If you are a small / medium business using contractors, you must make sure they are independent contractors to claim exemption from certain liabilities.
Contractors are a key area of compliance with the Australian Taxation Office.
If your contractors are not independent they will be classified as employees and your business will be liable for their:
- Superannuation
- Workers Compensation
- PAYG Withholding Tax
- Payroll Tax (State based tax)
- Fringe Benefits Tax (where applicable)
The following statutory bodies:
- Australian Taxation Office (superannuation and PAYG WHT),
- Workcover (Workers Compensation), and
- the various Offices of State Revenue (Payroll Tax)
are the bodies authorised to go back 4 years and review payments your business made to your “contractors” to make sure they are independent for liability purposes.
This is especially important in the building and construction industry. This industry is of particular interest to the various authorities.
Two important facts about contractors:
- Just because a contractor has an ABN does NOT make them an independent contractor.
- A contractor who uses a PTY LTD company will always be an independent contractor.
The following guide has been provided by the ATO in determining the status of your contractors.
| An employee….. | A contractor….. |
|---|---|
| Works in your business and is part of your business | Runs their own business and provides a service to your business |
| Cannot sub-contract or delegate | Is free to sub-contract or delegate work |
| Is paid for time worked, price per item or paid a commission | Is paid for a result based on a quote provided |
| Is provided tools for the job – or is re-imbursed for the cost of equipment | Provides their own tools and equipment and does not receive an allowance or reimbursement |
| Has no commercial risk. You are responsible for their work. | Has all commercial risk and is liable for rectifications and defects |
| Your business has control over the work | Contractor has the freedom in the way the work is done – subject to prior contractual agreements |
You may have hidden liabilities.
Please contact me if you need assistance in determining the independence of your contractors and assessing any potential hidden liability to these authorities.
Links
The ATO: Employee or Contractor: What’s The Difference?