logo
25th Feb, 2024
Following two prominent High Court decisions which dealt with the distinction between employees and independent contractors, the ATO has sought to provide guidance to businesses in the form of a taxation ruling. The most significant departure from its previous position is that the ATO now considers that various indicators of employment identified in case law, while relevant, should only be considered in respect of the legal rights and obligations between the parties, with the most important factor the holistic consideration of the contract between the parties.
In brief, the High Court’s decisions deal with the distinction between employees and independent contractors in the context of a labour-hire company and two truck drivers operating through partnerships to provide delivery services to their former employer. In the first case, the High Court ruled that a labourer engaged by a labour-hire company to work on construction sites under the supervision and control of a builder was an employee of the labour-hire company.
The High Court noted that this right of control, and the ability to supply a compliant workforce, was the key asset of the business as a labour-hire agency and constituted an employment relationship. That the parties chose the label “contractor” to describe the labourer did not change the character of that relationship, the High Court said. This decision also overruled a earlier Full Federal Court decision which held, after applying a “multifactorial approach”, that the labourer was an independent contractor.
In the second case, the High Court held that two truck drivers were not employees of a company for the purposes of the Fair Work Act 2009 and Superannuation Guarantee (Administration) Act 1992. The Court also observed that the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors (and not of employees).
The ATO’s Taxation Ruling 2023/4 now states that whether an individual worker is an employee of an entity under the term’s ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.
In addition, where the worker and the engaging entity have comprehensively committed the terms of their relationship to a valid written contract, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of an engaging entity.
The ruling notes that evidence of how the contract was performed, including subsequent conduct and work practices, cannot be considered for the purpose of determining the nature of the legal relationship between the parties. However, this evidence can be considered to establish the contractual terms or to challenge the validity of a written contract with general contract law principles.
In conjunction with the ruling, the ATO has also released a practical compliance guideline which sets out its compliance approach for businesses that engage workers and classify them as employees or independent contractors.
25th Feb, 2024
As a new calendar year commences, the ATO’s priorities in the self managed super fund (SMSF) sector remain consistent. As in previous years, the greatest area of concern for the ATO continues to be taxpayers illegally accessing their super before meeting a condition of release. While it notes that the vast majority of SMSFs follow the rules, those that do not are having a significant impact on the system.
According to the ATO, early withdrawal of super seriously impacts a member’s retirement savings, which can lead to an increased reliance on taxpayer- funded pensions (such as the Age Pension) in the future. This is in addition to significant financial and regulatory impacts for individuals, because illegally accessed benefits are assessable as income, and the ATO may apply and seek penalties, interest charges and disqualifications.
In order to weed out the few bad apples, the ATO implemented a program late in 2023 called “illegal early access estimate” which allows it to estimate the amount of retirement money leaving the system before it should. The information from the program informs the ATO of the size, scale and trajectory of the illegal early access risk and gathers intelligence to assist in addressing the issue.
This program will be used in conjunction with preventative approaches such as providing support and guidance products and education courses for new trustees. For example, the ATO continuously improves publications available on its website to support trustees in meeting their obligations at different stages of the SMSF lifecycle. It has also developed several online learning modules focused on the lifecycle of SMSFs, which will go live very soon.
Another preventative strategy employed by the ATO is an initial review of new registrants, which involves a risk assessment of all SMSF registrations to ensure trustees are entitled to set up a fund, and acts as a safeguard against identity fraud.
For new entrants into the SMSF system, the ATO has also tailored the first-time non-lodgers program, which identifies and takes actions against funds that have received a rollover from a member but have not yet lodged their first annual return.
On the topic of compliance action, the ATO has warned that it uses increasingly sophisticated risk detection models which resulted in a significant number of sanctions being applied last year. In 2023, it disqualified 753 trustees – triple the number from 2022 – and raised around $29 million in additional tax, penalties and interest. The use of this detection model is set to continue in 2024.
19th Dec, 2023
In response to community feedback and perhaps to negative commentary in the media, the ATO has announced it is pausing its “awareness campaign around tax debts on hold”. It notes that the purpose of the letters it sent was to ensure that taxpayers had full visibility of their existing tax debts. Nonetheless, it will undertake a review into its overall approach to debts on hold before progressing any further.
If your small business has tax amounts owing to the ATO and hasn’t received a letter thus far, keep in mind that you may still have a debt on hold.
Many small business debts were put on hold entirely by the ATO (meaning debt amounts were not deducted from tax refunds or credits) during the COVID-19 pandemic’s rapidly changing business conditions, with the intention of giving these businesses a chance to recover and rebuild. The Australian National Audit Office reviewed this approach and found it to be inconsistent with the law, and the ATO then received clear advice that by law, any credits or refunds that a small business becomes entitled to must be used to pay off (offset) its tax debt. This action is generally automatic, and should apply even where the ATO is not actively pursuing the debt (such as was the case during the height of the pandemic).
