New draft ruling: Who is an employee, according to the ATO?

4 July 2024
Amber Agustin, Partner, Melbourne

The ATO administers and enforces superannuation guarantee compliance under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA). The ATO has released its updated (draft) ruling TR 2023/4 on ‘who is an employee’, to set out its view on who is an employee for superannuation guarantee purposes.

The update to draft ruling TR 2023/4 is a long-awaited response to the High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the Full Federal Court remittal decision in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 and the Full Federal Court decisions in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 and JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76.

Longstanding SGR 2005/1 (Superannuation guarantee: who is an employee?) is now withdrawn. Appendix 2 of draft updated TR2023/4 will replace SGR 2005/1 once finalised. TR 2005/16 Income Tax: Pays As You Go – withholding from payment to employees was withdrawn earlier and the part of ruling TR 2023/4 that dealt with the worker classification for PAYG purposes remains largely unchanged.

Who is an employee for superannuation guarantee purposes?

Employers must, in effect, make superannuation contributions sufficient to discharge the superannuation guarantee obligation for:

  • common law employees (section 12(1) SGAA); and
  • a range of others, including contractors, board members and appointees and creative sector workers, referred to as ‘deemed employees’ (section 12(2)-(11) SGAA).

Some of the main categories of deemed employees, who must receive superannuation guarantee contributions are:

  • contractors who contract mainly for their labour – these are genuinely contractors and not common law employees. The legislation nevertheless requires the contracting principal, the ‘deemed employer’ to make superannuation guarantee contributions (subsection 12(3) SGAA);
  • Board members and members of executive bodies of bodies corporate (subsection 12(2) SGAA);
  • persons who provide musical, artistic or creative performances or presentations, or related services (subsection 12(8) SGAA);
  • persons who provide sporting or physical performances or presentations, or related services (subsection 12(8) SGAA);
  • persons who provide promotional performances or presentations, or related services (subsection 12(8) SGAA);
  • persons who provide services in connection with making films, tapes, discs, television or radio broadcasts (subsection 12(8) SGAA);
  • a range of public sector employees and appointees including defence force and police force members (subsection 12(4), (5), (6), (7), (9), (9A), (10); and
  • but excluding persons who are paid to do work which is wholly or principally ‘private or domestic’ in nature for not more than 30 hours per week (subsection 12(11) SGAA).

Each of the above categories can easily trip up employers/principals, but it is the obligation to make superannuation contributions under subsections 12(3), ie for contractors, which is usually of the greatest financial impact for businesses and therefore the focus of this article.

What’s new for ‘deemed employees’?

Much of the ATO’s updated position on ‘who is an employee’ for superannuation guarantee purposes remains consistent with its prior ruling. However, there are a few key developments and possibly a whole new category of contract potentially attracting superannuation guarantee obligations.

Focus on contract not post-contract performance

The previous focus on post-contract conduct has been dropped with a focus on the contractual rights, consistently with High Court authority.

New three point test to align with Moffet

Unsurprisingly, the ATO has now aligned its test for whether a worker is a deemed employee under subsection 12(3) of the SGAA with the Full Federal Court decision in Moffet. These three elements must be satisfied:

  • there must be a contract;
  • the contract must be wholly or principally ‘for’ the labour of the person; and
  • the person must ‘work’ under the contract.

In substance, the key change reflected in the above three elements appears to be a central focus on what the contract is ‘for’. Previously, under SGR 2005/1, there was a greater focus on the work being performed by the person, rather than the substance of the contract.

Contracting with entities

The clarity of SGR 2005/1 on the question of contracting with entities rather than the actual worker has usefully been supplemented with a more nuanced discussion including a section addressing tripartite contracts. The essential principle, namely, that the party providing the labour must be a natural person who is also a party to the contract in their personal capacity before subsection 12(3) can apply remains unchanged. Parties cannot avoid the superannuation guarantee obligation by the mere expedient of tripartite contracts. Indeed, as before, care should be taken to ensure that the contractual arrangements properly reflect the actually intended arrangements and that a natural person is not unnecessarily made a party to the contract, with unintended consequences.

Express right to delegate

Subsection 12(3) won’t apply where the contract contains a right to delegate, subcontract or assign the work, even where subject to consent of the other party. However, this is subject to the right to delegate, subcontract or assign being not challenged as a sham, limited in scope, or legally incapable of exercise. Time will tell what the ATO means by ‘limited in scope’. It does seem that the ATO accepts that even where the consent of the principal is required, a right to delegate, sub-contract or assign will take the contract out of the category of contracts to which subsection 12(3) applies as the person is not required to work under the contract, ie, someone else could possibly undertake the labour.

