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October 2019

Employee or independent contractor: What happens when it goes wrong?

The perennial question has reared its head and it was just a matter of time given the burgeoning gig economy.



The new working arrangements provide flexibility for workers, arrangers and customers. But what are the tax and other economic implications for those involved?

The changing working arrangements have put a spotlight on the traditional dichotomy between an independent contractor and an employee. The new arrangements suggest a further category, as yet undefined, that has characteristics of both.

A recent decision by the Fair Work Commission in Joshua Klooger v Foodora Australia Pty Ltd [2018] FWC 6836 demonstrates what can go wrong when the critical concept of engagement is misinterpreted.

Foodora was involved in the delivery of restaurant meals, food and drink and other items to homes and offices. Joshua Klooger entered into an “Independent Contractor Agreement” with Foodora that stipulated he was an independent contractor and not an employee.

In considering the “totality of the relationship” (a common line in such cases), the commission found that Joshua was, in fact, an employee. He was found to have been unfairly dismissed and Foodora was ordered to pay him compensation. Given that arrangements were the same for all its workers, the logical application of this decision is that it would apply to all of Foodora’s workforce.

Significantly, tax authorities circled during the heading and moved in once the decision was handed down.

Not only would payroll tax obligations seem to exist, but other employment tax obligations such as pay-as-you-go withholding (PAYGW), superannuation and personal services income (PSI) as well.

Two tax investigations were conducted into the Foodora business; one by Revenue NSW in relation to potential payroll tax liability and a separate investigation by the ATO looking at millions of dollars in potentially unpaid withholding taxes and superannuation.

The cumulative impact of this decision was that the German-founded food delivery business had to leave Australia.

As if these impacts were not enough, the decision of the Fair Work Commission effectively changes the flow of income and expenses for both Foodora and the worker.

Instead of the independent contractor receiving all the income and paying an amount to the digital platform provider, the result is now that the digital platform provider receives all the income and pays some of that to its employees. While this may not change the bottom line for either, the implications across a range of stakeholders including banks, government departments and auditors are significant.

Tax authorities in Australia have been grappling with the murky line between employees and independent contractors for many years. While there have been some attempts to solve the problem, none have been effective.

The commission’s decision, and in turn the ATO’s view of employees/contractors, can also be considered using a medical practitioner example. A medical practitioner is often not an “employee” of the medical practice, but an independent contractor. This generally sees the medical contractor issue the practice an invoice for their services. Under this scenario, the medical practitioner is responsible for paying their own superannuation, income tax instalments and liability insurance.

This is a very common example of a work arrangement between a medical practitioner and practice, which has generally been accepted by the ATO. However, the abovementioned Klooger v Foodora decision may provide precedence for some further investigation by the ATO.

With the above case in mind, the ATO may seek to further focus on contractor relationships such as this. If the ATO was to take the view that these practitioner/practice relationships are in fact an employee relationship, there would be a large number of medical practitioners and medical practices that would need to reconsider their tax structures and affairs.

From the view of the medical practice, this may involve more out-of-pocket expenses as not only would the practice have to pay the practitioners wage as an employee, they would also need to pay superannuation guarantee charge (SCG), allow for leave entitlements and ensure their insurances cover the employee.

From the view of the medical practitioner, this would likely simplify their tax affairs; however, as they are no longer carrying on a contracting business, certain tax deductions may no longer be available and the possibility of splitting income through certain tax structures would also be unachievable.

Alternatively, the practitioner and practice may elect to continue with their current arrangement; however, the ATO seeks to review the arrangement with the following outcomes:

  • Request the practice pay an applicable outstanding SGC to the practitioner’s superannuation fund. As this would be late paid superannuation, no tax deduction would be allowed for the payment.
  • Charge a 10 per cent interest rate and quarterly administration fees on the unpaid SGC amounts.
  • Amend the practitioner’s income tax return under the personal services income (PSI) provisions to disallow certain deductions and income splitting.

