The ATO collects a significant amount of information in relation to contractors in certain industries through the Taxable Payments Annual Report (“TPAR”).
The ATO uses TPAR information for various compliance programs. In addition, they share this information with other government agencies including the State Revenue Offices and the WorkCover Authorities. These organisations analyse the information using data matching tools to specifically target non-complying businesses. More than ever before, businesses are subject to greater scrutiny and a higher risk of detection for non-compliance.
As a result, we are seeing an increased number of audits from both State and Federal Revenue Authorities focussing on compliance with tax obligations in respect of contractors.
Whether your business or your clients prepare and lodge a TPAR or not, it is crucial they understand their contractor obligations as non-compliance can create material risks and, if not detected in time, can be costly to rectify.
Below are common issues we have seen in relation to employment taxes and contractor obligations.
Employee or contractor?
When considering a worker’s status for the purposes of the various employment taxes, the starting point is to determine the true nature of the relationship between the parties. That is to say, is the relationship one of employer and employee (master/servant) or principal and contractor?
A common misconception is that if the worker quotes an ABN and provides an invoice for services rendered, they are a contractor and not an employee. However, there have been many instances of workers purporting to be contractors who are found to be employees when reviewed by the revenue authorities.
Various tests have been developed by the courts to determine whether the worker is an employee or a contractor, including:
- The extent to which the principal can control the worker’s performance of work and working conditions;
- Whether the engagement is for a result or on an on-going basis;
- Whether the worker conducts an independent business;
- Whether the worker works for other independent clients;
- The worker‘s ability to delegate to others;
- Provision of equipment and materials by the worker to perform the work; and
- Extent of commercial risk assumed by the worker
If the worker is engaged via a company, trust or partnership, they cannot be considered an employee, provided it is not a sham arrangement.
If the worker is considered an employee, the employer is responsible for meeting PAYG Withholding, superannuation guarantee, FBT, payroll tax and workers compensation obligations.
Even if it is found that a worker is a contractor and not an employee, the various employment taxes have specific provisions which can deem those contractors to be employees. These provisions are discussed in some detail below.
Payments to a contractor are subject to payroll tax, unless at least one of the following exemptions applies:
- Services are provided on no more than 90 days in a financial year
- The contractor engages other persons to help perform the services
- The provision of labour under the contract is ancillary to the supply of materials or equipment
- The services are not ordinarily required by the business and the contractor provides the same services to other independent clients
- The services are of a type required by the business for less than 180 days in a financial year
- The contractor renders the same services to other clients in the same financial year
There are also specific exemptions available for owner-drivers, insurance agents and door-to-door salespeople.
The burden of proof is on the employer to substantiate that a contractor exemption applies. The Commissioner may deny an exemption due to a lack of information or insufficient evidence.
Workers’ Compensation Insurance (“WorkCover”)
Contractor provisions in relation to workers’ compensation insurance vary significantly across the States and Territories.
In Victoria, broadly payments to a contractor will be subject to WorkCover if all the following criteria are met:
- The contract is mainly for labour. (i.e. greater than 50% of the contract value is for labour)
- At least 80% of the work is performed by the same individual
- At least 80% of the contractor’s gross income (from the provision of similar services) is earned from the employer in question
As with payroll tax, the burden on proof is on the employer to substantiate why payments to a contractor have been excluded. The Victorian WorkCover Authority could deny an exclusion due to a lack of information or insufficient evidence.
Whilst superannuation guarantee obligations do not arise in respect of a contractor who is engaged via a company, trust or a partnership (in most cases), they can arise in respect of a contractor (individual or sole trader) who is engaged wholly or principally for his or her own labour and the individual:
- is remunerated for his or her personal skills + and
- must perform the work personally and has no genuine ability to delegate + and
- is paid by reference to time (e.g. hourly, daily rate) rather than for a specified result
PAYG Withholding obligations only arise on payments to contractors if they do not provide a valid ABN or there is a voluntary agreement between the contractor and the principal engaging them.
Importantly, if a business fails to comply with any PAYG withholding and reporting requirements, the payments made to a contractor could be treated as non-deductible for income tax purposes.
Fringe Benefits Tax (FBT)
Benefits provided to contractors are generally not subject to FBT.
How can we help?
There are several ways that we can assist, including:
- Review existing or develop new contractor management systems, contractor procedures or a questionnaire
- Review any contract arrangements that are in place and advise in relation to the employment taxes obligations
- Advise what documentation should be collected in relation to contractors in order to substantiate various payroll tax and WorkCover exemptions
- Ensure that contractor payments disclosed to the ATO in the TPAR are consistent with the disclosures made to the State Revenue Offices or WorkCover Authorities