The ATO has also released their Practical Compliance Guideline 2023/2 which sets out the approach of the Commissioner to businesses that classify their workers as either employees or independent contractors. As such, the guidelines sets out how the Commissioner allocates audit compliance resources based on the risk structure as seen below and are worthy of consideration.
Businesses are also encouraged to assess their risk rating and if applicable, adjust their hiring practices. As seen below, this may include ensuring that:
- both parties intended their relationship to be classified in a specific manner, either An independent contract or employee relationship;
- there is a comprehensive written agreement between the worker and employer;
- both parties knew of the taxation implications of being characterised as an independent contractor or employee;
- the performance of the arrangement has not deviated significantly from the initial agreement;
- specific advice as to the nature and tax implications of the employer and worker relationship was obtained to avoid unnecessary liability; and
- advice obtained from the compliance guideline was also communicated to the worker.
These are the ATO risk zone classifications.
| Risk Zone | Unpaid superannuation query | Proactive case selection |
| Very Low | No further compliance resources will be applied. | No further compliance resources will be applied. |
| Low | Compliance resources will be applied to test whether the worker meets the extended definition of employee under the SGAA. | No further compliance resources will be applied. |
| Medium | Compliance resources will be applied to test whether the worker is an employee under the ordinary meaning or meets the extended definition of employee under the SGAA (or both). Medium-risk arrangements will be given lower priority than arrangements that are rated high risk. | Compliance resources will be applied to test whether the worker is an employee under the ordinary meaning or meets the extended definition of employee under the SGAA (or both). Medium-risk arrangements will be given lower priority than arrangements that are rated high risk. |
| High | Compliance resources will be applied to test whether the worker is an employee under the ordinary meaning or meets the extended definition of employee under the SGAA (or both). High-risk arrangements will be given the highest priority resourcing.
Engaging entities may be subject to higher penalties if it is found that they failed to correctly classify their workers. |
Compliance resources will be applied to test whether the worker is an employee under the ordinary meaning or meets the extended definition of employee under the SGAA (or both). High-risk arrangements will be given the highest priority resourcing.
Engaging entities may be subject to higher penalties if it is found that they failed to correctly classify their workers. |
These are the ATO criteria they will consider when determining a risk zone and audit.
| Criterion | Very Low | Low | Medium | High |
| 1 | There is evidence that both parties intended for the worker to be classified in the same way, either as an employee or as an independent contractor | There is evidence that both parties intended for the worker to be classified in the same way, either as an employee or as an independent contractor | There is evidence that both parties intended for the worker to be classified in the same way, either as an employee or as an independent contractor | Any arrangements that do not fall within the other 3 risk zones |
| 2 | There is a comprehensive written agreement that governs the entire relationship between the parties | There is a comprehensive written agreement that governs the entire relationship between the parties | Not applicable | Any arrangements that do not fall within the other 3 risk zones |
| 3 | There is evidence to show that both parties understood what the worker’s classification meant, and what the tax and superannuation consequences of that classification would be | Not applicable | Not applicable | Any arrangements that do not fall within the other 3 risk zones |
| 4 | The performance of the arrangement has not significantly deviated from the contractual rights and obligations agreed to by the parties | The performance of the arrangement has not significantly deviated from the contractual rights and obligations agreed to by the parties | The performance of the arrangement has not significantly deviated from the contractual rights and obligations agreed to by the parties | Any arrangements that do not fall within the other 3 risk zones |
| 5 | The party relying on this Guideline is meeting the correct tax and superannuation obligations that arise for their intended classification, and reporting appropriately | The party relying on this Guideline is meeting the correct tax and superannuation obligations that arise for their intended classification, and reporting appropriately | The party relying on this Guideline is meeting the correct tax and superannuation obligations that arise for their intended classification, and reporting appropriately | Any arrangements that do not fall within the other 3 risk zones |
| 6 | The party relying on this Guideline obtained specific advice confirming the classification was correct | The party relying on this Guideline obtained specific advice confirming the classification was correct | Not applicable | Any arrangements that do not fall within the other 3 risk zones |
| 7 | An engaging business relying on this Guideline also obtained specific advice confirming the application of the extended meaning of employee under the SGAA, and communicated this outcome to the worker | Not applicable | Not applicable | Any arrangements that do not fall within the other 3 risk zones |
Regardless of whether employers classify their workers as employees or independent contractors, employers are encouraged to review their relationship with their workers given the changes the ATO has implemented in classifying workers as either contractors or employees.
In doing so, businesses should assess review their existing contracts in reference to the updated risk and assessment framework to minimise the risk of an ATO investigation or audit.
We suggest that each employer or employee or contractor read this to determine when they believe the ATO would classify the relationship and therefore proceed to audit or not.
If you have any queries, please do not hesitate to contact Tony Pointon and Andrew Pointon of our Melbourne Office.
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