For many businesses, the temptation to classify workers as independent contractors presents an opportunity for reduced costs, increased flexibility and administrative simplicity. This often seems more attractive compared to the minimum entitlements and protections that might be mandated for employees by law.
However, it is important to understand the differences between a person engaged as an employee and a person engaged as a contractor, in order to ensure that the contractual arrangements between the parties are in fact reflective of the parties’ relationship. For businesses, an unexpected re-classification can be devastating – they may be ordered to make back-payments of wages, superannuation, and other benefits. Furthermore, businesses could face civil penalties and may be exposed to significant additional tax liabilities as a result of incorrectly categorising their workers.
Engaging creatives is an area where the slightest details can lead to unintended and potentially costly consequences – beyond the ‘ordinary’ application of the withholding and superannuation provisions, there are a myriad of special rules which may apply to fees paid to talent engaged in the performance, sporting and creative arts spaces.
Who is an employee?
Typically, a worker’s relationship with an engaging entity is either as an employee, also known as a contract of service, or as an independent contractor, under a contract for services.
The general meaning of ‘employee’ has been extensively considered in recent High Court cases,[1] with the result that the question of whether an individual is an employee requires an objective assessment of the totality of the relationship between the parties. This includes the legal rights and obligations under their contract, whether expressly stated or implied.[2]
Importantly, the ‘label’ which parties choose to describe their relationship, whether within a written contract or otherwise, is not determinative of, or even relevant to, that characterisation. However, where the terms of the worker and the business’ relationship are clearly documented in a written contract then it is the legal rights and obligations within that contract that will be relevant to decide the worker’s status.[3] The actual performance of the contract, including subsequent actions and practices, is no longer a determinant of the nature of the legal relationship between the parties.[4]
The central question is whether the worker is working in the business of the engaging entity, based on the construction of the terms of the contract, having regard to the following indicia of employment identified[5] (noting that the case law makes it clear this evaluation should not be a mere tick the boxes exercise).[6]
1 Control – Does the engaging entity have the contractual right to exercise control about how, where and when an employee performs work? The more control the engaging entity can exercise over how, when and where the worker performs their work under the contract, the more likely the worker is to be an employee of the engaging entity.
2 Delegation – Does the worker have a power to delegate their work under the contract to others?
3 Results – Is the substance of a contract mean that the worker is being paid to achieve a specific result?
4 Tools and equipment – Does the worker provide their own tools and equipment and incur their own expenses?
5 Risk – Does the worker bear the risk of any costs arising out of injury, or remedying any defect in carrying out their work?
6 Goodwill – does the contract for the work prevent goodwill accruing to the worker’s business as a result of work performed under the contract?
Tax considerations associated with engaging talent
Classification of a worker as employee or contractor will have different tax consequences (and raise different obligations in respect of payments to be made by the engaging entity).
In relation to employees, an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.[7] Therefore, where the engaging entity has made payment to an employee as a consequence of their employment (and the payment is made to an individual[8] in their capacity as an employee) this means that the business is obliged to:
(a) withhold tax (PAYG withholding) from the wages, bonuses and other amounts paid to the individual employee, and subsequently report and remit these withheld amounts to the ATO;
(b) make superannuation payments for eligible employees;
(c) account for, report and pay Fringe Benefits Tax (FBT) in respect of any non-cash benefits provided to employees; and
(d) cannot claim input tax credits on wages paid to the employee, but should be able to claim an income tax deduction for those wages.
On the other hand, if a worker is a contractor, the worker is typically responsible for their own tax obligations. This means that:
(a) the business is not generally required to withhold tax from payments made to the contractor, unless:
(i) the contractor fails to provide their ABN (in which case, the rate of withholding is 47%); or
(ii) the business and the contractor have mutually agreed to withhold tax from their payments (in which case tax will be held at the agreed rate); or
(iii) the special rules relating to the engagement of performing artists apply (as discussed below);
(b) the business should not be required to pay FBT on any non-cash benefits provided to contractors, but may be required to pay GST on amounts paid to the contractor for the supply of their service; and
(c) might still be responsible for superannuation payments on contractors engaged in their individual capacity, specifically if:
(i) the contract’s main focus is the provision of the individual’s labour[9]; or
(ii) an individual is paid to perform, present or participate in the performance or presentation of any music, play, dance, entertainment, sport display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills; or
(iii) an individual is paid to provide services in connection with an activity referred to in paragraph (ii) above; or
(iv) an individual is paid to perform services in connection with the making of a film, tape or disc of any television or radio broadcast.[10]
The extension of the application of superannuation to payments made under the expanded definition of ‘employee’ for superannuation purposes does create complexity in terms of characterising payments – particularly in circumstances where an employer may be liable for superannuation guarantee charge (plus other costs) if it fails to remit superannuation as required, this can be a costly error.
