I hear so much rubbish talked about contractors not being bona-fide contractors and how you can avoid tax simply by giving your "employer" an ABN. Unfortunately most of that advice is gleaned from BBQ advisors and is just plainly uninformed. Most recently I was talking to a business coach and mentor, a self appointed title I might add, and he was adamant that if you received more than 80% of your income from a single client that, "The law prevented you from being a contractor" - WRONG!!!
So the question remains, what is the true situation with respect to contractors and employees?
Engaging contractors to resource your business is a legitimate and legal arrangement to effectively resource your business. It is not necessarily a sham arrangement and neither does it seek to deprive the tax office or other government agencies of appropriate levies and dues. Engaging contractors does however, need to be implemented and documented properly if you wish to achieve your desired savings and administrative efficiencies.
The information below is provided to inform you of the current issues surrounding contractors and employees, it is not advice and should therefore not be relied upon. Our team here at Complete Business Strategies are experts at providing specific advice so your contractor arrangements avoid any unintended liability. If you require assistance or more information please give our office a call on (07) 54391600 or CLICK HERE to make an appointment with one of our qualified team.
Fair Work and Employment Law Compliance - The First Consideration
This should be your first consideration because the regulations may prohibit you from restructuring an existing position in your business or may restrict you from engaging new personnel on a contract basis.
All employers have obligations to comply with federal and state employment law. That body of legislation and regulations is generally in place to ensure workers rights are protected and will contain specific compliance measures for determining who is an employee and who is not. That determination will be based on the factual arrangements in place. Employers should seek qualified advice before engaging contractors and most certainly before restructuring an existing employee to become a contractor.
Assuming your advice regarding your employment law obligations allows you to restructure an existing arrangement or engage a new contractor then you will need to consider four key aspects of your business compliance risk. These risks all largely rely on the determination of a worker or employee for each of their purposes and if tested will rely on evidence so a written contract is a must.
The following ATO video provides two definite examples of an employee and contractor but most importantly introduces the concept of being paid for a result, commercial risk, and other important factors in the distinction between an employee and a contractor. Remember we can work with you to structure contractual arrangements in a way to achieve your desired tax and business compliance outcomes, all you need to do is pick up the phone and give us a call on (07) 54391600.
In general you will have to withhold PAYG Withholding from all wages paid to employees but not to contractors. One of your reasons for engaging a contractor may be to eliminate this obligation which can be achieved by ensuring the arrangement with your contractor does not deem them to be an employee for this purpose.
You may still be required to make deductions from contractor payments if they don't quote their ABN on their invoices to you or if you have a voluntary agreement with them to make deductions.
2. Superannuation Guarantee
Contractors are entitled to receive super guarantee payments when those payments are wholly or principally for labour. A contract may be considered wholly or principally for labour, if the contractor:
is remunerated wholly or principally for their personal labour and skills, and
must perform the contract work personally, and
is paid by reference to hours worked rather than completion of the contract.
Payments to contractors properly operating through a company, trust, or partnership are not subject to this test and will not be subject to super guarantee.
Workcover is a state based system of levying workplace accident insurance premiums to employers. The requirements are different in each state but in general, Workcover premiums are based on the earnings of "workers" and includes contractors where they are deemed to be a worker for Workcover purposes.
In Queensland, for example Workcover will accept the ATO decision tool as a determination of the worker status for individual contractors; In New South Wales each case is examined on it's facts; South Australia deems contractors to be workers when they perform work of a prescribed class if other relevant elements are met. The key issue here is that the rules that apply to Workcover vary from state to state so you should seek specific advice for your situation.
4. Payroll Tax
Payroll tax applies to large employers and is a state based tax meaning there may be different rules to determine who is an employee and those rules may or may not deem contract payments to be part of the Payroll Tax calculation. It is preferable therefore, if you have a larger business, that you seek specific advice before implementing any contract arrangements.
Personal Services Income (PSI)
The personal services income regime deals with how personal services income is taxed and to whom.
A contractor can be a bona-fide contractor operating through a trust or company but still be subject to the personal services income rules.
At its core, the PSI regime seeks to tax the individual who is providing personal services irrespective of the structure that person is legitimately trading through. Note here the superannuation guarantee test looks first to the structure then applies the labour test, whereas the PSI rules look through the structure at the work actually done. This difference is important but also highlights complexity in the contractor/employee tests.
My not so learned business coach and mentor mentioned above confused the personal services income rules with the contractor/employee rules when he so vehemently advised the law prevented one from being a contractor if the 80/20 test is not passed. It does not, personal services income simply deals with how the income is taxed and to whom. It does not directly address the issue of who can legitimately be a contractor. I will provide my approach to the PSI rules in a later blog.
Engaging contractors is a legitimate strategy to resource your business but it must be done properly.
Your obligations as an employer are paramount and should be your first consideration to avoid your contractor arrangement being deemed a sham.
It is possible to make administrative and tax savings by ensuring the requirements of each of the core risks are understood and there is appropriate evidence to support the terms of the contract.
All contractual arrangements should be in writing and kept up to date.