Due to the legal requirement for offsetting, small businesses with debts on hold may now find that any credits or refunds from lodged tax returns or BASs may be less than expected, or may even be reduced to zero. After the offsetting, any balance payable relating to your business’s debt on hold will remain on hold until it is paid in full.
You don’t need to actively do anything in relation to offsetting of debts, and you will only need to contact the ATO if you’d like to make payments towards your debt on hold or make a request for the ATO not to offset.
The easiest way to check whether a debt on hold exists is through ATO online services. You may need to download a file with all transactions on the applicable account to check, as debts on hold will not show as an outstanding balance on the account (because of their “on hold” status).
It’s important to be aware that debts on hold can be reactivated at any time where the ATO believes that there’s capacity for your business to pay. You will be notified if this is going to happen, usually in writing. A reactivated debt will show as an outstanding balance on the relevant account in ATO online services.
While the ATO acknowledges that its approach to communicating about debts on hold caused “unnecessary distress”, particularly to taxpayers whose debts were incurred several years ago, it has verified that all debts exist and that all taxpayers were previously informed when the debt was originally incurred through their notice of assessment.
19th Dec, 2023
While Single Touch Payroll Phase 2 (STP Phase 2) started on 1 January 2022, many digital service providers have a deferral in place to enable them to transition their customers over time. Under STP Phase 2, businesses report certain information directly to the ATO through their payroll software, such as:
STP Phase 2 doesn’t change which payments employers need to report through STP, but it does change how those amounts need to be reported.
Employers need to take note that STP Phase 2 changes require your input. Carefully review your payroll reporting codes to ensure accurate data submission to the ATO through STP.
You will now start to see BAS data pre-filling by the ATO.It’s important to cross-check the pre-filled information with your payroll records to prove the correct data has been submitted to the ATO and ensure correct withholdings are remitted. Any anomalies you identify may highlight errors in your system configuration.
Don’t forget that when an employee leaves a job, information must be provided in the employer’s STP Phase 2 report, including the employment cessation date and the correct code indicating why the employee left. Details of termination payments must also be reported to the ATO.
23rd Oct, 2023
The ATO has advised that new and ongoing subscription costs can also qualify as eligible expenditure for the purposes of the digital adoption boost. This was not specified in the ATO’s original release on the measure.
The additional 20% tax deduction applies to eligible expenditure incurred by small and medium business entities between 7:30 pm AEDT on 29 March 2022 and 30 June 2023. The boost is for business expenses and depreciating assets and is capped at $100,000 of expenditure per income year. Eligible claimants can receive a maximum bonus deduction of $20,000 per income year.
In its latest release, the ATO states that a good rule of thumb is to consider “if the small business would have incurred the expense if they didn’t operate digitally. That is, if they hadn’t sought to adopt digital technologies in the running of their business”.
Using this rule of thumb, the ATO confirms that these costs are eligible:
Whether some expenditure is eligible for the boost will depend on its purpose and its link to digitising the operations of the specific small business. For example, “the cost of a multifunction printer would not be eligible if it were intended to only make copies of paper documents. However, it would be claimable if being used to convert paper documents for digital use and storage”.
Importantly, the ATO states that new and ongoing subscription costs can also qualify as eligible expenditure if it relates to a taxpayer’s digital operations; for example, an ongoing subscription to an accounting software platform for the business would qualify, as would a new subscription for digital content that is used in developing web content to advertise the business.
23rd Oct, 2023
A recent Inspector-General of Taxation and Taxation Ombudsman (IGTO) report has recommended improvements to the small business litigation funding program, aimed at delivering better access to justice and fairness for small businesses.
The original intention of the funding program was to mitigate the disadvantage that small business taxpayers face against the ATO, which is a well-resourced and experienced litigant in proceedings which are often complex and costly.
Taxpayers that are self-represented in the Administrative Appeals Tribunal Small Business Taxation Division in disputes with the Commissioner of Taxation are generally eligible for litigation funding where the ATO engages external legal representation. Eligible small business taxpayers will have reasonable costs of engaging an equivalent level of legal representation covered.
The report from the IGTO was mainly based on two completed dispute investigations, where taxpayers expressed concerns that the ATO had attempted to cap the funding to levels below that necessary to run their matter.
There were also questions as to the ATO’s calculation basis for reimbursements which taxpayers were not made aware of when entering these agreements, and the ATO’s “numerous emails to the taxpayers’ legal representatives questioning the bills which … detracted from case preparation”.
The IGTO notes that without the adoption of its suggested improvements to litigation funding by the ATO, further dispute investigations should be expected. Meanwhile, in response, the ATO considers itself to be no longer bound by the original policy intent of the program, and has continued to confine the findings of the report to the two cases investigated, notwithstanding similar ATO actions and decisions that have been subject to further complaints to the IGTO.
However, it is understood that the ATO does intend to consult with stakeholders before committing to any improvements and that the IGTO recommendations contained in the report will be considered as a part of this process. While changes may not be forthcoming for the small business litigation program, the takeaway for taxpayers is that they can always turn to the IGTO, which provides an independent body to investigate the ATO’s decisions.