Depending on the size of the business, payroll tax may also be payable on wages paid to employees or fees paid to contractors. Payroll tax is a state based tax payable by employers where their group’s taxable wages exceed certain thresholds. Where the thresholds are exceeded, payroll tax will be payable on all wages, bonuses and other allowances paid to an employer’s employees. However, amounts paid to contractors may not be subject to payroll tax, depending on the availability of certain ‘contractor exemptions’.
It is clear to see why ensuring a clear understanding of a worker’s status as employee or contractor is crucial to getting the company’s tax obligations right.
Special rules – performing artists
Specific rules also apply from a withholding perspective when payments are made to performing artists involved in promotional activities. In essence, any organisation or entity hiring performing artists must withhold an amount from payments made to them as an individual if they are:
(a) Australian residents; and
(b) engaged under a contract to perform in a promotional activity conducted for an audience – be it via film, TV, radio, social media, print, etc.
For clarity, the term ‘performing artist’ encompasses a variety of talent, including singers, dancers, actors, models, musicians, and comedians.[11] Former athletes involved in promotions due to their sporting reputation, and individuals renowned for their intellectual, artistic, musical, or other relevant skills, are also covered, provided they participate in promotional activities. A ‘promotional activity’ is any event or medium where a person endorses or advertises products or services.
Generally, businesses hiring these artists are required to withhold at a rate of 20% of payments made to them under the contract.
However, there are also exceptions to this general rule (e.g. where the artist hasn’t submitted a TFN declaration, the artist is under 18 years old or the Australian Taxation Office has advised the business to adjust the withholding amount). In cases where a TFN hasn’t been supplied, a 47% withholding rate is enforced (instead of the 20% which would otherwise apply). In other cases, the rate of withholding may be varied upwards or downwards (including to nil).
For performing artists who are non-residents of Australia, withholding may still apply for payments related to their performance of entertainment and sports activities within Australia. For example, where talent attends Australia to give a speech, perform in a play or film, provide sports commentary or will be paid appearance fees, bonuses, endorsement fees or sponsorship funds.
In this context, withholding may apply regardless of whether the business contracts with the performing artist individually, or via a related (non-resident) entity. The withholding rates are:
(a) up to 45% for non-resident individuals; and
(b) up to 30% for non-resident companies.[12]
Payments to support staff may also be captured under these rules, which will apply unless an applicable tax treaty applies to designate taxing rights to their country of residence (or the withholding rate is otherwise varied). For example, payments made to United States residents engaged to perform entertainment or sports activities in Australia will not be subject to withholding if the payment does not exceed USD$10,000 in total.
Non-resident artists can appoint a resident agent to manage their withholding obligations in Australia on their behalf. If a performing artist is contracted via an agency, the responsibility for PAYG withholding and superannuation lies with that agency rather than the paying entity, who will pay the resident agent, rather than the artist directly, for the artist’s services. This will often assist in simplifying the business’ obligations in engaging foreign talent.
As is evident even from the brief summary set out above, there are a myriad of rules to work through in order to ensure a business is complying with all of its obligations when engaging talent. From a (simple!) consideration of whether the person is engaged as an employee or contractor, to an analysis of the purpose and nature of their engagement in order to determine withholding and superannuation obligations, this can be a complex area. However, the correct classification and treatment of payments to talent is key to avoid any adverse implications.
Footnotes
[1] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contacting Pty Ltd [2022] HCA 1 (Personnel Contracting); and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
[2] Personnel Contracting [61] and [172-173].
[3] Personnel Contracting [43], [59] and [173]; WorkPac Pty Ltd v Rossato [2021] HCA 23 at [56-57] and [63].
[4] Ibid [55], [59], [173] and [185-189].
[5] Personnel Contracting [36-39], [61-62], [121], [173] and [183]. The relationship may be affected by statutory provisions and by awards made under statutes (Personnel Contracting [41]).
[6] Personnel Contracting [34].
[7] TAA s 12-35.
[8] Section 12-35 does not apply to payments made to other entities provided that the arrangement is not a sham or a mere redirection of an employee’s salary or wages.
[9] section 12(3) Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA)
[10] section 12(8) SGAA.
[11] TAA s 12-315; Taxation Administration Regulations 2017 (TAR) reg 32.
[12] Ibid reg 50.