It is critical that any business, not just gig economy businesses engaging independent contractors, understand the issues and take all steps to ensure that their business model works; otherwise, the consequences can be catastrophic.


Tony Ince, senior analyst, RSM Australia
20 September 2019


Single Touch Payroll (STP) reporting irregularities: ATO contacting businesses

The Australian Taxation Office it is currently emailing STP enabled employers who have either ceased reporting for over 45 days; or have submitted employees under multiple payroll or BMS IDs.



These reporting irregularities may cause their employees to see incorrect, incomplete or multiple entries in their income statements.

Any new system creates a learning curve for everyone – if you have made a mistake, the corrections can be made now, well before year end.





Employee entitlements, ‘wage theft’ and Fair Work: Why it’s time to be proactive

The Press Club. Tokyo Sushi. Ezard. These three restaurants are just a few of the big names widely reported to be embroiled in the Fair Work Ombudsman’s crackdown on underpayment of staff.



Its investigations have uncovered serious breaches of Fair Work legislation, affecting businesses across the hospitality, retail and dining sectors as well as many other industries.

In the case of George Colombaris, the celebrity chef has admitted to underpaying his workers by $7.83 million, and has been ordered to pay a $200,000 fine. With heightened media attention and a new focus from employees on whether they are getting a fair deal, it’s likely that many other high-profile names will soon feel the heat from Fair Work. And it’s not just monetary risks that these businesses face. The media has coined the new term “wage theft” — and the reputational damage for anyone accused of this is going to be significant.

We ask the question, why do businesses in these industries, as well as other industries that typically employ large numbers of shift or casual staff outside of the regular nine-to-five, find it so hard to pay their employees correctly, and what can they do to remedy this?

Paying workers fairly: What are the challenges?

Employers often don’t understand their obligations under Australia’s highly complex industry awards systems. For example, the Hospitality Industry (General) Award 2010 allows companies to work out how much an employee would be paid for a 38-hour week. They can then uplift that by 25 per cent to recognise overtime, and pay this amount to the employee on an annual basis, as long as actual pay and total hours worked are reconciled annually, to ensure that the employee has been fully compensated for the time they actually worked.

However, the problem comes because staff in industries such as hospitality work long hours that can change frequently. If a business doesn’t have an effective way of recording hours worked, or never goes back and checks how much overtime a staff member has completed, it is unlikely that it will be paying employees correctly. As such, while employers may take care to roster employees appropriately, employees could end up working 60-plus hours per week and not get paid correctly for this if a reconciliation is never performed by the employer. The media attention given to this issue is prompting staff to check their own wages, and when they find a breach, go to the unions, Fair Work Ombudsman and the press.

The issue is made more challenging because many businesses in these industries don’t have a large or sophisticated HR department or payroll function — this may reduce the capability of the business to correctly review contracts, awards and rates of pay or perform annual reconciliations for those on annualised salaries.

What are the risks to businesses in this area?

There is no doubt that businesses are obliged to pay their employees correctly, fully and appropriately, and should do so in a timely manner. To do anything else is grossly unfair to employees as well as to competitors who are doing the right thing and are disadvantaged as a result.

Fair Work has recognised that there’s an endemic problem with hospitality-related businesses, and is directing its investigations towards these industries. This poses significant risks for any business found to be breaching of their obligations, including:

  1. Reputational damage: “Wage theft” is not a term you want associated with your business, and the risk to business reputation is significant. The business’s ability to attract new customers and high-quality staff in the future will be impacted.
  2. Financial impact: Companies found to be breaching their obligations may have to pay fines as well as compensation to employees, which may grow as the press becomes even more negative. This is in addition to the clear requirement that they make good any historical underpayments to employees. Many hospitality businesses don’t operate on high margins at the best of times, so unexpected employee costs, together with monetary penalties, could have the potential to end operations altogether.
  3. Immigration restrictions: Many employees in the hospitality and retail industries (and many other industries) are in Australia on work visas. Any Fair Work investigation is likely to be referred to the Department of Immigration and Border Force, and vice versa. These bodies will conduct their own investigations into how a company is paying workers from abroad. This may lead to restrictions or bans on employing people from overseas as well as separate fines and additional adverse press coverage for breaching immigration law. Data sharing has become much more efficient among government organisations, meaning the Australian Taxation Office and other government departments may also become interested.
  4. Criminalisation: There has been genuine political interest in criminalising Fair Work Act breaches, and the government has indicated that it is considering drafting further legislation around this. If passed, business owners and directors may face criminal charges and potential prison time if they are found to be underpaying workers.

