The Australian Taxation Office has advised there will be increased audit activity in the coming year targeting contractor arrangements.
The introduction of the new contractor reporting regime, which will apply to the building and construction industry from 1 July 2012, will also put contractor arrangements under further scrutiny.
As outlined below, payers have differing obligations in respect of employees and contractors and it is therefore important to determine whether a worker is an employee or contractor.
Employee or contractor?
There is no single definition of ‘employee’. The definition of an employee is different for the purposes of pay-as-you-go (PAYG) withholding, superannuation, payroll tax, WorkCover and fringe benefits tax (FBT) obligations.
A number of factors, such as the degree of control that the payer has over the worker, whether workers hold necessary licences and insurance policies, and the number of organisations they provide services to, are relevant in determining the relationship for PAYG purposes.
PAYER’S OBLIGATIONS
(i) PAYG withholding
Where workers are deemed to be employees, the correct PAYG withholding tax must be withheld from their earnings. If a worker is a contractor, a payer is only required to withhold amounts from payments where the contractor:
- has entered into a voluntary agreement with the payer; or
- provides work/services under a labour hire arrangement; or
- has not quoted an Australian business number.
(ii) Superannuation
Where a worker is deemed to be an employee, the employer must make superannuation guarantee contributions on the worker’s earnings (currently nine percent). Contractors are responsible for their own superannuation obligations. Note that Contractors cannot be deemed to be employees where they operate through an entity.
(iii) Payroll tax
Each state and territory of Australia has its own legislation governing payroll tax. Payments to workers are taxable if they are deemed to be employees.
(iv) WorkCover
Each State/territory of Australia has its own legislation governing WorkCover. Payers are liable for WorkCover for contractors if they are deemed to be employees.
(v) FBT
Where a worker is deemed to be an employee, the employer is required to pay FBT (currently 46.5 per cent) on the grossed-up taxable value of benefits provided, subject to any concessions and exemptions.
In summary, the emphasis is on the payer to correctly establish if a worker is an employee or a contractor. If a payer incorrectly classifies a relationship they will be liable for any associated penalties. Therefore, when businesses engage workers, it is important to establish the status under which services are provided.
In a future monthly tax update, we will examine in more detail the factors that distinguish an employee from a contractor.
