Pay As You Go Withholding and Superannuation Guarantee
Employers are required to withhold tax from wages paid to employees and to make superannuation contributions on behalf of those employees at a minimum prescribed rate.
Failure to meet these obligations can result in significant tax obligations accompanied by penalties and interest.
In both the Pay As You Go (PAYG) and Superannuation Guarantee (SG) legislation, the definition of employee is derived from the term’s common law meaning and is a case of substance over form.
Calling a person a contractor does not make them a contractor.
Furthermore, the SG legislation extends the definition of an employee to include a person who enters a contract wholly or principally for their labour. This captures arrangements where:
The contractor is remunerated (either wholly or principally) for their labour and skills;
The contractor must perform the work personally; and
The contractor is not paid to achieve a result (E.g they are paid for hours worked).
The following are the relevant factors for consideration:
- The terms and the circumstances surrounding the formation of the contract;
- Control of the contractor by the hirer;
- Whether the worker operates on their own account or in the business of the hirer;
- Whether the contractor is paid to achieve a result;
- The contractor's ability to delegate or subcontract;
- Whether the contractor bears any risk;
- Whether the contractor provides tools, materials, etc;
- The hirer's right to suspend or dismiss the contractor;
- The hirer's right to exclusive services;
- Whether there is provision of benefits that are usually associated with employees. Eg annual leave, sick leave; and
- Whether the contractor is required to wear the hirer's uniform.
The fact that most contractors will have an Australian Business Number (ABN) has no bearing on the determination of the person’s status as employee versus contractor.
There is a decision tool on the ATO website to help businesses determine if a worker is an employee or contractor.
Where a contractor operates through a structure such as a company or trust, the PAYG and SG legislation will not have application. In this respect, it is important to ensure that the documentation surrounding the arrangement clearly demonstrates that the engaged party is the company or trust and not the individual.
Fringe Benefits Tax
Where employers (and/or their associates) provide non-cash private benefits to employees (and/or their associates), an obligation to pay Fringe Benefits Tax (FBT) may arise.
Again, the definition of “employee” is taken from the common law and as such, FBT may be payable in respect of benefits provided to contractors.
From 1 July 2011 new provisions of the Accident Compensation Act 1985 apply to contractor relationships in Victoria. The general contractor provisions are included in Section 8 and the provisions relating to incorporated contractors are contained in Sections 9 & 10.
Under the general contractor provisions, a person is deemed to be a worker and amounts paid to them must be included in rateable remuneration for the purpose of calculating the hirer's premiums, where:
The provision of materials is not the principal object of the arrangement; and
At least 80% of the work is performed by the same individual; and
At least 80% of the contractor’s overall services income is earned from the hirer.
The contractor is also entitled to make a claim for WorkSafe compensation with the hirer where they sustain a workplace injury whilst performing work under that arrangement.
A hirer can seek a determination from WorkSafe that the arrangement is part of the contractor’s independent trade or business. Factors that will be considered include:
The use of a business name by the contractor;
The history of the formation of the contractor’s business;
The extent and nature of advertising undertaken by the contractor;
The range of clients serviced by the contractor;
The extent and nature of plant and equipment provided by the contractor in execution of the services;
The engagement of staff or sub-contractors;
The use of business premises;
The method of operation of the business. E.g. tendering for jobs;
The contractor’s entrepreneurial risk;
The nature of contracts entered into;
Whether work is performed under separate contracts at the same time;
The nature of the contractor’s business and the type of services provided;
Whether the contractor quotes competitively for jobs on an all inclusive basis (labour & materials); and
Whether the contractor merely charges for services on an hourly rate and adds on the cost of materials.
The above is not an exhaustive list of factors and no one factor is conclusive taken on its own.
The provisions for incorporated contractors apply when there is a deemed worker, as determined above, under a contractual arrangement between a hirer and an incorporated contractor.
Under the incorporated contractor provisions, the hirer must include the contractor’s remuneration when calculating their rateable remuneration. Also, where the deemed worker sustains a workplace injury whilst performing work under that arrangement, they are only entitled to make a claim for WorkSafe compensation with the hirer.
Where the incorporated contractor is required to maintain its own policy, they are not required to declare as rateable remuneration any amount that is required to be declared by the hirer under the incorporated contractor provisions.
Each State and Territory operates its own WorkCover system and the rules may vary between jurisdictions.
Businesses engaging contractors outside of Victoria should not rely on the above and should seek advice specific to those other jurisdictions.
In Victoria, where a contractor is a common law employee, the principal is required to pay Payroll Tax on the remuneration paid to that contractor.
Additionally, Payroll Tax applies to services provided under a “relevant contract”. Generally, a relevant contract exists where the contractor provides labour under the contract.
However, there are six exemptions that apply to relevant contracts to exclude them from Pay-roll Tax. There are also exemptions for owner drivers, insurance agents and door to door sellers.
The six exemptions are:
The contractor provides services to the one principal on no more than 90 days in a financial year;
The contractor engages others to do all or part of the work under the contract;
The provision of labour is ancillary or secondary to the supply of materials or equipment;
The contractor’s services are of a kind not ordinarily required in the principal's business and the contractor usually provides those services to a range of clients;
The contractor’s services are of a type ordinarily required in the principal's business for less than 180 days in a financial year; and
The Commissioner is satisfied that the contractor ordinarily renders their services to the public generally in a financial year (a determination is required).
Note – the Commissioner has approved certain deductions for classes of contractors to reflect the deemed amount for materials and equipment.
Each State and Territory operates its own Payroll Tax regime and differences may arise from jurisdiction to jurisdiction. Where a business engages contractors outside of Victoria, specific advice on the application of that jurisdiction's Payroll Tax should be sought.
Reporting of Payments to Contractors in the Building & Construction Industry
From 1 July 2012 a new reporting regime has commenced that requires participants in the building and construction industry to report details of payments to contractors to the ATO. This report is know as a Taxable Payments Annual Report (TPAR).
The purpose of this reporting regime is to address the lack of tax compliance by contractors operating in the building and construction industry.
Fair Work Act, etc.
If a contractor is considered to be a common law employee, they will be entitled to the minimum standards contained in the Fair Work Act, Awards and/or industrial agreements. For example, minimum wage rates, leave entitlements, unfair dismissal, redundancy pay, etc.
Furthermore, employers can face very significant penalties if the Fair Work Ombudsman finds that they have misrepresented an employment relationship as an independent contracting relationship in order to avoid employee entitlements.
Where it appears that a contractor may be a common law employee, specific advice should be sought.
Tax Issues for Contractors
Contractor relationships often appear attractive to the contractor as there may be an opportunity to achieve better tax outcomes. However, it is frequently the case that the Personal Services Income (PSI) regime will deny those favourable tax outcomes.
Furthermore, even if a contractor can avoid the PSI regime, the general anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act may be applied by the ATO in order to deny the taxation benefits.
If the contractor is motivated by tax benefits, it is essential that they confirm that they will be available before setting up the contractor relationship.
Lastly, the contractor should be aware that compliance obligations and associated costs are more onerous than for a salary/wage earner.
Many of the areas covered by this blog are very complex and require in depth consideration. There are also different rules that apply in different States & Territories to contend with.
We encourage any business that uses contractors to get in touch if they need assistance to clarify their obligations.
32 Main Road, BALLARAT VIC 3350
1300 328 855
Suite 13, 33-35 Macedon Street SUNBURY VIC 3429
(03) 9744 4522