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In the UK, IR35 legislation was introduced in 2000 to tackle “disguised employment,” where individuals working through intermediaries, such as personal service companies (PSCs), were essentially performing the same roles as employees but without paying the same tax and National Insurance contributions. The introduction of off-payroll working rules in 2017 (public sector) and 2021 (private sector) shifted the responsibility of determining IR35 status from the contractor to the hiring client, significantly impacting the UK’s contracting landscape.
Australia has long had its own approach to addressing worker classification through Personal Services Income (PSI) rules, which were introduced in 2001. These rules ensure that individuals earning income primarily from personal exertion cannot divert income through companies or trusts to reduce tax liabilities. While not as restrictive as IR35, PSI rules place limits on income splitting and reinforce the distinction between employees and independent contractors.
The Future of Contractor Legislation in Australia
Although Australia has not yet introduced an IR35-style system, recent legislative changes indicate that the country is taking a stricter approach to worker classification. On 26 August 2024, the Fair Work Legislation Amendment (Closing Loopholes No.2) Act 2023 introduced a “whole-of-relationship” test to determine whether a worker is genuinely an independent contractor or should be classified as an employee. (Fair Work Ombudsman)
This test looks at the actual working relationship rather than just the contractual terms. Key factors such as control, integration into the business, and financial dependence will be assessed to determine if a contractor should be reclassified as an employee. Additionally, the new legislation gives independent contractors the right to challenge unfair contract terms through the Fair Work Commission, helping to prevent worker exploitation. (TG Law)
With these legislative changes, Australia is moving closer to a stricter contractor classification system. While there is no official IR35-equivalent law yet, businesses that rely on independent contractors should take note of these regulatory shifts and prepare accordingly.
What Australian Businesses Need to Watch Out For
With a tightening legal framework around worker classification, businesses must ensure they remain compliant to avoid financial and legal consequences. Here’s what Australian companies should do to protect themselves:
Review Contractor Agreements – Ensure that agreements reflect the actual working relationship and comply with new legislative definitions.
Assess Control and Supervision – Excessive control over a contractor’s work could lead to reclassification as an employee.
Conduct Role Assessments – Use the whole-of-relationship test to reassess contractor engagements and avoid misclassification risks.
Implement Opt-Out Agreements – Where appropriate, explore legal opt-out provisions that allow certain contractors to remain independent. (Russell Kennedy Lawyers)
Stay Informed and Seek Advice – Regularly monitor updates from the Fair Work Ombudsman and consult legal experts to stay ahead of legislative changes.
Conclusion
While Australia does not yet have an IR35-style framework, the government is clearly tightening worker classification laws through PSI rules and the new Fair Work amendments. If Australia follows the UK’s lead, contractors could face stricter tax and employment laws, impacting businesses that rely on flexible, contingent workforces.
To stay compliant and mitigate risks, businesses must proactively review their contractor engagements, reassess workforce structures, and stay informed on legislative developments. The contracting landscape is evolving, and now is the time for Australian companies to ensure they are prepared for potential changes.
For further information on any of the above or for advice, reach out to Parminder Toor on Parmindert@talent-aligned.com.au