Employee or contractor? The latest ATO updates for businesses and workers

Whether someone is an employee or a contractor is one of the most common questions we're asked, and one of the most expensive to get wrong. The answer decides whether you withhold tax, pay super, report through Single Touch Payroll and provide leave and other entitlements.

The rules have shifted over the past few years, and the ATO has issued new draft guidance in 2026. Here is where things stand for businesses that engage workers, and for workers who aren't sure which side of the line they fall on.

Why the label matters

If a worker is an employee, the business generally must:

• withhold PAYG tax from their pay and report it through Single Touch Payroll
• pay super guarantee (currently 12% of ordinary time earnings)
• meet Fair Work obligations such as minimum pay, leave and notice
• consider state payroll tax and workers' compensation

A genuine independent contractor runs their own business, invoices for results and looks after their own tax and super. Calling someone a contractor doesn't change what they are. If the ATO later decides they were an employee, the business can face unpaid super plus the super guarantee charge, PAYG withholding penalties and, for company directors, personal liability through director penalty notices.

How the ATO decides: the contract comes first

Following two High Court decisions in 2022 (Personnel Contracting and Jamsek), the ATO's view in Taxation Ruling TR 2023/4 is that, for tax and super, you look first at the legal rights and obligations in the written contract. If the contract is genuine and not a sham, its terms are what count, rather than how the parties describe the arrangement.

The ATO then weighs the terms as a whole, including:

• Control: who decides how, when and where the work is done
• Own business: whether the worker is part of your business or runs their own
• Delegation: whether they can send someone else or subcontract the work
• Payment: paid for time worked, or paid to produce a result
• Tools and expenses: who supplies significant equipment and bears the costs
• Commercial risk: who carries the cost of fixing defective work

The ATO's free employee/contractor decision tool on its website walks through these questions and is a sensible first check.

Contractors can still be owed super

Super law has a wider meaning of "employee". Under section 12(3) of the Superannuation Guarantee (Administration) Act, a person paid under a contract that is wholly or principally for their labour is treated as an employee for super guarantee, even if they are a contractor for every other purpose.

This usually applies when the person:

• is paid mainly for their own work, rather than for materials or equipment
• must do the work personally and can't delegate it
• is engaged as an individual, rather than through their own company or trust

The ATO folded this guidance into TR 2023/4 in December 2024 (replacing the older SGR 2005/1). An ABN on the invoice doesn't change the outcome.

New ATO draft guidance in 2026

The ATO has released two drafts this year that add detail on contractor super:

Both are still drafts, so the final versions may change. They show where the ATO is focusing, though. If you engage tradies, cleaners, drivers, IT contractors or workers sourced through an agency, now is a good time to check:

• whether each contract is mainly for the person's labour
• how invoices split labour from materials and equipment
• who the employer is when an agency or platform sits in the middle

Payday Super raises the stakes

From 1 July 2026, employers must pay super guarantee at the same time as wages, and contributions must reach the worker's fund within seven business days of payday. This applies to contractors who count as employees for super, too.

Under quarterly super, a misclassified contractor might only have come to light at year end. Now, every payment to that worker has its own super due date, so mistakes add up faster and are easier for the ATO to spot through Single Touch Payroll and fund reporting. Our Payday Super guide explains the new timing in more detail.

The Fair Work test is different

Since 26 August 2024, the Fair Work Act has used a "whole of the relationship" test for workplace law. It looks at the real substance and practical reality of the arrangement, including how it works day to day, rather than only the written contract.

A contractor earning above the contractor high income threshold ($190,100 from 1 July 2026) can choose, in writing, to opt out of this definition and be assessed under the contract instead. They can withdraw that choice at any time.

The Fair Work changes don't alter the ATO's tests. The ATO continues to apply TR 2023/4 for tax and super, so the same worker could be a contractor for tax but an employee under workplace law, or the other way round. Sham contracting, where an employee is deliberately treated as a contractor, can lead to significant penalties under the Fair Work Act.

Checklist for businesses

1. List every worker you pay through an invoice rather than payroll.
2. Review each written contract against the ATO factors, and run the ATO decision tool for anyone borderline. Keep a copy of the result.
3. Check whether each contract is wholly or principally for labour. If it is, pay super on the labour part with each payment.
4. Ask contractors to show labour, materials and equipment separately on invoices.
5. Check that what happens day to day matches the contract, for Fair Work purposes.
6. If you find a past shortfall, get advice. Correcting it voluntarily is generally treated more favourably than waiting for the ATO.

What it means for workers

If you work on an ABN but your work looks like a job, with set hours, one main client, their tools and no ability to send someone else, you may be an employee, or at least entitled to super. Check your super fund account to see whether contributions are arriving.

Genuine contractors should also be aware of the personal services income (PSI) rules. If most of your income comes from your personal effort for one client, the PSI rules can limit the deductions you can claim, even when you are a contractor.

Not sure where you or your workers stand? Our registered tax agents can review your contracts, payroll and super set-up and help you put things right. Learn more about our payroll services, or book a free 15-minute consultation. Consultations are available in English, Punjabi (ਪੰਜਾਬੀ), Hindi (हिंदी), Urdu (اردو) and Gujarati (ગુજરાતી).

This article contains general information only and does not take your personal circumstances into account. SGR 2026/D1 and SGD 2026/D1 are drafts and may change when finalised. Tax, super and workplace rules change, so speak with a registered tax agent before acting.