The Australian Taxation Office (ATO) finalised an update to its income tax ruling regarding the definition of employee to include guidance on SG obligations. Additionally, it has withdrawn Superannuation Guarantee Ruling (SGR 2005/1),^[1] on the same topic.

The Taxation Ruling (TR or Ruling) TR 2023/4^[2] addresses who qualifies as an employee for Pay As You Go (PAYG) withholding purposes. This TR also now incorporates a new addendum (TR2023/4A1) (Addendum) as Appendix 2 of TR 2023/4 that provides guidance on when someone is considered an employee under Section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA). As such, the finalised ruling now covers the different definitions of an employee for both PAYG and superannuation purposes. This update reflects recent Federal Court rulings that expanded the definition of employee for SG purposes, specifically referencing JMC Pty Ltd v Commissioner of Taxation ^[3] (JMC) and Jamsek v ZG Operations Australia Pty Ltd (No 3) ^[4] (Jamsek).

Section 12 of the SGAA states that the terms employee and employer carry their ordinary meanings but may be expanded or qualified by other provisions in the section. The key changes in the updated ruling, which differ from SGR 2005/1, are primarily to include discussion and guidance in relation to the expanded definition of employee:

• Contracts wholly or principally for the labour of the person (Subsection 12(3))
• Entertainers, artists, musicians, sportspersons, et cetera (Subsection 12(8))
• The exclusion relating to work wholly or principally of a domestic or private nature (Subsection 12(11))

These changes are explored in further detail below.

Contracts wholly or principally for the labour of the person

The updated TR relies on the same criteria established by the Federal Court in Dental Corporation Pty Ltd v Moffet ^[5] (Moffet), for the application of Subsection 12(3) of the SGAA, which deems an independent contractor to be an employee if they work under a contract that is wholly or principally for their labour. These are as follows:

• There must be a contract.
• The person must ‘work’ under that contract.
• The contract must be wholly or principally ‘for’ the labour of a person.
   

Existence of a contract

This requires “a bilateral exchange of promises of labour and payment between two sides of the contract. On one side of the contract, a promise to provide labour and on the other side of the contract, a promise to make payment.”^[6]

Notably, the updated TR at [97] provides that a contract can be bilateral even if there are more than two contracting parties. This effectively prevents parties from circumventing the superannuation regime by forming a contract with more than two named parties. The updated TR also clarifies that the focus of Subsection 12(3) of the SGAA is on the rights under the contract, and not the actual performance of the contract.
 

Performance of work under the contract

The concept of “works under a contract” is one of personal exertion and personal effort. The updated TR clarifies that Subsection 12(3) applies only where the party providing the labour (i.e., the worker) is a natural person who was a party to the contract in their individual capacity and not in any other capacity such as a trustee of a personal services trust or a partner in a partnership.

Therefore, independent contractors engaged through an interposed entity or structure, such as a partnership, personal services trust, or a company, will not be treated as an employee for SG purposes.
 

Contract wholly or principally ‘for’ the labour of a person

Whether the contract is wholly or principally ‘for’ the labour of a person, is to be assessed from the perspective of the engaging entity and is to be determined by reference to the terms of the contract.

The updated Ruling outlines three scenarios that will support a finding that the contract is not wholly or principally for the labour of the person, in line with the Federal Court’s decisions in Moffet, JMC, and Jamsek. These are as follows:

1. Contracts containing a right to delegate, subcontract, or assign the work

SGR 2005/1 placed emphasis on the performance or the actual exercise of the right to delegate, subcontract, or assign work in order to be excluded from the extended definition of employee under Subsection 12(3) of the SGAA, as opposed to the mere existence of the right.

The updated Ruling distinguishes itself from SGR 2005/1 on this aspect and clarifies that the mere existence of such a right in a contract is sufficient to trigger the exclusion, regardless of whether it is a fettered or unfettered right, and regardless of whether consent of the engaging entity has been obtained or not (unless the provision is considered a sham, is legally incapable of exercise, or is limited in scope). While this arguably expands the scope of the exclusion from Subsection 12(3), it is crucial to note the ATO’s observation in this regard in its Decision Impact Statement in JMC, ^[7] which noted that the existence of an empty contractual right of delegation may support a finding of sham.

