THE SK NEWSLETTER #1 [SEPT-OCT 2023]

JAMSEK - EXPANDED DEFINITION OF ‘EMPLOYEE’ but not all is rosy for business owners

Andrew Giorgi – Senior Associate

Earlier this year the Full Federal Court handed down its decision in Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48 (‘Jamsek’) which considered the expanded definition of ‘employee’ for superannuation guarantee purposes. Super guarantee is a minefield for business owners, given the potential for uncertainty as well as harsh interest rates and personal director liability which can apply if the business fails to make superannuation payments on time and in full.

The issue of whether a worker is an employee or a contractor of a business has been a hotly contested topic over many years, including in recent times. Jamsek is another example of recent litigation between taxpayers and the Australian Taxation Office over who is entitled to be paid superannuation. As at the date of this newsletter, the Commissioner of Taxation is seeking leave in the High Court of Australia in a similar dispute (JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76) which may yet clarify the law in this area. We will keep you informed of developments through our LinkedIn company page HERE.

In 2022, the High Court held that where a written contract between a worker and employer is comprehensive, legally effective and not a sham, the correct categorisation of the worker is to be determined by reference to that contract. In practical terms, where businesses will often prefer and purport to engage workers as contractors of their business to minimize their overheads (e.g. “go get your own ABN!”), the recent cases have shifted the balance in proving these matters in favour of the business owner by placing the written contract as the key piece of evidence.

However, the legislation which governs whether a worker is an employee of a given business for superannuation purposes is drafted more broadly than the ‘common law’ categories considered in the High Court’s recent judgments. If a person works under a contract that is “wholly or principally for the labour of the person”, that person is an employee of the other party to the contract for superannuation purposes and is due superannuation contributions from his or her employer. The recent case law may also incentivise disgruntled or merely curious workers to seek guidance from the ATO about their entitlements which may in turn lead to a review or audit for the business.

In Jamsek, the individuals involved were truck drivers who engaged with the business through partnerships they had set up with their wives. These individuals provided their own trucks and were responsible for all costs and risks associated with their vehicles, including the maintenance of insurance.

At first blush, one might have considered the drivers’ court case weak, given they supplied their own expensive trucks and had a contractual ‘right’ to delegate or employ other persons to do the deliveries.

In conclusion, the Full Federal Court held that the two individual applicants were not employees within the expanded definition of ‘employee’.

This was primarily because the employment contracts were with the individuals in their capacities as partners of their respective partnerships, not in their personal capacities. The Court also found that the fundamental problem with their case was that a large part of their contracts related to the provision of ‘functional and properly maintained delivery trucks’ which was a considerable capital commitment. This was held notwithstanding that the contracts clearly had a considerable labour component.

Business owners take note…

Business owners may think that by engaging workers through a partnership, company or trust and/or insisting they provide their own tools of trade, that they will circumvent any application of the expanded definition.

There are difficulties with such an approach:

(a) Can’t force me - In a tightened labour market and subject to industry practicalities, forcing a requirement for a worker to contract outside of an individual capacity may be too burdensome or unpalatable to attract and retain labour.

(b) How much equipment does the worker bring to work? In Jamsek, the capital contribution of the individuals was significant (one of the trucks was acquired for in excess of $70,000 in 1989). Contrast this against a worker who brings only a few personal tools to the job. The potential for uncertainty as to how the law is applied is high.

Heavy penalties await - if you are wrong.

Business owners will not want to get their categorisation of workers wrong. In addition to a nominal interest of 10% per annum and a general interest charge rate in excess of 10%, the ATO and corporations legislation views the assessment and collection of superannuation entitlements as a priority.

Recent public guidance (and our own practical experience) demonstrates that the ATO is putting company directors on notice with the issue of Director Penalty Notices. Due to the operation of the law, these types of notices can rarely be extinguished without being paid (either by the company at first, or the director, secondly). Due to its priority nature, any meaningful superannuation liability is at considerable risk of being pursued by the ATO or any subsequently appointed insolvency practitioner.

Smailes Krawitz has experience in dealing with these matters, including Director Penalty Notices.

Email or call us to discuss your specific situation.

Email: Andrew Giorgi

DID YOU KNOW THAT WE CAN ASSIST YOU WITH YOUR TRUST DEED NEEDS?

At Smailes Krawitz, we take pride in our commitment to keeping our trust deed precedents up to date and in line with the latest legal requirements. Below is a list of some of the trust deeds that we regularly supply clients and referrers:

Establishing self-managed superannuation funds

Updating self-managed superannuation funds
Establishing Bare Trusts
Deeds of Vesting
And much more

Establishing discretionary trusts
Establishing unit trusts trust – fixed and non-fixed
Deeds of Amendment for all types of trusts
Deeds of Change of Trustee
Deeds of Appointment of Successor Appointors and Guardians

Email: Alan Krawitz

TRUST DISTRIBUTIONS – planning ahead

Planning ahead is always time well spent when it comes to tax effective Trust distributions. Smailes Krawitz assists clients in preparing Trust distribution resolutions and can provide tax and trust law advice in respect of the same.

Let’s consider the concept of ‘Discretion’.

Recent case law (Re Owies) demonstrates that, in exercising its discretion to distribute income of the trust, a trustee must give ‘real or genuine’ consideration in the exercise of their discretion. This includes where a trustee exercises a discretion to distribute income without being properly informed as to the financial circumstances of the beneficiaries of the trust.

Where a trustee fails to properly exercise its discretion, the trustee’s decisions could be overturned or the trustee could be removed by a court, should an aggrieved beneficiary apply to question the issue in court.

In addition to these important trust law considerations, care needs to be taken in navigating the taxation issues affecting trust distributions, such as streaming of capital gains and franked dividends, defining income, compliance with recent ATO guidance on section 100A and general Division 7A requirements.

It is well established that to make beneficiaries presently entitled to the income of the trust for the financial year (and stop the trustee from being assessed at the top marginal rate of tax), the income distribution resolution must be passed by no later than 30 June.

We assist clients and their advisors navigating the ATO guidelines and legal principles to reduce the risk of scrutiny or challenge from disgruntled beneficiaries and the ATO.

We recommend that Trust distribution decisions be carefully considered and discussed well before the end of the financial year. Now is a good time to start.

FEATURED PRACTITIONER: ANDREW GIORGI

Andrew is a senior associate at Smailes Krawitz. Tax controversy is Andrew’s primary area of focus and he has experience in matters in income tax, tax residency, default and asset betterment assessments, fraud and evasion findings, general and specific anti-avoidance provisions, debt recovery, director penalties and tax administration generally.

Outside of tax disputes, Andrew works closely with the directors and his colleagues on all aspects of tax advisory, trusts law, estate planning and commercial drafting.

Having experience with a national law firm and the Australian Public Service, Andrew possesses a broad skillset and is cognizant of issues which can arise in commercial litigation, contractual disputes, administrative law, professional negligence and insolvency.

This background gives Andrew a strategic outlook and a ‘front-end to back-end’ perspective when providing assistance in taxation, trusts, estate planning and commercial matters.

For further information about any of the matters contained in The SK Newsletter or for any assistance with any other tax, trust, estate or commercial law matters, please contact one of our Directors.