Contractor v Employee: Guidance from the ATO

Christopher Heyes
9 March 2023
4 min read

10 March 2023

Two recent High Court decisions emphasised the importance of written contractual agreements and the difficulty for businesses to correctly classify whether certain workers should be considered employees or independent contractors.

Based on these High Court decisions, the ATO has issued updated guidance in the form of Draft Taxation Ruling TR 2022/D32 and Practical Compliance PCG 2022/D5.

The distinction between contractors and employees is crucial in ensuring businesses are meeting its various employment tax obligations and workers are receiving their correct entitlements.

TR 2022/D3

Draft TR 2022/D3 replaces TR 2005/16, which has now been withdrawn, with effect from 15 December 2022.

Draft TR 2022/D3 provides the Commissioner’s interpretation of who is an "employee" for PAYG withholding and superannuation guarantee purposes. Consistent with the High Court's decisions, Draft TR 2022/D3 provides that whether a worker is an employee of an entity is a question of fact, determined by reference to an objective assessment of the totality of the relationship between the parties and having regard only to the legal rights and obligations which constitute that relationship.

The High Court decisions has emphasised that a written contract is crucial in determining the nature of the employment relationship between the worker and the engaging entity. This is reinforced in TR 2022/D3.

The key question that businesses should determine is whether the worker is working in the engaging entity's business, based on the terms of the contract and having regard to the various indicia of employment identified in relevant case law (i.e., control, engaged for a specified result, burden of risk, delegation).

However, it is important to note that TR 2022/D3 is not binding on the Commissioner for superannuation guarantee purposes and the Commissioner’s view on the extended definition of an “employee” for superannuation guarantee purposes is not provided.

PCG 2022/D5

PCG 2022/D5, also issued in draft, outlines the Commissioner's proposed compliance approach in relation to contractor arrangements. 

PCG 2022/D5 does not to provide a definitive answer to the employee versus contractor determination but seeks to provide a framework against which the ATO can assess its allocation of compliance resources using a risk-based methodology. This is set out in the following table:

Risk category


Very low risk
Business and worker acting consistently with an agreed and understood relationship
Very low risk
Business engages both contractors and employees – relationships are agreed and understood
Low risk
No evidence that the employee understood the tax or superannuation consequences
Medium risk
Business and worker agreed to relationship
High risk
Changing circumstances not considered
High risk
No evidence of agreed relationship

This framework may assist businesses to understand the likelihood of the ATO dedicating compliance resources to their contracting arrangements.

However, importantly, if the contractor relationship has a lower risk rating under PCG 2022/D5:

  • it does not mean that an employment relationship has not been established; 

  • the business cannot rely on the risk rating if a worker lodges a complaint regarding the relationship; and

  • it will not impact the likelihood that the State Revenue authorities will undertake audit activity focusing on the businesses’ contractor arrangements.

While businesses may find that good governance can assist with its ATO risk profile, we recommend that businesses focus on properly establishing, documenting, and evaluating the contractual terms of an arrangement and understanding the taxation, superannuation guarantee and payroll tax implications of these arrangements. 

Findex tax specialists can assist businesses that will be impacted by helping to get their payroll requirements in order and compliant. Our experts can help ensure there are limited, if any, surprises caused by these High Court decisions. Contact the Tax Advisory team here.

10 March 2023
Chris Heyes

The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Findex (Aust) Pty Ltd ABN 84 006 466 351.

This article contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.

Author: Christopher Heyes | Associate Partner

Chris has over 20 years’ experience providing practical advice and compliance services in the various areas of employment tax such as payroll tax, Fringe Benefits Tax (FBT), superannuation guarantee, workers compensation and pay-as-you-go (PAYG) Withholding. Chris has extensive experience working with clients across many areas of tax consulting to manage employment taxes risks and exposure. He has proven this experience across a broad range of industries and client categories including private companies, large corporations, government agencies and family owned businesses. Chris specialises in providing tax effective solutions which also take into account other tax and commercial considerations. My Specialty • Employment Taxes • Global Mobility