Therefore, businesses will still need to carefully evaluate their delegation, subcontracting, and assignment clauses for each type of contractor engagement they enter into, in order to determine whether the exclusion from Subsection 12(3) applies or not.

2. Contracts for the provision or production of a result, where the worker is paid for the result (results contracts)

Where the substance of the contract is for the achievement of specified results (and not for the provision of labour), the contract will not be wholly or principally for the labour of a worker and will not fall within the extended definition of employee under Subsection 12(3).

The updated Ruling does not deviate from the above position adopted in SGR 2005/1 but provides more clarity on identifying “results contracts” in output-based or non-hourly remuneration models.

The ATO guidance clarifies that piece-rate or output-based payment models are more consistent with an employment relationship where they are simply a natural means to provide remuneration for the task performed due to the presence of one or more of the following factors:

• Where the sole duty of the employee is to complete the task
• Where it is easier to calculate remuneration based on task completion
• Where the amount per task is calculated by reference to the period worked or by reference to time variables (such as effort, speed, and waiting times)
• Where paying per task is used as a means to increase productivity

The guidance also provides examples of non-hourly remuneration models that the ATO would consider to be consistent with an employment relationship:

• Land salesmen engaged by a firm of land agents and paid by commission
• Bicycle couriers paid a flag fall rate per delivery instead of per time period engaged
• Fruit pickers paid daily per bin of fruit picked
• Interviewers who are paid a fixed rate upon completion of each assignment that is determined by reference to the time expected to complete the assignment

In this regard, the updated TR relevantly refers to the Court’s finding in JMC, which held that being paid an hourly rate was “not inherently incompatible with either an employment or an independent contract relationship.” While the Court inclined toward an independent contractor relationship, this determination was arrived at based on the specific facts of the case — and the ATO Guidance does caution employers to holistically evaluate each of its contractual engagements on a case-by-case basis before making a determination in this regard.

3. Contracts principally for a benefit other than the labour of the worker (such as contracts that are primarily for the provision of equipment or nonlabour components)

The updated TR observes that the use of a substantial capital asset in the provision of services is a factor supporting a conclusion that the contract is not wholly or principally for labour. 

Notably, the updated TR at [110], distinguishes between contracts that provide a single integrated benefit, of which the provision of labour forms just one component, such as delivery services (where it may not be appropriate to distinguish between the labour and nonlabour components of the services performed), and contracts that comprise several discrete benefits (for example, labour of a driver and the use of a truck). The updated TR states that regardless of whether a contract is for several discrete benefits or one integrated benefit of which labour is just one component, a quantitative valuation or, where appropriate, a qualitative analysis must be undertaken to determine whether labour is the principal benefit or component contracted for.

Entertainers, artists, musicians, sports persons, promoters, et cetera 

Under Subsection 12(8), persons involved in the performing arts, sports persons, entertainers, promotional activities, and the like may be employees for SG purposes.

The updated TR clarifies the tests contained in Paragraphs 12(8)(a) to (c) must be applied on a payment-by-payment basis (where each payment is examined separately) having regard to the substance of the arrangement, rather than merely how the parties have agreed to label the payment.

It further states that Subsection 12(8) is not limited in the way that Subsection 12(3) is limited to contracts wholly or principally for a person's labour. However, ATO has confirmed that for Subsection 12(8), it is necessary that the particular person is actually paid to provide, perform, or present services rather than for some other purpose. The example provided is that a person engaged to write a script is performing services but one who sells existing scripts is not — they are merely selling property.
 

Clarifications to Subsection 12(8)(a)

Under Subsection 12(8)(a), payments to individuals are subject to SG where:

• They are made to an entertainer, artist, musician, sportsperson, etc.
• Such persons are paid to perform, present, or participate in music, play, dance, entertainment, sport, display, promotional activity, or any other similar activity.
• Such performance, presentation, or participating involves the exercise of personal skills, such as intellectual, artistic, musical, or physical skills.

