Is your business correctly classifying its workers? Misclassification can lead to major tax liabilities and penalties.
The Australian Taxation Office (ATO) updated its guidelines in 2023, following High Court rulings, to clarify whether a worker is an employee or contractor.
The shift from traditional assessments to strict contract-based evaluations has created a pressing need for businesses to examine their existing agreements and compliance practices.
This blog explains the new rules, their tax and superannuation implications, and how small businesses can comply using accounting services.
Why The Fundamental Shift In Classification Rules?
Until recently, the ATO and courts evaluated worker status through a multifactorial approach, considering the overall nature of the working relationship.
This has now changed. Following two High Court judgments delivered in 2022—CFMEU v Personnel Contracting and ZG Operations v Jamsek—the ATO’s updated position gives primary importance to what’s written in the contract, provided it’s not a sham.
The revised Taxation Ruling TR 2023/4, supported by Practical Compliance Guideline 2023/2, makes it clear: if a valid written contract exists, it will determine whether the worker is an employee or an independent contractor.
This assumes the terms are being followed in practice. If there’s evidence the arrangement doesn’t reflect the contract (e.g., in actions or outcomes), the ATO may investigate further.
However, this shift creates new challenges for small businesses. Getting contracts right from the beginning has never been more vital, and poorly drafted agreements can trigger severe compliance consequences.
Key Factors Still Under Review
While the focus has narrowed to the written contract, the ATO still assesses specific contractual factors.
These indicate the nature of the working relationship and may raise red flags if misaligned with the worker’s actual duties.
Here’s a simplified analysis of what the ATO examines within contracts:
| Factor | Employee | Contractor |
|---|---|---|
| Control | Business dictates how, when, and where work is done | Worker has autonomy over work methods and timing |
| Delegation | Cannot delegate tasks to others | Can subcontract or delegate work |
| Payment | Paid hourly or by salary | Paid for specific results or projects |
| Equipment | Business provides tools or equipment | Worker supplies their own equipment |
| Risk | Business bears commercial risk | Worker bears risk for defects or issues |
Tax Implications For Small Businesses
Classifying a worker correctly impacts how you handle taxes. Employees require businesses to:
- Withhold Pay-As-You-Go (PAYG) tax, reported when your tax return is online.
- Pay superannuation contributions, typically 11% of earnings in 2025.
- Provide entitlements like leave and workers’ compensation insurance.
Contractors, however, manage their own tax obligations. They don’t receive superannuation or entitlements, and businesses don’t withhold PAYG tax.
Misclassifying an employee as a contractor can result in unpaid taxes, penalties, and backdated superannuation payments. Using an accountant for taxes ensures accurate reporting and compliance when your tax return is filed online.
Superannuation Obligations
Even if a worker is a contractor for tax purposes, superannuation rules may still apply.
The Superannuation Guarantee (Administration) Act uses a broader definition of “employee,” covering workers like entertainers or those providing personal labour.
Businesses may need to pay superannuation for these contractors, even if their contract labels them as independent.
Penalties for non-compliance can reach 200% of the owed superannuation, plus interest and fees.
Why Should Small Businesses Act Now?
Small business owners are at higher risk of misclassification due to informal practices, legacy contracts, or a lack of updated documentation.
Misclassifying employees as contractors may seem like a cost-saving measure in the short term, but it can lead to expensive outcomes later. From unpaid super to tax liabilities and legal disputes, the consequences are significant.
With the ATO’s guidance now leaning heavily on written terms, small businesses must ensure they are engaging with professionals who can assist with contract reviews and tax compliance.
This includes verifying obligations related to:
- PAYG withholding
- Tax return online lodgement requirements
- Superannuation payments
- Leave entitlements
- Insurance and workers’ compensation
How to Comply With The New Guidelines?
To align with the ATO’s updated guidelines, small businesses must take proactive steps. Start by reviewing existing contracts.
Ensure they clearly outline:
- Control arrangements, specifying who directs the work.
- Payment terms, either hourly or results-based.
- Delegation of rights, clarifying whether the worker can subcontract.
- Equipment provisions, stating who provides the tools.
- Risk allocation, detailing who bears responsibility for errors.
If the contract doesn’t match the actual working relationship, the ATO may deem it a sham, triggering audits. Avoid relying on checklists; instead, assess the entire relationship. For past arrangements, address non-compliance early to avoid penalties.
Need Help Classifying Your Workers?
At Leading Tax Experts, we understand that the new ATO guidelines can be confusing, and getting them wrong could cost your business.
Our qualified accountants are experienced in reviewing contracts, identifying compliance risks, and ensuring you meet your superannuation and tax return obligations online.
Whether you’re a new business or reviewing existing arrangements, our accounting services are designed to give you peace of mind. Call us today on 1300 583 829 or book a consultation online — let us help you stay compliant and avoid penalties.
