Are you one of the many small businesses that employ contractors rather than employees in order to reduce some of the reporting and administration responsibilities?
Many small business owners believe that if they employ a contractor, rather than an employee, then they will not need to pay one or more of the following financial commitments.
- withhold PAYGW from their remuneration.
- insurances such as work cover.
- annual leave.
- annual leave loading.
- termination or redundancy pay.
- statutory superannuation.
The Australian Taxation Office (A.T.O.) is concerned that many employers are remunerating employees on a contract basis when in fact the person qualifies as an employee, not a contractor.
The A.T.O. asserts that the essential difference between an employee and a contractor is;
- an employee works in your business and is part of your business, and
- a contractor runs their own business.
The A.T.O. has developed a decision-making tool that helps a small business determine whether the person that they are paying is an employee or contractor for taxation and superannuation purposes.
Companies, trusts and partnerships are always contractors
An employee must be a person. If you have hired a company, trust or partnership to do the work, this is a contracting relationship for tax and superannuation purposes. The people who do the work may be directors, partners or employees of the contractor but they are not your employees.
Some workers are always employees
The following workers are always treated as employees:
- apprentices
- trainees
- labourers
- trades assistants
Apprentices and trainees do both work and recognised training to get a qualification, certificate or diploma. They can be full-time, part-time or school-based and usually have a formal training agreement with the business they work for. This is registered through a state or territory training authority or completed under relevant law.
In most cases, they are paid under an award and receive specific pay and conditions. You must meet the same tax and superannuation obligations as you do for any other employees.
The table below outlines six of the factors that, taken together, determines whether a worker is an employee or contractor for tax and superannuation purposes.
Employee or contractor
| Employee | Contractor |
| Ability to subcontract/delegate: the worker can’t subcontract/delegate the work – they can’t pay someone else to do the work. | Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work. |
| Basis of payment – the worker is paid either: for the time worked price per item or activity commission. | Basis of payment: the worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work. |
| Equipment, tools and other assets: your business provides all or most of the equipment, tools and other assets required to complete the work, or the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets. | Equipment, tools and other assets: the worker provides all or most of the equipment, tools and other assets required to complete the work the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets. |
| Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. | Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. |
| Control over the work: your business has the right to direct the way in which the worker does their work. | Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement. |
| Independence: the worker is not operating independently of your business. They work within and are considered part of your business. | Independence: the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work. |
It is important to get this employee contractor clarification right, as the penalties listed below are substantial.
Penalties and charges include:
- PAYG withholding penalty – for failing to deduct tax from worker payments and send it to the A.T.O.
- super guarantee charge, made up of
- super guarantee shortfall amounts – the amount of super contributions that should have been paid into a complying fund
- interest charges
- an administration fee
- additional super guarantee charge of up to 200%
In addition to the super guarantee charge – which imposes nominal interest and an administrative charge in all cases on top of the super guarantee shortfall – the A.T.O. can impose additional penalties of up to 200% of the super guarantee charge.
Should you require any further information in relation to employees or contractors please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.