Are your Contractors Really Employees?

The area of contractor vs employee is one that is fraught with danger for business.

It is not uncommon for a business to be asked by a new worker to be treated as a contractor for tax purposes for a variety of reasons such as industry norms or supposed “tax benefits”.

In a tight labor market, it is understandable that many businesses will feel pressured to go with the flow on this but consider the consequences.

• If the Commissioner of Taxation subsequently finds that a contractor was really an employee for income tax purposes, the penalty is equal to the amount of PAYGW that should have been withheld from each payment. And this may not be tax deductible!
• Superannuation is payable for an employee and individual contractors that are mainly providing labour. Failing to make the required superannuation contributions will result in the superannuation guarantee charge and considerable penalties.
• If benefits have been provided FBT may apply if that person is deemed to be an employee not a contractor.

• Whilst payroll tax can also apply to contractors, there are some exemptions. In the case of an employee, there are far fewer exemptions.

• Penalties under Fair Work Act may also apply if the worker is found to be an employee (note different tests apply under this Act to the taxation laws).

The fact that that person has an ABN is not determinative. Merely stating in an agreement that the party is an “independent contractor” is not sufficient.

Recent High Court decisions regarding the distinction between employees and independent contractors have changed the way these arrangements should be interpreted. These decisions highlighted the importance of the terms of the contractual terms between the parties.

As a result, the ATO has issued a taxation ruling and a practical compliance guideline that provides a “risk rating” ranging from very low risk to high risk based on a number of factors.

We recommend using this risk rating process when looking at your current arrangements to identify those workers at a high risk. To use the risk matrix click the link below.

pcg2023-002.pdf

The key takeaway for businesses is to review all current contractor arrangements. Having an up-to-date contractor agreement in writing that considers the recent changes is highly recommended.

To review more information regarding this, please see the ATO website or follow the link provided below.

Employee or independent contractor | Australian Taxation Office