How the gig economy could create hidden tax issues

Workers and employers are benefitting from the burgeoning gig economy. However, this is creating some uncertainty around whether people are independent contractors or employees, or a hybrid of both.

This was demonstrated in the Fair Work Commission’s decision in Joshua Klooger v Foodora Australia Pty Ltd [2018] FWC 6836. Klooger entered into an independent contractor agreement with Foodora, stipulating 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 Klooger was unfairly dismissed and was entitled to compensation. Tax authorities swooped after the decision, finding obligations existed in payroll tax, pay-as-you-go withholding (PAYGW), superannuation, and personal services income (PSI).

These meant 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.

And, 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 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 view these relationships were, in fact, employee relationships, 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:

  1. 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.
  2. Charge a 10 per cent interest rate and quarterly administration fees on the unpaid SGC amounts.
  3. 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, senior analysts, RSM Australia

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