How the gig economy could create hidden tax issues for contractors and employers
Workers and employers are benefiting from the burgeoning gig economy in which people work part-time or on a project basis, often for a stable of employers.
However, this is creating some uncertainty around whether people are independent contractors or employees, or a hybrid of both.
Misinterpreting the arrangements can lead to inadvertent breaches of various legislation, as was demonstrated in the Fair Work Commission’s decision in Joshua Klooger v Foodora Australia Pty Ltd  FWC 6836.
While Mr Klooger had entered into an independent contractor agreement with Foodora that stipulated he was a contractor and not an employee, the Fair Work Commission found that he was, in fact, an employee based on the “totality of the relationship”. This meant Mr Klooger had been unfairly dismissed and was entitled to compensation.
Furthermore, the tax authorities swooped after the decision, finding that payroll tax obligations existed, as well as other employment tax obligations such as pay-as-you-go withholding (PAYGW), superannuation and personal services income (PSI).
These decisions meant that Foodora was liable for millions of dollars of potentially unpaid withholding taxes and superannuation. Compounding the problem, the decision of the Fair Work Commission effectively changed the flow of income for both Foodora and its workers. The cumulative impact meant that the German-founded food delivery business had to leave Australia.
Instead of the independent 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 this issue for many years and, to date, no attempts to solve the problem have been effective. The Foodora example illustrates the potential pitfalls for many businesses when it comes to embracing the gig economy. The line between independent contractors and employees remains murky, which could affect businesses in a range of different industries.
Contractors are not technically employees of the business, so they usually get paid by issuing the business an invoice for their services and then pay their own superannuation, tax instalments and liability insurance, as well as any other costs of doing business.
This common example of a relationship between a contractor and a business has generally been accepted by the Australian Taxation Office (ATO), but the Foodora case could lead to changes. If the ATO were to take the view that these relationships were, in fact, employee relationships, then there would be a large number of contractors and businesses that would need to reconsider their tax structures and affairs.
This could mean significant out-of-pocket expenses for businesses as they would need to pay wages to their employees, pay the superannuation guarantee charge (SCG), allow for leave entitlements and ensure their insurances covered their employees.
The contractors themselves would have their tax affairs simplified but would also be unable to continue claiming certain tax deductions or splitting income through certain tax structures.
If the contractor and business elected to continue with the current independent contractor arrangement, the ATO may seek to review the arrangement with the following outcomes:
- Request the business pay an applicable outstanding SGC to the contractor’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 contractor’s income tax return under the personal services income (PSI) provisions to disallow certain deductions and income splitting.
These developments mean it’s critical for any business engaging independent contractors to seek expert advice to ensure they understand the issues and take all steps to ensure their business model works. Failing to do so could be catastrophic, as was illustrated by Foodora’s forced exit from the Australian market.
Tony Ince and Kane Zaknich, RSM Australia
22 November 2019