4.3.3.20 Income from Employment or Independent Contracting

Summary

This topic provides information about the following:

• income assessment for employees (1.1.E.87),
• back pay paid to a person for a period of employment,
• back pay paid to a person reinstated after a suspension without pay,
• 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 (or other valuable consideration) earned, derived or received from remunerative work done by the person as an employee (1.1.E.87) 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 paragraph (1A)(e), a leave payment…, section 1073AA Work bonus

Policy reference: SS Guide 3.1.14 Work Bonus

Back pay paid to a person for a period of employment

Arrears of pay can be treated as income IF the person had a 'present legal entitlement' to the payment of arrears at the time they were earned (for example, the person was underpaid due to administrative error on the part of the employer). A debt should be raised based on the under declared earnings.

In situations, such as where a workplace agreement backdates a pay increase, 'present legal entitlement' exists from when the person becomes legally entitled to the back pay (i.e. from the date of decision to pay the back pay). A lump sum payment of back pay is remunerative and the amount is held as income for 52 weeks from the date the person first becomes legally entitled to receive payment.

Act reference: SSAct section 8 Income test definitions, section 1223(1) Debts arising from lack of qualification, overpayment etc, section 1073AA Work bonus, section 1073A Employment income attribution over a period for social security pensioners

Policy reference: SS Guide 4.3.3.10 General Provisions for Income from Employment, 3.1.14 Work Bonus

Back pay paid to a person reinstated after a suspension without pay

A lump sum of back pay to a person reinstated after a suspension without pay is remunerative, and is to be taken into account under the relevant rate calculators and held as income for up to 52 weeks (section 1073A) from the date the person first becomes legally entitled to receive it. If a person has legal entitlement to the back pay at the end of the suspension period, it is not considered income during the suspension period.

Explanation: Income is taken into account when it is first earned, derived or received, at the point in time when a person first has legal entitlement to the money. 'Present legal entitlement' means the future recipient of the monies has a legal right to insist upon payment, and if required, to initiate legal proceedings to recover those monies.

Back pay following reinstatement is not the same as a compensatory payment for unfair dismissal.

Act reference: SSAct section 1073A Employment income attribution over a period for social security pensioners

Policy reference: SS Guide 4.13 Compensation, 4.3.1.20 Determining the Rate of Income for Pensioners of Age Pension Age from 20/09/2009

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: Work bonus is not available to a person who is self-employed.

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

Policy reference: SS Guide 4.7.5 A New Tax System (including GST) from 1 July 2000, 3.1.14 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

Policy reference: SS Guide 4.7.1 Assessing the Income & Assets of Sole Traders & Partnerships, 4.7.5.20 Pay As You Go (PAYG) Tax System, 4.7.5.30 Business Requirements & Fringe Benefits

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 earned and received.

Act reference: SSAct section 1073A Employment income attribution over a period for social security pensioners 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 4.3.3.10 General Provisions for Income from Employment, 4.3.3.30 Employment Income for Pensioners of Age Pension Age pre-20 September 2009, 4.3.3.40 Employment Income for Allowees, 4.3.1.10 Determining the Rate of Income for Benefits, 4.3.1.20 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, 4.3.3.10 General Provisions for Income from Employment

Income test treatment of ministers of religion

For the income test treatment of ministers of religion see 4.3.3.55 Income Test Treatment of Ministers of Religion.

Commissions received by employees

These commissions are assessed (from the date they are entitled to be received) as remunerative lump sums and held as income for up to 52 weeks, even where the payments are small and/or regular. The period covered by the commission payment will be allocated to appropriate instalment periods and spread evenly throughout the instalment periods.

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 'earned'.

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 date they are entitled to be received) as remunerative lump sums and held as income for 52 weeks, even where the payments are small and/or regular.

Examples: 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 FCT 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, disability support wife pensions and carer payments (people who are not blind) section, section 1065 Rate of age and disability support pension (blind people), section 1066 Rate of sole parent pension, bereavement allowance and widow B pension, section 1066A Rate of disability support pension (people under 21 who are not blind), section 1066B Rate of disability support pension (people under 21 who are blind), section 1067G Rate of youth allowance, section 1067L Rate of austudy payment, section 1068 Rate of widow allowance, newstart allowance (18 or over), sickness allowance (18 or over), partner allowance and mature age allowance under Part 2.12B, section 1068A Rate of parenting payment - pension PP (single), section 1068B Rate of parenting payment - PP (partnered), section 1073A Employment income attribution over a period for social security pensioners, section 1073B Daily attribution of employment income, section 1073C Fortnightly or yearly expression of attributed employment income, section 1073AA Work bonus

Policy reference: SS Guide 4.3.1.10 Determining the Rate of Income for Benefits, 4.3.1.20 Determining the Rate of Income for Pensioners of Age Pension Age from 20/09/2009, 4.3.3.30 Employment Income for Pensioners of Age Pension Age pre-20/09/2009, 4.3.3.25 Employment Income for Pensioners of Age Pension Age from 20/09/2009, 4.3.3.40 Employment Income for Allowees, 3.1.14 Work Bonus

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Last reviewed: 2 August 2010