If you are an employer in the building and construction industry or any another industry really where you believe you are paying an independent contractor (an independent contractor can be a sole trader, partnership, trust or company), rather than an employee you may want to read on. Why is this distinction so important? The main reason is because each payee has different tax obligations but also because there are different obligations under fringe benefits tax and superannuation laws.
If you determine the payee to be an employee then you must provide the Australian Taxation Office (ATO) with a Tax file number declaration and withhold an amount from any salary, wages, bonuses, commissions, allowances based on tax tables printed by the ATO. You will also be required to satisfy your superannuation and work cover obligations. If the payee is an independent contractor then the only time you will be required to withhold amounts are where you have been asked to do so or they do not provide you with an Australian Business Number. Please note that the superannuation laws may still apply for Independent contractors.
So what factors do you need to consider in determining if you are paying an employee or independent contractor? Unfortunately like many things in our tax law, there is no one definitive test or rule to apply and each case needs to be looked at independently.
Some of the factors and questions that you will need to consider are listed below (please note that this list is not exhaustive):
- Do you have the right to control the how, when, where and by whom the job is performed?
- Is the payee paid on an hourly rate or for specific tasks?
- Do you provide the payee with materials and equipment that are required for the job?
- Are there set hours that the payee must work?
So what can happen if you classify a worker as an independent contractor as opposed to an employee? Well, it can turn out to be a very expensive cost to your business (see On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366). You will be liable for penalties under the Fair Work Act. You will be liable for superannuation guarantee charge and penalties for unpaid superannuation but you may also be ordered to make back payment of wages set by the relevant award or an enterprise bargaining agreement.
So if you find yourself in the position where you don’t actually know if you are paying an employee or independent contractor avoid the costs of getting this wrong and give us a call, we will be more than happy to work with you to work it out and make sure that all of your obligations are satisfied.
Written by Sandra Polotnianka
Hattam McCarthy Reeves
Chartered Accountants and Business Advisers
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