Tax ruling confirms employee classification for superannuation purposes

Recent High Court rulings have transformed the legal framework for determining employment relationships in Australia, moving from a multifactorial test to a focus on the contractual terms. These decisions have significant implications for businesses, especially in relation to superannuation obligations and legacy agreements.

In December 2024, the Australian Taxation Office (ATO) released a consolidated version of Taxation Ruling TR 2023/4 (TR 2023/4) addressing who is an employee for the purposes of income tax and the superannuation guarantee. Companies should continue to review their employee’s contracts carefully to ensure compliance with these changing legal standards.

How have recent appellate judgments changed employee classification in Australia?

A series of appellate decisions handed down in 2022 and 2023 have shifted the longstanding common law approach in Australia of determining whether a person is an employee from an application of the multifactorial test to one centred on contractual construction.

Prior to 2022, the multifactorial test sought to evaluate the totality of the relationship having regard to a range of factors, contractually and practically, including as to whether the individual:

• is paid for hours worked or results delivered
• is subject to a degree of control by the purported employer
• has a right to delegate or subcontract
• is required to provide its own equipment in discharging performance
• owes a duty of loyalty and fidelity to the purported employer
• promises future performance in addition to work already performed
• is represented as being part of the purported employer’s business for example, through the use of uniforms with logos.

That approach changed in 2022 when the High Court held in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMEU) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek) that the relationship is to be ascertained solely by reference to the parties’ rights and obligations under the contract, and not subsequent conduct, provided:

• the parties have committed the terms of their relationship comprehensively to a written contract
• the validity of that contract is not disputed
• the terms of that contract have not been varied, waived, or subject to estoppel.

The factors in the multifactorial test are relevant but only insofar as they are reflected in the terms of the contract. Conduct of the parties after the formation of the contract remain relevant in determining whether there is a variation in terms or give rise to a waiver or estoppel.

In 2023, the Full Federal Court considered whether the worker in Jamsek was an employee under the extended statutory definition in superannuation law in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (Jamsek No 3), after it was remitted for consideration by the High Court in Jamsek. Under the extended statutory definition, an employee includes a person who works under a contract that is wholly or principally for their labour (Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) section 12(3)). The Court also confirmed existing ATO guidance that where an individual performs work for another party through an interposed entity, they are not an employee at common law or under the extended statutory definition in superannuation law.

Also in 2023, the Full Federal Court followed the principles laid down in CFMEU and Jamsek, but provided further guidance on the right to subcontract or assign and the right of control in JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76 (JMC). In particular, of all the factors to be considered in the written terms in characterising the relationship, the right to delegate or subcontract carries significant weight.

The result is that Australian courts have returned to a more traditional legal analysis giving primacy to the rights and obligations committed by the parties to contract rather than how the relationship operated in practice. These principles have been more or less confirmed by the ATO in TR 2023/4.

What does the ATO say in TR 2023/4?

The ruling was originally issued on 6 December 2023 in response to the High Court decisions in CFMEU and Jamsek. On 11 December 2024, the ruling was updated with the insertion of Appendix 2 because of Superannuation Guarantee Ruling SGR 2005/1 (SGR 2005/1) being withdrawn earlier in the year on 26 June 2024. TR 2023/4 applies with retrospective effect.

SGR 2005/1 previously set out the Commissioner’s view on who is an employee under superannuation law. The consolidated version of TR 2023/4 now presents the Commissioner’s view of who is an employee for taxation and superannuation purposes in a single ruling. Being published in the appendix does mean that the Commissioner’s views on who is an employee under superannuation law are not legally binding however, that was already the position under the withdrawn SGR 2005/1.

Appendix 2 of TR 2023/4 provides detailed guidance on who is an employee under the extended definition in section 12 of the SGAA relying on Jamsek No 3 and an earlier Full Federal Court decision, Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118. In determining whether a person is an employee under the extended definition of section 12(3) of the SGAA, the Commissioner considers that:

• the analysis should focus on the contractual rights and not what occurs in practice
• the analysis is performed from the perspective of the engaging entity and not the entity being engaged
• if the worker has a right to delegate, subcontract, or assign their work they are generally not employees under the extended definition however, exceptions apply
• if the contract is for a result that can be a decisive factor that the worker is not an employee under the extended definition
• if there is the provision of a substantial capital asset by the entity being engaged, this can be a decisive factor that the worker is not an employee under the extended definition.

What are the implications for superannuation obligations?

Under superannuation law, employers that fail to pay an employee’s superannuation guarantee are subjected to a number of punitive measures:

• the superannuation guarantee charge (SGC), 11.5% in FY25 and 12% from FY26, applies on a wider base of salary or wages, and not just ordinary time earnings in addition to interest and an administrative charge
• failure to provide an SGC statement results in a penalty of up to 200%
• an administrative penalty of up to 75% of the shortfall applies if a false or misleading statement is made
• personal liability for the directors on the SGC amount where director penalty notices are issued
• the general interest charge.

How can businesses ensure compliance?

Businesses should thoroughly review their written agreements with workers to ensure they are comprehensively documented and that the terms do not give rise to an employment relationship.

The following contractual terms should be carefully considered:

• whether the individual is engaged in the employer’s business
• whether the individual can delegate, subcontract, or assign work
• whether the individual is rewarded for hours performed or for results achieved
• whether the individual is required to supply his or her own tools and equipment
• whether the individual carries risk for work performed
• whether the individual is entitled to the goodwill generated in the performance of the work
• whether the individual is engaged directly or through an interposed entity.

Where a shortfall arises, you should consider making a comprehensive voluntary disclosure to the ATO as soon as possible.

If you have any questions about the new legal approach or need assistance with reviewing your employee contracts, quantifying a potential exposure, or making a voluntary disclosure, please contact our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Dhanushka Jayawardena

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