Unpaid Trust Distributions: ATO's Rulings vs. Recent AAT Decision and What It Means for 2023
It has long been the ATO’s practice to treat a trust’s unpaid present entitlements (“UPE”) to a company as a loan for th...
This question has plagued business for many years. Recent High Court decisions now provide clarification for business.
If an individual has been incorrectly classified as an independent contractor instead of an employee, there may be consequences for the business. For example:
In both recent cases:
The High Court, in determining whether an individual is an employee, involved a fundamental shift from the previous test of considering the ‘totality’ of the relationship (multifactorial test).
Before the High Court’s ruling in CFMEU and Jamsek, both the Federal Court and the Full Federal Court held that the multifactorial test, used to identify and weigh up the factors in characterising an individual as an employee, was the appropriate test.
The multifactorial test included (but not limited to):
Under this test, the contract agreement was only one of the factors that was considered in making a determination as to whether an individual was an employee or an independent contractor.
In both the CFMEU and Jamsek, the High Court held that the multifactorial test should no longer be used if there is:
This new approach relies on a comprehensive written contract to determine whether the other party to the agreement is an employee or, an independent contractor. This means that while the totality of the relationship between the parties still needs to be considered, it is the terms and conditions evidenced by a written contract that are relevant.
Importantly, business now needs to review their independent contractor arrangements to make sure the terms and conditions of engagement are clearly set out in a comprehensive written contract (agreement for services). This will ensure that an agreement made with an individual, deemed to be a ‘contractor’, is a ‘genuine contractor’ and not an ‘actual’ employee.
Ulton can assist you with drafting comprehensive written contracts for both independent contractors and your employees. For further details on these services and more please see our Human Resources Consulting page.
It is common practice in the health care industry for a medical practice to enter into a tenancy and agency model with the medical practitioner. Under this type of arrangement the practice provides facilities and administration services. The administration entity collects the fees from the patient on behalf of the practitioner and in exchange for these services the administration entity retains a service fee and then pays the balance to the medical practitioner.
However, after the recent payroll tax cases of Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Optical Superstore) and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (Naaz), these arrangements may need to be restructured as the administration service entity may be subject to payroll tax for payments made to the practitioner engaged under a “relevant contract”.
It was generally understood that payments made to the practitioner by the administration service entity would not be caught by payroll tax, as the amounts were beneficially owned by the practitioner and are only held by the service entity on trust for the practitioner and therefore the payment to the practitioner are not taxable wages. The court however held that the practitioner was not only providing their services to the patients but also to the service entity for a payment (being the remaining balance of the fees less the service fee) which were essential for the service entity to conduct its business, thereby deeming the service agreements as “relevant contracts”.
In order to remain outside the scope of payroll tax, service entities will be required to relinquish some of the control in their contracts with the practitioner, including:
Essentially, this means service entities will need to review their contracts with the practitioners.
If you wish to discuss any concerns you have about whether an individual is an employee or an independent contractor, please contact your trusted Ulton advisor or Ulton's HR consultant, Christine Guy.
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