This article appeared in our April 2018 newsletter, written by Peter Gill.
There was recently a Four Corners special on the Australian Taxation office. One of the stories they featured was the cancellation of Australian Business Numbers (ABN) of people who contract, but the ATO believe should be employees. These rules are exclusive to sole traders and there are many people who may be affected.
Factors that can indicate the existence of an employer/employee relationship are as follows:
- People who work regular working hours
- Paid a fixed hourly rate
- Perform similar or repetitive services
- Paid regular or similar pay periods
- Receive regular or similar pay amounts
- Deriving all or most of their income from one source
- The person not having to provide specialised equipment or their own materials to complete the work.
When the ATO identifies sole traders who perform services that meet even some of the above criteria they are at risk of being deemed an employee of the person/entity they are providing services for. In the Four Corners program the contractors identified had their ABN cancelled. If a person does not hold a valid ABN, the person paying them for services is required to withhold tax at the top marginal rate and remit to the ATO. This effectively halves the contractor’s take home income and also makes it problematic when lodging their tax return.
What are the penalties for employers?
Employers that engage contractors who should be employees can have a failure to lodge/pay penalty imposed by the ATO. Again, this is at the top marginal rate of the total amount paid to contractors who should be employees. This penalty is on top of the payments they have already made to employees. This can be significant and a shock to the employer/contractor.
What can contractors do about this?
If you believe you may be affected by the above rules, a solution is for the contractors to change their business structure from a sole trader to a company, a trust or partnership as those entities are exempt from these rules. This however means extra cost to the contractor as they have to pay to incorporate and/or set up trust deeds, may have to pay annual ASIC fees and lodge annual tax returns for these entities. They also become liable for their own workers compensation insurance and superannuation.
What can employers do about this?
This legislation presents difficulties for employers particularly those whose labour needs are variable. Recently a client was subject to audit on this very matter. The client provides building services and can have a large project one month needing many support personnel and then other times have very little need for staff. The employer does not want to formally employ staff as they will likely need to put them off when the project is finished. This can present problems with employee protection laws and also make the employer liable for leave provisions adding a significant cost to their business.
We explored this issue with other providers in the market and they told us they have a strict policy of only engaging persons operating through a company, trust or partnership business structure. This appears to be the obvious answer, but not all persons want to incorporate given the extra costs they bare. This can translate to increased charges being passed on to the engaging entity.
The other option is for the employer to engage the person as a casual employee. Casual employees are not required to be paid sick leave or annual leave and can be terminated easily. However, they are to be paid a higher rate and superannuation guarantee. The employer is also liable for the worker’s compensation insurance for that employee (it needs to be said that these obligations could already be present in the contractor scenario anyway). There are also further obligations on the employer if they engage a casual employee for greater than a 12 month period.
What to do if you believe you are affected by these rules.
If you are an employer or a service provider and think you may be affected by these rules, we encourage you to contact us to discuss your circumstances. Audit activity is increasing in these areas and the penalties significant.
