188.8.131.52 Income from employment or independent contracting
This topic provides information about the following:
- income assessment for an employee or private contractor (1.1.E.87)
- back pay paid to a person for a period of employment
- income assessment for independent contractors
- self-employed people and voluntary agreements in the PAYG tax system
- contract of service
- contract for services
- commissions received by employees
- advance of future commission
- commission received by self-employed people, and
- commission-only real estate sales people.
Income assessment for employees
The money paid (or other valuable consideration provided) for remunerative work done by the person as an employee or private contractor in an employer/employee relationship is assessed as the person's income without any reductions. This income is called employment income (1.1.E.102) and includes, but is not limited to commissions, salary, wages, employment-related fringe benefits or a combination of these.
When an employee, such as a taxi driver, has takings including GST, the amount of GST is not considered income if the amount is remitted to the ATO. This is similar to the treatment of business income where GST is forwarded to the ATO.
Act reference: SSAct section 8(1) Income test definitions, section 8(1A) A reference in this Act to employment income, in relation to a person …, section 8(1B) For the avoidance of doubt; if …, section 8(1C) For the purposes of subsection (1A), a leave payment …, section 1073AA Work bonus
Policy reference: SS Guide 3.1.15 Work bonus
Back pay paid to a person for a period of employment
All employment income is assessed for the same length of time as the associated earning period. Back pay of employment income is assessed when it is paid to an individual by being applied from the beginning of the instalment period in which it is paid and attributed forward for the relevant number of days for which it was paid, up to a maximum of 52 weeks.
Example: Monique is a kitchen hand on JSP working in the hospitality industry. After 4 years of working at a restaurant, it is found that staff have been underpaid for those 4 years. Monique is paid back pay to make up for the underpayment, in the form of a lump sum payment. The lump sum will be applied from the beginning of the fortnight in which it is paid and attributed forward for 52 weeks. If the attribution of income results in income being applied to part of an entitlement period, that amount will be attributed across the entire entitlement period.
Act reference: SSAct section 8 Income test definitions, section 1223(1) Debts arising from lack of qualification, overpayment etc., section 1073A(2) to (4) Attribution of employment income paid in respect of a particular period or periods
Income assessment for independent contractors
A person who is self-employed who earns, derives or receives money (or valuable consideration), is allowed only those costs directly involved in obtaining the profits. The allowable costs may include GST costs where they cannot be claimed back as input tax credits from the ATO. (This is comparable to the pre-July 2000 situation where wholesale sales tax was included in the price of certain goods.) A person who is self-employed may work:
- as an independent contractor, or
- on a commission basis.
Note: Pensioners over age pension age (apart from PPS) who have income from self-employment from gainful work, may be eligible for the work bonus from 1 July 2019.
Persons over age pension age receiving a social security pension (apart from PPS) have their assessed annual income from self-employment from gainful work converted to income for an instalment period. The self-employment income from gainful work for an instalment period is spread evenly across all days in the instalment period, regardless of which days, or the number of days, worked.
Act reference: SSAct section 8 Income test definitions, section 1075(1) Permissible reductions of business income, section 1072 General meaning of ordinary income, section 1073AA Work bonus
Self-employed people & voluntary agreements in the PAYG tax system
A self-employed person may enter into a PAYG voluntary agreement with a business to bring themselves into the tax withholding system when no other PAYG withholding applies.
This means that the business, when paying for services provided by the person who is self-employed, deducts amounts from payments to the person and remits them to the ATO to help the person meet their annual income tax liability.
The amount of PAYG tax withheld and paid to the ATO does not affect the amount of assessable income used for social security purposes.
Explanation: A person's gross income is usually used to determine their income for social security purposes. PAYG tax deductions are not the same as business deductions allowed to the self-employed or those running a business.
People must have an ABN to enter a voluntary agreement. They may still be considered to be self-employed for social security purposes.
Act reference: SSAct section 1075 Permissible reductions of business income
Contract of service
A contract of service or labour indicates an employer/employee relationship.
A high level of control over the power of deciding the following matters by another person suggests an employer/employee relationship:
- what is to be done
- who is to do it
- the way it is to be done
- what means are to be used
- the time when work is to be done, and
- the place where the work is to be done.
If the employment contract is one of service, the person is an employee.
Income assessment for contract of services (employee)
The following table shows the treatment of income from a contract of services according to how the income is paid.
|If the person's income from contract of services is received …||then the contract income is …|
treated as employment income. It is income in the fortnight in which it is paid if the contract is for a period of up to a fortnight. If it is for a period of more than a fortnight, income is applied from the beginning of the entitlement period in which it is paid and attributed forward for the number of days for which it was paid.