How can businesses stay compliant with Fair Work?

Firstly, if a business believes it may have underpaid workers or otherwise be in breach of the Fair Work Act, it must deal with the issue quickly and honestly. The owners must work out how much they’ve underpaid their staff and start to remediate. This is essentially their only choice — if Fair Work doesn’t believe the company is trying to remedy the situation, the case is likely to go to court.

Moving forward, the business may need to reshape its workforce or business model. The problem is that many such businesses operate on such low margins that, had they been paying their workers correctly, their viability may be called into question. For companies that have not yet discovered a breach but would like to be more proactive in this area, there are several steps they can take:

Develop a thorough understanding of the awards: There are complicated rules around roster patterns, rates for grades of employees, part-time versus full-time, number of shifts a staff member can work, how many days off they can have, and length of time given between shifts. Support from professionals, including employment lawyers, will likely be a good idea in this regard.

Create policies and procedures around time and attendance records: This is one of the most common errors we see at BDO. In retail there are often very basic paper timesheets, prone to manipulation and error, and without good sign-off and approval protocols. Even if a business has a digital solution, if there aren’t thorough procedures around when an employee says they’ve started their shift (versus when they simply arrive at the  workplace), it’s hard to keep track of who’s working what hours and when.

Offer training: Make sure frontline employees and staff understand these formal policies and procedures to ensure compliance.

Check that annual salaries actually match up to time worked: Another common error we see is that businesses will calculate someone’s annual salary based on estimated hours under an award, but won’t go back and check it correlates with the time an employee has actually worked. This is made even more difficult when shifts are incorrectly recorded or an employer offers alternative arrangements such as time in lieu.

Audit periodically: Regular sample testing and independent checks are a must. This will ensure that employees are following time-recording processes correctly and that payroll teams are checking annual salaries against the hours staff members have actually worked.


Ben Renshaw, partner, BDO
27 September 2019


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Pension deeming rates cut from 1 July 2019

The Government has announced that it will lower the social security deeming rate from 1.75% to 1.0% for financial investments up to $51,800 for single pensioners and $86,200 for pensioner couples.



The upper deeming rate of 3.25% will be cut to 3.0% for balances over these amounts.

This deemed rate is probably higher than many pensions are earning on bank deposits.  Under the new rates, age pensioners whose income is assessed using deeming will receive up to $40.50 a fortnight for couples, $1053 extra a year, and $31 a fortnight for singles, $804 a year.

The reduced deeming rates have been backdated to 1 July 2019. Any additional pension payment will flow through into pensioners' bank accounts from the end of September 2019 in line with the regular indexation of the pension.




Audit warning sounded as ATO clamps down on dodgy claims

The Tax Office says it will be scrutinising every tax return lodged this year as it continues its crackdown on illegitimate claims.



ATO assistant commissioner Karen Foat said the Tax Office contacts around 2 million taxpayers each year to clarify information on their tax return, but said there was nothing to fear if they had claimed what they were entitled to.

“If we do decide to look a little closer through an audit, you can expect that we will contact you or your tax agent to make further inquiries,” Ms Foat said.

“The sort of information we may need from you or your agent will vary depending on the circumstances. Often, we are just looking for an explanation and documentation on a deduction.

“Other times, we may need to have a more detailed review. Though, again, this generally involves us asking you or your agent for more information or evidence to support your claims.”

With an estimated tax gap of $8.7 billion, Ms Foat said the ATO could not afford to turn a blind eye to those who were overclaiming even by a little.

