're contracting me and I'm entitled to delegate...
Jamie Johns 09:21
Delegate... delegate the work.
Ashley Carmichael 09:22
-that we're doing to other people...
Jamie Johns 09:23
Yes.
Ashley Carmichael 09:24
- t's fairly strong indication that it's a genuine contractor relationship.
Jamie Johns 09:29
Yes.
Ashley Carmichael 09:30
Whereas , you know, if I'm not allowed to delegate or I've got to get your permission, and it might point the other direction.
Jamie Johns 09:37
Yes.
Ashley Carmichael 09:38
And whether or not, hmm... the engagements to achieve a result. So that's the classic, am I employed by the hour or by the day?
Jamie Johns 09:51
I see.
Ashley Carmichael 09:52
Or am I employed to complete a certain job?
Jamie Johns 09:54
Yes.
Ashley Carmichael 09:55
And whether or not the worker provides their own tools and equipment.
Jamie Johns 10:01
Hmmm...
Ashley Carmichael 10:02
If I turn up on your work site and I pick up your hammer and saw and get to work...
Jamie Johns 10:11
Yeah!
Ashley Carmichael 10:12
-that's indicating an...
Jamie Johns 10:14
I see!
Ashley Carmichael 10:12
-employee versus, you know, if I turn up and I've got all my own kit.
Jamie Johns 10:19
Yes!
Ashley Carmichael 10:20
And, that suggests more of a contractor.
Jamie Johns 10:24
Yeah!
Ashley Carmichael 10:25
The exposure to risk.
Jamie Johns 10:28
Okay!
Ashley Carmichael 10:29
You know, a contractor...
Jamie Johns 10:31
Uh! Hmmm...
Ashley Carmichael 10:32
-should bear a level of risk, should something go wrong. So, whether that's...
Jamie Johns 10:38
Yeah!
Ashley Carmichael 10:39
-damages or for rectification.
Jamie Johns 10:41
Yeah!
Ashley Carmichael 10:42
That sort of thing. And.. whether or not there’s generation of goodwill. So, you know...
Jamie Johns 10:49
Ah! Yeah!
Ashley Carmichael 10:50
-if you think about a typical business
Jamie Johns 10:51
Yup!
Ashley Carmichael 10:53
-over time you develop some goodwill around that business.
Jamie Johns 10:57
Yes!
Ashley Carmichael 10:58
Whereas if it's more of an employee, there will be an absence of that goodwill. And you know, that can include things like, you know, does the public see that business and operating under their own business name and have some spot.
Jamie Johns 11:18
Then... Yes! Yeah! So, some of those points there, Ash, are not new in a general sense. But are they then porting back to the, if there is a contract involved, then, you know, that contract becomes a reflection of those points that you said it can hold more weight the spot.
Ashley Carmichael 11:39
Yeah, you're spot on there. So those criteria are as old as the hills and that's been around for a long time.
Jamie Johns 11:47
Yeah!
Ashley Carmichael 11:48
What we're looking at now is how do you assess those criteria? Going way back...
Jamie Johns 11:54
Yes!
Ashley Carmichael 11:55
-you just looked at the totality...
Jamie Johns 11:56
Totality!
Ashley Carmichael 11:57
-of what was going on. Whereas the high court in those cases said no and we would only do that in exceptional circumstances.
Jamie Johns 12:06
Totality!
Ashley Carmichael 12:07
If there's a written contract, then we should only be looking at that contract...
Jamie Johns 12:13
Hmmm..
Ashley Carmichael 12:14
-and see what it's got to say...
Jamie Johns 12:15
Yeah!
Ashley Carmichael 12:16
-you know, as to those points. Hmmm...
Jamie Johns 12:18
Yeah! Yeah! You know, it's certainly interesting because, as you said at the start, the risk that someone, you know, maybe was previously classified as a contractor and then with this new guidance coming in, someone then being classified as an employee, it brings in all those obligations that you said earlier, fair work, superannuation, the list goes on and on. So yeah, it's a good point... hmmm... you know... those small businesses, I think, really need to get some advice on. And, hmmm... You know... Is there anything that businesses should do now, Ash, with this new direction that the tax office are taking? Is there things that the ordinary small business person should take action with this knowledge?
Ashley Carmichael 13:09
Yeah, look what there is. This area is just such a tough area for small and medium businesses...
Jamie Johns 13:16
Hmmm...
Ashley Carmichael 13:17
-even for large businesses because it's just so complicated and there's so much gray area.
Jamie Johns 13:22
Yeah!
Ashley Carmichael 13:24
And... But it's also a really risky area that the consequences of getting it wrong can be really significant.