Example: $1,000 paid for a period of 25 days work. Daily rate would be $1,000 ÷ 25 = $40, with $40 attributed to each day of the first entitlement period. As the income would be attributed to only 11 days of the second entitlement period, the $440 applied to this entitlement period would be attributed across each day in the entitlement period.
|as a single lump sum||treated as a remunerative lump sum and attributed forward for the relevant number of days for which it was paid up to a maximum of 52 weeks .|
Act reference: SSAct section 1073A Attribution of employment income paid in respect of a particular period or periods, section 1068-G7B Claimant or recipient receives lump sum amount for remunerative work, section 1068-G7C Partner of claimant or recipient receives lump sum amount for remunerative work, section 1068-G8 Ordinary income received at intervals longer than one fortnight, section 1068B-D19 Period over which ordinary income taken into account
Policy reference: SS Guide 184.108.40.206 General provisions for income from employment, 220.127.116.11 Employment income for allowees, 18.104.22.168 Determining the rate of income for benefits, 22.214.171.124 Determining the rate of income for pensioners of age pension age from 20/09/2009
Contract for services
A contract for services to produce a result indicates self-employment. If the 'when, where, how and who by' is left to a person's choice, it is likely that the person does the work as a self-employed contractor. A person who owns the business premises, the tools and equipment is usually a self-employed contractor.
Example: A person who has to pay for things like stationery and sample products, and operates from their own home without being reimbursed for costs, such as electricity, postage, and transport is more likely to be self-employed rather than an employee.
Income assessment for contract for services (self-employed)
If the person's contract for services is part of their business, e.g. a concreting or painting contract for service would usually be part of a business, then the contract income is treated as income under the guidelines for assessing business income.
Act reference: SSAct section 1074(1) Ordinary Income from a business-treatment of trading stock, section 1075(1) Permissible reductions of business income
Policy reference: SS Guide 4.7.1 Assessing the Income & Assets of Sole Traders & Partnerships, 4.7.2 Assessing the Income & Assets from Private Companies pre-01/01/2002, 4.7.4 Assessing the Income & Assets from Primary Production, 4.12 Means Test Treatment of Private Trusts & Private Companies from 01/01/2002, 126.96.36.199 General provisions for income from employment
Income test treatment of ministers of religion
For the income test treatment of ministers of religion see 188.8.131.52.
Commissions received by employees
These commissions are assessed from the beginning of the entitlement period in which they are paid and attributed forward for the relevant number of days for which they were paid, up to a maximum of 52 weeks, even where the payments are small and/or regular. If the attribution of income results in income being applied to part of an entitlement period, that amount will be attributed across the entire entitlement period.
Explanation: Even if there is a pattern to the payments, they do not relate to each other and there is no certainty when the next one would be received.
Advance of future commission
A review of the employee's contract should determine if the advance is a:
- repayable loan, which is not income, or
- a wage or retainer, which is assessed as income when it is 'paid'.
If the payment is for a non-periodical amount (i.e. it is not one of a series of related payments), the wage would be assessed as a remunerative lump sum.
Commission received by self-employed people
A person who is employed on a commission basis to sell a product and/or recruit other commission salespersons, is employed under a contract for services and is self-employed. The costs of obtaining the income are allowed to be deducted in the same manner as for businesses.
The net commissions are assessed from the first day of the entitlement period in which they are paid as remunerative lump sums and held as income for 52 weeks, even where the payments are small and/or regular.
Example: People who are generally characterised as self-employed include consultants for 'Avon', 'Tupperware', 'Amway' and similar consultants and distributors.
Commission-only real estate sales people
Commission only real estate sales people have been regarded as employees since the decision of the High Court in the 1973 case of Federal Commissioner of Taxation v Barrett. Real estate salespersons were considered employees because their duties (selling real estate) were considered an integral function of the business entity for which they worked.
Explanation: Despite the freedom the sales persons may have about how they perform the work, they are considered employees if they:
- only carry out the work as representatives of the organisation
- have calls made on their time
- have no control over advertising, and
- have no control over the form of contracts that buyers have to execute.
Examination of the arrangements for taxation, superannuation and worker's compensation may also assist in determining employee status.
Exception: In the 1999 AAT decision re Ekis it was decided that this part-time real estate agent working on a commission-only basis was not an employee 'in the ordinary sense of the word'. However, the policy based on Barrett remains and has not been changed because of the Ekis decision.
Act reference: SSAct section 1064 Rate of age and disability support pensions and CP (people who are not blind), section 1065 Rate of age and disability support pension (blind people), section 1066A Rate of DSP (people under 21 who are not blind), section 1066B Rate of DSP (people under 21 who are blind), section 1067G Rate of YA, section 1067L Rate of Austudy, section 1068 Rate of WA, JSP (18 or over), PA, and mature age allowance under Part 2.12B, section 1068A Rate of PP-pension PP (single), section 1068B Rate of PP-PP (partnered), section 1073A Attribution of employment income paid in respect of a particular period or periods, section 1073B Attribution of employment income paid monthly, section 1073C Fortnightly or yearly expression of attributed employment income, section 1073AA Work bonus
Policy reference: SS Guide 184.108.40.206 Determining the rate of income for benefits, 220.127.116.11 Determining the rate of income for pensioners of age pension age from 20/09/2009, 18.104.22.168 Employment income for pensioners of age pension age from 20/09/2009, 22.214.171.124 Employment income for allowees, 3.1.15 Work bonus