If you’re reading this, it probably means that you, or somebody close to you, is…
By Jarrod Rogers CPA
This article should not be read as personal advice and does not apply to every situation. Should you need advice specific to your circumstances (employer or work) we invite you to become a client.
Do you have an ABN? Tens of thousands of people do and many of them legally should never have applied for one.
Did you know that thousands of people who are employed as contractors are technically not contractors?
If you are working as a contractor or consultant, it is important for you to know what the ATO defines as a contractor, but it is even more important to know the rules if you are employing contractors or sub-contractors.
Taking on workers as contractors
As a tax agent, one of the major trends in the economy I have noticed is the move away from permanent employment towards casual employees and contractors.
The main reason for this is the complexity and cost associated with hiring an employee. It has been said that Australian business is being strangled in red tape. Calling your workers a “contractor” and insisting on them having an ABN is a way of avoiding the following burdens:
- Superannuation guarantee
- Annual leave, sick leave, long service leave
- Payroll tax (for large employers)
- Workcover insurance
- Public liability/indemnity insurance
It also gives the employer flexibility to cut shifts when business is slow, rather than pay wages to idle staff.
There are advantages for employees, too. Not paying super often results in higher hourly rates, which is appealing to younger workers, as is the flexibility of working on a temp basis.
Industries were taking on contractors is common
Examples of industries where contractors are commonly used:
- Accounting and bookkeeping
- IT consultants
- Graphic designers
- Health professionals
- Massage and fitness
ATO rules about subcontractors
As with any ATO rules, there are black and white examples, with a big grey area in the middle. Having said that, according to the ATO, the following people can never be contractors and should always be employees.
- apprentices & trainees
- company directors
- labourers & trades assistants
At the other end of the scale, there are contractors who clearly are independent contractors.
- heavy machinery operators who provide the vehicle
- contractor paid for a fixed job and a fixed price.
The ATO has a table on its website which summarises the difference between an employee and a contractor.
Basically, the activities of a contractor look like those of a business, not like those of an employee.
I have been on both sides of the fence. When I was an employee, I got paid my salary every month, regardless of how the business was going. I was paid to look after my bosses clients.
Compare that to self-employment. If there are not enough paying customers, then there is no pay. If there are lots of paying customers, I keep the surplus. I get paid to do a job for my own clients.
Rule of thumb:
Signs that a worker is not a genuine contractor
A worker is probably not a contractor if:
- They get paid by the hour
- They cannot pay another person to work in your place. A particular person needs to turn up for work.
- The boss chooses the worker’s hours
- A worker wears the employer’s uniform/carry employer’s business card
- In a trade context, the employer pays for materials
- Work is performed at the employer’s premises
- The employer assigns the work
A worker can still be considered an employee even if they have an ABN, they issue invoices, the work for other bosses, they earn less than 80% from one boss or if subcontractors are standard industry practice.
Avoiding ATO penalties about contractors/employers
So how do you stay out of hot water with the ATO?
Basically, you need to make sure your workers are classified correctly. If you have “subcontractors” who are clearly employees under the ATO definition, you need to make sure you are meeting your superannuation, WorkCover and PAYG tax obligations.
You need to assess where each employee fits in the ATO rules. The ATO has a useful resource Employee Contractor Decision Tool.
You may find that you have a number of contractors who need to go on the books.
Beyond Accountancy can help with all aspects of payroll, from taking on new employees to regular pay runs to issuing PAYG Payment Summaries (aka group certificates). With modern software systems, electronic banking and an experienced accountant, small businesses can process their payroll and super in less time than it takes to pay multiple “contractors'” invoices.
Paying a company instead of an individual
If you are paying an entity (company, trust) instead of an individual, you generally avoid obligations to pay super and deduct tax. This includes workers you hire via a labour-hire firm.
I heard of one case where a big employer was audited by the ATO and its workers were deemed to be employees. The employer basically told workers “establish a Pty Ltd company that we can pay you through, or we won’t give you any more work”.
Employers who force workers to get an ABN are walking a fine line and those who advise workers how to work around the ABN application system are in danger of being unregistered tax advisers.
Avoiding ATO penalties about contractors/workers
Generally, the worker is unlikely to be in trouble for merely operating as a contractor. The employer has obligations to the worker. The worker only has to ensure they complete their tax return correctly.
The one exception to this is applying for an ABN. If you are not entitled to an ABN, you cannot apply for one. However, it is commonplace for employee-type “contractors” to re-do the ABN application with different answers until the system allows them to apply.
It is an offence to make a false declaration to the ATO and you should not do so lightly.
Contracting via a private company
Many workers, both professionals and in trades, have set up private companies with a view to minimise their tax. A private company has advantages over a sole trader, such as potential legal separation of business operations and personal assets.
A company can make super contributions for the worker, whereas some contractors are technically not entitled to claim a tax deduction for the money they put in super.
Also, a company can be used to salary package fringe benefits, in particular a motor vehicle.
Before considering setting up a private company, you should carefully weigh up the costs vs benefits. It is very important to understand the personal services income (PSI) rules and the anti-avoidance rules. Both these provisions make it very hard to use a company as a means of reducing tax on “contracting” income.
We are currently taking on new clients – both employers and workers – and would be glad to help you work out how these rules apply to you.