4.3.3.20 Income from employment or independent contracting

Summary

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.

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.

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.

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.

People must have an ABN to enter a voluntary agreement. They may still be considered to be self-employed for social security purposes.

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.

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.

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.

Income test treatment of ministers of religion

For the income test treatment of ministers of religion see 4.3.3.55.

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, 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.

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
• 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 the period to which the amounts relate to, even where the payments are small and/or regular.

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.

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.