Jamie Johns 13:33
Yes!
Ashley Carmichael 13:34
As, you know, I said earlier, in terms of, you know...
Jamie Johns 13:36
Yeah!
Ashley Carmichael 13:37
-monetary impact..
Jamie Johns 13:39
Yes!
Ashley Carmichael 13:40
Hmmm... You know, for example, dealing with this PAYG aspect, you can get hit with a little withhold penalties...
Jamie Johns 13:48
Yeah!
Ashley Carmichael 13:49
- which are, you know, really significant.
Jamie Johns 13:50
Yeah! What would you suggest people do then, do you think?
Ashley Carmichael 13:54
Well, look, they've got to do their best to get across the topic.
Jamie Johns 13:59
Yeah!
Ashley Carmichael 14:00
And these documents that I've referred to, so TR 2022/D3 and PCG 2022/D5…
Jamie Johns 14:08
Yeah!
Ashley Carmichael 14:09
-that they're available. You can just Google them and you'll
Jamie Johns 14:11
Find them!
Ashley Carmichael 14:12
-find them.
Jamie Johns 14:13
Yeah!
Ashley Carmichael 14:14
And they're reasonably plain English documents. You know... most people have a good go at reading them. And I'd encourage them to do that...
Jamie Johns 14:24
Yes!
Ashley Carmichael 14:25
-if they're using contractors.
Jamie Johns 14:26
If they're using contractors, yeah, that's a good point. Yeah!
Ashley Carmichael 14:29
You know, look, it just is an important area...
Jamie Johns 14:33
Yeah!
Ashley Carmichael 14:34
-and it does deserve an investment in time. But, you know, really…
Jamie Johns 14:39
Hmmm!
Ashley Carmichael 14:40
- if you're using contractors,..
Jamie Johns 14:43
Contractors!
Ashley Carmichael 14:44
- you know.., you need to talk to someone who's familiar with...
Jamie Johns 14:47
Yeah!
Ashley Carmichael 14:48
-the area and get some guidance...
Jamie Johns 14:51
Yeah!
Ashley Carmichael 14:48
-mate! And, and periodically review what you're doing. Things sort of have a way of evolving over time.
Jamie Johns 14:58
Yeah!
Ashley Carmichael 14:59
And, you know, arrangements might have been co-shared...
Jamie Johns 15:04
Yeah!
Ashley Carmichael 15:05
-months ago, but as...
Jamie Johns 15:06
Not anymore!
Ashley Carmichael 15:07
Yeah! Haha!
Jamie Johns 15:08
So I think your point there is very good. Like your message here in today's podcast is if you've got existing contractors, who should people reach out to? Ash, they can reach out to the office.
Ashley Carmichael 15:22
Yeah, but your accountant, is a good first port of call or get in touch with us...
Jamie Johns 15:28
Yes!
Ashley Carmichael 15:29
You know, our whole team's right across this issue and... you know...
Jamie Johns 15:32
Yeah!
Ashley Carmichael 15:29
-absolutely willing to help people and get an understanding and also to review what's going on.
Jamie Johns 15:43
Yeah!
Ashley Carmichael 15:44
There's still a bit of a wait-and-see approach here with, you know, that the consultation process is happening. These documents might get tweaked a bit...
Jamie Johns 15:52
Uh! Hmmm.
Ashley Carmichael 15:53
-before we finalise.
Jamie Johns 15:54
Yeah!
Ashley Carmichael 15:55
And, so we'll have to keep monitoring that and we'll keep updating people, you know, through our newsletters and that sort of thing.
Jamie Johns 16:01
Yes!
Jamie Johns 16:04
Yeah!
Ashley Carmichael 16:04
But it just needs time. There's other things happening as well in this space,..
Jamie Johns 16:10
Uh! Hmmm.
Ashley Carmichael 16:11
-particularly around payroll tax and...
Jamie Johns 16:14
Yeah!
Ashley Carmichael 16:15
And , and the businesses in the health sector. So...
Jamie Johns 16:18
Yeah!
Ashley Carmichael 16:19
GPs, dentists, physios, optometrists, etc. That there's a fairly common practice structure they use where the professionals or the clinicians are often contractors...
Jamie Johns 16:36
Yeah!
Ashley Carmichael 16:37
-and there have been a couple of significant cases with state revenue offices around payroll tax, one of them in Victoria and another one in New South Wales.
Jamie Johns 16:40
So, it's... yeah! It's very important that those industries that you mentioned are really across this then.