“Our biggest tip is to ensure you work with us from the beginning and provide the information required to help us resolve any concerns and finalise the audit,” Ms Foat said.

“We understand it can be frustrating to dig up old receipts and information, but it is necessary. A small amount of overclaiming by a large number of people adds up to $8.7 billion less each year for essential services; we can’t turn a blind eye to that.

“If you think you’ve made a mistake or an error in your tax return, the best thing you can do is to ‘fess up’ as soon as possible.”

Avoiding penalties

The ATO’s latest warning comes after taxpayers rushed to lodge early this year to claim the increased low and middle-income tax offset, with the agency warning that early lodgers could be susceptible to making errors because of the lack of prefill data.

Ms Foat said the best way to avoid a potential audit and subsequent penalties was to come clean sooner rather than later.

“Whether we apply penalties will depend on your behaviour. We see behaviours ranging from genuine mistakes through to deliberate overclaiming. In the most extreme cases of intentional fraud, we may seek to prosecute through the courts,” Ms Foat said.



 Jotham Lian 
27 September 2019


“If the ATO has been in contact to review your claims and you know you’ve overclaimed, it is important to be honest and get the matter resolved quickly. Taxpayers are more likely to face penalties if they aren’t honest with us once we come knocking.

“The best way to ensure a smooth audit process is engage with us early and to keep accurate records.”

New ATO data-matching program – overseas movement data and HELP debt

The Australian Taxation Office will acquire overseas movement data from the Department of Home Affairs (DHA) for individuals with an existing HELP, VSL or TSL debt.



The data matching program will be conducted for next three financial years.

Those living and working overseas with a Higher Education Loan Program (HELP), Vocational Education and Training Student Loan (VSL) and/or Trade Support Loans (TSL) are required to update their contact details and submit an overseas travel notification if they have an intention to, or already reside overseas, for 183 days or more in any 12 months; and lodge their worldwide income or a non-lodgement advice.





ATO black economy strike force heads to Brisbane

Up to 400 businesses in inner north Brisbane are set for a visit from ATO officers after a number of tip-offs on black economy activities.



The ATO’s own data and intelligence has suggested that Teneriffe, New Farm, Newstead and Fortitude Valley are “at-risk” suburbs for suspected black economy behaviour.

According to ATO assistant commissioner Peter Holt, businesses who are not declaring income, not complying with their tax and super obligations or underpaying workers are contributing to the black economy.

“Teneriffe has a long history of dealing with wool fleeces. It’s been a few decades since wool was traded here, but we’re aware that some dishonest businesses are still in the business of fleecing money from the community,” Mr Holt said.

“These dishonest businesses may think they can pull the wool over our eyes, but this couldn’t be further from the truth. We’re aware there is an issue and we want to protect the honest businesses in these suburbs.

“We’ve received tip-offs about businesses in these suburbs demanding cash from customers, unpaid or underpaid employee entitlements, underreporting of sales, and businesses paying their workers cash in hand.

“We don’t just rely on referrals from the community. Our intelligence suggests that some businesses in these suburbs have outstanding tax returns or BAS statements, appear to be operating in cash, or may not be complying with their employer obligations.”

Ahead of the visits, the Tax Office will notify businesses of a potential visit through phone, SMS, email or letter.

ATO officers will carry identification such as a hard plastic card with the coat of arms, the name of the officer and their photograph, and an expiry date. There is also an Australian government watermark on the card itself.

The ATO will also be visiting tax practitioners of small businesses in these areas as part of its early intervention strategy.

These visits will enable the ATO to better understand the drivers behind agent behaviour, and provide education and support to encourage willing participation of their clients in our tax and super systems.

Industries marked out as more likely to be visited include:

  • Cafes, restaurants and takeaway food services
  • Computer system design and related services
  • Pharmaceutical and other store-based retailing
  • Creative and performing arts activities
  • Residential building construction
  • Postal and courier pick-up and delivery services/other transport support services
  • Building cleaning, pest control and gardening services
  • Personal care services



Jotham Lian 
26 September 2019