In this regard, the updated TR clarifies that the definition of “entertainment” should be construed broadly to mean “an activity that gives amusement or enjoyment” as laid down in General Aviation Maintenance Pty Ltd and Commissioner of Taxation. ^[8] It also clarifies that performance under this provision relates only to the execution of personal skills of the person and not the level of success achieved by such person.
 

Clarifications to Subsection 12(8)(b) and (c)

Under Subsections 12(8)(b) and (c), payments to individuals are subject to SG where:

• They are made for services provided in connection with the activities referred to in Subsection 12(8)(a).
• They are made in connection with the making of any film, tape, disc, television, or radio broadcast. 

In this regard, the updated TR relevantly clarifies that the term “in connection with” must be construed narrowly, where the services must relate directly to the activity in question and be “bound up or involved in” that activity. That is, the use of the term “in connection with” in Paragraphs 12(8)(b) and (c) is intended to cover persons providing the 'behind the scenes' services that enable the relevant activity to occur. For example, a technician engaged to control the sound quality for a concert is not an active participant in any performance. Even though the technician is not within Paragraph 12(8)(a), they are still an employee because they are paid for services in connection with a musical performance which falls within 12(8)(b).

Work of a domestic or private nature

Subsection 12(11) of the SGAA excludes a person who is paid to do work that is wholly or principally of a domestic or private nature for 30 hours or less per week from the definition of employee for SG purposes. 

The updated TR clarifies the terms domestic and private by offering examples like cooking, cleaning, shopping, assisting with shopping, bathing, dressing, child-minding, home repairs or maintenance, gardening, and other general household tasks.

In this regard, the ATO guidance relies on the decision in Commissioner of Taxation v Newton ^[9] to emphasise that the exemption under this provision applies only to a householder ‘for whom’ the work is done and is not to be determined solely with reference to the work that the person performs.

Therefore, there needs to be a direct arrangement between the householder making the payment and the person carrying out the work of a domestic or private nature. A business that pays a worker to perform work of a domestic or private nature for an end-user or client will not be able to rely on the exemption in Subsection 12(11). For example, while some work done in a school, hotel, hospital, or in a retirement village might be characterised as domestic, it cannot be characterised as being of a domestic or private nature, in the context of the SGAA. Whether a person carrying out such work is, however, an employee for superannuation purposes will depend on whether they fall within the other subsections of Section 12.
 

Conclusion

The updated Taxation Ruling marks a significant step by the ATO in aligning the extended definition of employee for SG purposes with recent common law developments and provides employers with further clarity on the application of Section 12 of the SGAA.

Importantly, the ATO’s clarifications and guidance issued in relation to the assessment to be conducted for the application of Subsection 12(3) serves as a reminder for employers to not arbitrarily rely on delegation, subcontracting, and assignment contractual clauses, output-based payment models, and nonlabour contractual components as reasons for not applying the SG provisions. Employers should instead thoroughly review the updated TR against their current positions and contract templates to assess how their obligations might change as a result of the updated taxation ruling. 

We appreciate that the application of SG is technical and complex, and A&M would be happy to help assess your obligations correctly.

[1]Australian Taxation Office, “Superannuation Guarantee Ruling, SGR 2005/1,” https://www.ato.gov.au/law/view/document?docid=SGR/SGR20051/NAT/ATO/00001&PiT=20050223000001

[2]Australian Taxation Office, “Taxation Ruling, TR 2023/4,” https://www.ato.gov.au/law/view/view.htm?docid=%22TXR%2FTR20234%2FNAT%2FATO%2F00001%22

[3][2023] FCAFC 76

[4][2023] FCAFC 48

[5][2020] FCAFC 118

[6]Jamsek at [32]

[7]JMC Pty Ltd v Commissioner of Taxation, NSD 562 of 2022 (Full Federal Court), S69/2023 (Special leave application), NSD 175 of 2020 (Federal Court)) | Legal database (ato.gov.au)

[8][2012] AATA 120

[9][2010] FCA 1440