However, it is not sufficient to simply state that the parties agree that the relationship is one of independent contractor and principal. All the surrounding facts must be examined before a decision is made. To do this is to incur substantial economic risk and possible penalties as well. The decision tree is fairly complex so I will outline each of the areas affected.
If a contractor is paid wholly or primarily for labour then they will be entitled to superannuation guarantee contributions, currently 9.5% of ordinary earnings. This includes company directors, board members and contractors where more than half the contract is for labour – irrespective of whether an ABN is supplied or not.
All amounts paid an employee in return for their services are liable for payroll tax. Even if you define workers as contractors in the agreement that they sign, they may still be regarded as employees for payroll tax purposes. There are a number of tests to determine the status of an employee / contractor; these include but not limited to;
- whether the work can be delegated
- who bears the commercial and injury risk?
- whether the worker is paid per job or per hour
- whether the worker works exclusively for you for extended times
- who supplies the tools and equipment?
There are some variations between states. For Queensland details are available at the Office of State Revenue website.
The employer/employee relationship is central to determining liability to pay WorkCover. The definition of who is a worker for WorkCover purposes is based on the common law definition of an employee. Unlike payroll tax, there is as yet no harmonisation of the law in this area.
In Queensland a worker must be an individual in order for the employer to have a WorkCover liability. I.e. where you engage a corporation, the people working for that corporation will not be your workers. However, a partner in a partnership may be.
Even where they provide their own ABN and are responsible for their own tax, a person may be deemed as an employee. Additionally, a person who falls into any of the following categories may be an employee:
They fail the results test or do not have a Personal Services Business Determination from the Tax Office
- Share farmers
- Salesperson paid by commission
- A person not regularly carrying on a trade or business, or who performs work outside their trade or business
- A person hired from a labour-hire agency, group training organisation or holding company to work for the employer.
There are also eight specific exclusions which apply. Namely, a person will not be a worker if they are a:
- Director of the employer
- Trustee of the employer
- Partner of the employer
- Person who performs work under a contract of service with the Commonwealth or a Commonwealth authority
- Professional sportsperson
- Part of a bona fide share fishing agreement
- Driving instructor
- Participant in the Work for the Dole scheme.
Once again it is important to determine if a worker is an employee or contractor.
If they are contractors, you will generally only withhold tax if they fail to quote their ABN, or if you have entered into a PAYG voluntary agreement with them. On the other hand, if they are employees, you will generally withhold tax from most payments that you make to them.
To correctly determine whether a worker is an employee or contractor, you need to look at the whole working arrangement. A worker isn’t automatically a contractor just because they have an ABN or specialist skills, or you only need them during busy periods. The decision has many of the same conditions mentioned above. For full details go the ATO website.
NOTE: The important take away from this article is that just calling a worker a “contractor” does not automatically remove the liabilities and responsibilities of employing people in your business.
Acknowledgement to Australian Bookkeepers Network and the ATO for much of the material in this article.
Dai is a Master of Business Administration graduate of the University of New England, Registered BAS Agent and member of the Institute of Certified Bookkeepers. For 16 years he owned, operated and managed businesses in the tourism and hospitality industry – particularly Accommodation, Event Management, and Food & Beverage Management. In recent years, Dai has worked in the Not for Profit sector, Real Estate, Motorsports, and Motor Trades industry and business services, in Finance, Administration, and Practice Management roles, before becoming a Professional Bookkeeper in 2009.