We had a lot of feedback in respect of the April article on contractor v employees. We thought we should follow it up with some further information.
From the feedback there appears to be some confusion about the application of the penalties. The main risk falls on businesses that engage sole traders who the ATO deems to be employees. If a business is identified to be hiring people deemed to be contractors they can have a failure to lodge penalty imposed. To put some numbers on it we’ll look at the following example:
David Pty Limited is subject to audit and the ATO determines that $100,000 of payments to contractors are deemed employees. The ATO imposes a failure to withhold penalty of $47,000.
David is now required to remit this to the ATO and also not entitled to claim a tax deduction. If the ATO identifies that David was reckless about this payment or has a history of poor ATO compliance, the ATO can levy a further 25% penalty or even 100% of the base amount in more serious cases.
These penalties are significant and also not tax deductible.
The audit activity is being driven by the requirement of businesses to complete a Taxable Payments Annual Report (also known as TPAR). This report is required to be lodged every year by 25 August by businesses in certain sectors (mostly construction related) to disclose how much they have paid a contractor. In the recent audit of our client the ATO were only interested in the contractors reported on the TPAR who was were individual sole traders. People who act through company, trust or partnership were ignored.
When we prepare individual income tax returns now, the ATO provide us with a summary of the taxable payments advised to them that the individual has received during the year. This means that when the tax return is lodged the ATO expect to see these payments declared in the individual income tax return. The ATO have expanded the industries required to lodge a TPAR report for the 2018 financial year which Patricia from our office will go into more detail about in this newsletter.
We strongly recommend that if you are an employer using the services of sole contractors, you look at the indicators of an employer/employee relationship and review your arrangements. If you are a contractor and believe you may be receiving payments that could be deemed to be employer/employee related, you talk to the persons making these payments to bring it to their attention that a problem may exist.
Should you believe a problem may exist we encourage you to contact us to discuss your situation.
This article appeared in our June 2018 newsletter. Author: Peter Gill
