Increasingly, business owners are looking for flexibility in their employment obligations and ways in which to better manage their labour costs.
For many this means using more contractors rather than direct employees. Taking this step may make good business sense but it’s important to ensure that you do not breach any of your compliance obligations in the process.
Businesses have been warned recently over the perils of getting it wrong. “Sham contracting” is something that can cost your business dearly, as one NSW company found out when it was fined $17,000 for sacking employees and re-hiring them as contractors.
There are a number of tax issues you need to consider when you engage contractors. You may have responsibilities under the PAYG and superannuation guarantee legislation as well as exposure for both workers compensation and payroll tax.
The fact that a person is described as a contractor, or that the parties both agree that they are in a contract relationship, does not necessarily mean that they are an independent contractor for taxation purposes.
You need to test this under the relevant provisions of the legislation. Your intention is not the critical test, and whilst documentation is important, by itself it does not determine the true nature of the relationship.
The facts of each case would be tested against the various regulations, to determine whether the person is an employee or a bona fide contractor.
To complicate the position there is not a consistent definition of employee or contractor under the legislation so you need to test your circumstances in each area.
This will include both Commonwealth and State legislation and different provisions within the Income Tax Assessment Act.
Where your contractor operates through an entity structure such as a company there is generally a reduced risk of exposure.
Contractors engaged under their own names as sole traders represent a higher risk of exposure. This risk increases where they are principally providing you with labour (there are no materials or plant and equipment provided by them), they work from your premises, and you represent their sole or main client.
Another simple test is to compare a contractor with an employee in your business. If there is no difference between the two other than the way they are paid and the hours they are engaged for then they may an employee for tax purposes.
The general principle of ‘if it walks like a duck and talks like a duck, it is probably a duck’ may apply here.
If you get this wrong you can be exposed for payments that should have been made or with held together with penalties and interest.
The superannuation guarantee area is a high focus area for the Tax Office at the moment. They are active in the audit space here.
Under this part of the legislation an employer can be liable for superannuation guarantee payments where a contractor is deemed to be either a common law employee or deemed employee under the Act.
As an employer if you get this wrong your liability for superannuation payments can go back to the time when you first engaged your contractor.
Whilst the payments individually may not be a lot of money, when you multiply this across the number of contractors you have and the years you have engaged them, this can add up to a substantial liability.
Take no comfort from the fact that your business colleagues or competitors do the same thing. They may have got it wrong or not taken any advice before entering into the contract arrangement.
This is something that you should take advice on. Talk to your accountant and ask them whether the engagement satisfies a bona fide contractor arrangement.
Contract relationships may create greater flexibility in your labour force but you need to ensure that you are within the requirements of the relevant legislation.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.