Implied right to delegate or sub-contract

The draft ruling is silent on circumstances where a contract neither expressly prohibits delegation nor expressly permits it. Ordinarily, a contractor will have the right to delegate or subcontract unless either there is an express clause to the contrary or the circumstances necessarily imply a term to the contrary. Contracts which are silent on delegation, sub-contracting or assignment may be targeted by the ATO for further consideration and it may be for the principal/employer to satisfy the ATO that such a clause should be implied.

Delegation and sub-contracting of inherently personal services

It is also not clear what this means for contracts which are by their nature personal, including for creative endeavours. Such contracts may be interpreted as not permitting delegation, sub-contracting or assignment, even in the absence of an express prohibition clause.

A new type of contract – ‘contracts for integrated benefits’

Relying on the remittal decision in ZG Operations, the ATO has seemingly identified a new type of contract, the ‘contract for integrated benefits’, and the draft ruling sets out how employers/principals must determine whether these contracts are principally for labour.

The Federal Court at first instance found that the relevant contracts were “plainly for the provision of substantial equipment and services” and, accordingly, not “principally for the labour of the person”.

The Full Federal Court on appeal did not consider the issue, having already found that the workers were employees within the ordinary meaning of that word.

The High Court acknowledged the absence of reasons in the Full Federal Court judgment on this issue. However, Gageler and Gleeson JJ found that “what was contracted for, provided, and paid for, under the contract was the carriage of goods by means of a truck, not the truck and separately Mr Jamsek as an individual to drive it”. The case was remitted to the Full Federal Court for reconsideration.

The Full Federal Court on remittal found that the contracts were “for the provision of labour and equipment being the trucks rather than being contracts whereby the Drivers undertook to produce a given result”.

It is difficult to read these three conceptualisations of the contracts consistently. However, reading them together produces an understanding that while the contracts were not contracts for a result, they were also not contracts for labour and the use of the trucks separately. From these decisions, it appears the ATO has developed a new concept, that of the ‘contract for integrated benefits’.

As the Full Federal Court in the remittal of ZG Operations characterised the contract as a single integrated benefit ie a delivery service, and not the separate benefits of the driving labour and the use of trucks, the ATO’s draft ruling seeks to have the comparative values of the components of ‘contracts for integrated benefits’ determined and compared. Where that quantitative valuation exercise establishes that the value of labour was the principal component, then the contract will be principally ‘for’ labour, according to the ATO.

Under the draft ruling, the ATO expects employers to determine the comparative value of the components of ‘contracts for integrated benefits’ to determine the comparative value of the labour component. This analysis is expected to determine whether labour was the principal benefit and if it was, then the ATO’s view is that the contract is principally for the benefit of the labour of the worker.

The ATO relies on obiter in the remittal in ZG Operations. However, in that decision it was far from clear that the Court had determined that the valuation of the components as stand-alone counter-factuals could meet the section 12(3) test that the contract be ‘for’ labour and it seems to stand in contrast with the High Court’s characterisation in ZG Operations that “what was contracted for, and provided, and paid for, under the contract was the carriage of goods by means of a truck, not the truck and separately Mr Jamsek as individual to drive it”. It was far from clear whether, even if the workers had put on such evidence, the Court would have adopted such an approach.

Many if not most contracts for services, as distinct from contracts for goods, will necessarily involve labour in the delivery of the services. This new category seemingly introduces for employers/principals the obligation to cost up the notional components of ‘contracts for integrated benefits’ and undertake a comparison of the components to determine whether the notional value of that component is the principal component.

The ATO does acknowledge that a qualitative, rather than quantitative analysis might be appropriate. However, the draft ruling seemingly favours a quantitative analysis and refers to the ZG Operations remittal decision in which Perram and Anderson JJ commented on the type of evidence that would assist the necessary quantitative analysis including the market value of hiring trucks and the market cost of labour.

This interpretation may be at odds with a reading of subsection 12(3) together with subsection 11(1)(ba) of the SGAA. Subsection 11(1)(ba) provides that ‘salary or wages includes payments under a contract referred to in subsection 12(3) that are made in respect of the labour of the person working under the contract’ and thereby calls for a determination of what value of the payments is referable to the labour component of the contract.  However, before considering subsection 11(1)(b), subsection 12(3) calls for a determination of what the contract is ‘for’. It will be interesting to see if the ATO’s quantitative analysis approach to subsection 12(3) is tested (if it remains in the final ruling) in due course.

The ATO has not abandoned its view that a contract for a result will not be a contract principally for labour and therefore will not attract the operation of section 12(3). However, the new category of ‘contracts for integrated benefits’, if it finds its way in the final ruling, provide a detailed mechanism for employers/principals to determine whether contracts are caught within the ambit of subsection 12(3) where previously they may have been treated as excluded as not primarily for labour. This change may be expected to catch a volume of contracts previously disregarded for subsection 12(3) purposes.

What next?

Comments on the draft ruling are due by 9 August 2024.

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Authored by:

Amber Agustin, Partner

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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