Ashley Carmichael 16:54
Well, yeah, it is very much so because those, you know, anyone in those industries will know that those arrangements are really prevalent.
Jamie Johns 17:03
Yeah! That's right!
Ashley Carmichael 17:04
And..
Jamie Johns 17:05
Yeah!
Ashley Carmichael 17:08
And what the outcome of those cases wasn't great for what those...
Jamie Johns 17:13
Yeah!
Ashley Carmichael 17:14
-arrangements are. And, you know, there's a big question mark now whether there's sort of big payroll tax obligation.
Jamie Johns 17:19
Payroll tax, of course, the state tax, isn't it?
Ashley Carmichael 17:22
Yeah. But, you know, just to... you know... keep it as complicated as possible, one of those cases, it's called Thomas and NAS. It's been appealed. It'll be heard a bit later this year.
Jamie Johns 17:35
Yes.
Ashley Carmichael 17:36
And depending on what the outcome of that is, you know... that might…
Jamie Johns 17:41
And what did that case that involved in a snapshot if I could ask you?
Ashley Carmichael 17:45
That was a GP practice or is a GP practice up in New South Wales.
Jamie Johns 17:51
Yes.
Ashley Carmichael 17:52
We're in Melbourne.
Jamie Johns 17:53
Yeah!
Ashley Carmichael 17:54
And what it was is the classic structure where a number of the GPs that were operating in that practice were actually independent and...
Jamie Johns 18:08
Yes.
Ashley Carmichael 18:09
-they pay a service fee to the practice for the rooms and...
Jamie Johns 18:14
Uh! Hmmm.
Ashley Carmichael 18:15
-support staff and, you know, all that the usual business.
Jamie Johns 18:18
Yeah.
Ashley Carmichael 18:09
And so, what happened is the... So as is normally the case, the practice collects all the receipts from the patients...
Jamie Johns 18:30
Yes.
Ashley Carmichael 18:09
-and on behalf of those doctors. It would then charge a service fee; it deducts that service fee and then sends the...
Jamie Johns 18:39
Yes.
Ashley Carmichael 18:40
-leftover money to the doctor.
Jamie Johns 18:41
Yes.
Ashley Carmichael 18:42
Now, it's historically been held that that type of arrangement isn't one of employee...
Jamie Johns 18:54
Uh! Hmm...
Ashley Carmichael 18:55
-or when, ah, you know... what they call a ratable contractor.
Jamie Johns 18:58
A contractor! Yeah!
Ashley Carmichael 19:03
And not subject to payroll tax, but of course, you know... these decisions have held contrary to that and that...
Jamie Johns 19:12
And then?
Ashley Carmichael 19:14
- payroll tax would be applicable.
Jamie Johns 19:14
Applicable! And now that's on appeal?
Ashley Carmichael 19:17
Well, that's right.
Jamie Johns 19:21
Yeah!
Ashley Carmichael 19:17
So, the Victorian case was similar involving some optometrists. There was a few sort of distinguishing factors which Merky the Warder there, that one isn't being appealed, but these are...
Jamie Johns 19:35
Yeah!
Ashley Carmichael 19:36
-case in New South Wales is.
Jamie Johns 19:38
Yeah!
Ashley Carmichael 19:36
And at the moment, those in that industry...
Jamie Johns 19:44
Yes!
Ashley Carmichael 19:45
-are really sort of everything's a bit up in the air.
Jamie Johns 19:47
Yeah!
Ashley Carmichael 19:48
It's hard to know which way to go.
Jamie Johns 19:51
Yeah!
Ashley Carmichael 19:52
Yeah. So hopefully when that case...
Jamie Johns 19:53
Hmm..
Ashley Carmichael 19:53
-is heard, so to be in the New South Wales Supreme Court...
Jamie Johns 19:57
Uh! Hmmm.
Ashley Carmichael 19:58
And hopefully we get a decision that clears up...
Jamie Johns 20:01
Yeah!
Ashley Carmichael 20:02
-some of the confusion.
Jamie Johns 20:03
Confusion! Yeah!
Ashley Carmichael 20:04
We'll know where we stand.
Jamie Johns 20:05
Yeah!
Ashley Carmichael 20:06
Uh! Hmmm.
Jamie Johns 20:07
Well, Ash, thanks for your time today in this podcast. Look, if anyone has contractors, we both encourage you to reach out, to score accounts, reach out to our office and our team of accountants and client managers will definitely be able to help you. So thanks for your time today, Ash.
Ashley Carmichael 20:28
No, thanks for taking the time to chat to me.
Jamie Johns 20:30
And yeah, we'll see you in the next podcast anyway. Bye, everyone.