Think you are a contractor? The ATO may disagree!
Ever since the introduction of the Australian Business Number (ABN), the issue of Contractors (or Sole Traders) versus Employees has been a constant topic of conversation – and with good reason. In situations where an individual can successfully argue that they are a contractor rather than an employee the following benefits become available:
- Reduced paperwork for the employer as there is no leave, withholding tax or superannuation obligations in relation to a genuine contractor;
- Increased income as contractors tend to charge the client more than an employee would have (to compensate for the loss of superannuation and leave entitlements);
- More after-tax income in the hands of the contractor due to an increase in the available deductions for work-related expenses. Most contractors are able to claim a deduction for amounts which would be preliminary expenses if paid by an employee.
As you can imagine, this has resulted in a flood of would-be contractors joining the workforce looking to use their ABN as a means of circumventing the normal employer/employee obligations and take advantage of these benefits.
Are you an Employee or a Contractor?
Determining if you are an employee or a contractor comes down to a review the arrangement under which the work is to be conducted. Just because you are a contractor under one agreement does not automatically make you a contractor in all client arrangements.
The following factors should be considered when deciding how to classify yourself as either a Contractor or an Employee:
|
Employee |
Contractor |
|
| Can you sub-contract or delegate the work? | A specific person must undertake the work. | Worker has the right to pay another person to do the work rather than doing it themselves. |
| Do you have control of the work? | What work is performed, where the work is done, when the work is done and how the work is carried out is controlled by the client. | Work is performed at the discretion of contractor. Existence of a deadline or other conditions in a contract does not automatically exclude classification as a contractor |
| When are the payments made? | Regular payments based on hours worked. | Invoiced on completion of the work or completion of specified stages. |
| Who supplies the tools and equipment necessary to perform the work? | Items required are provided by the client. | Owns most or all of the tools and equipment required to complete the job. |
| Who ultimately holds the risk relating to the work? | The client bears all the risk and is liable for rectifying any defect in the work performed by worker. | Contractor bears the risk and are liable for rectifying any defect in the work performed at their own expense. |
| Is the individual independent from the client? | Typically only has one source of employment and has no immediate plans to take on another project. | Has a website and other marketing tools, openly advertises for new clients and has other contracts in place. |
What happens if I get it wrong?
Businesses which incorrectly classify employees as contractors can face some (if not all) of the following:
- Penalties for failing to satisfy their withholding tax obligations;
- Superannuation shortfall amounts as well as associated penalties;
- Increased Workcover and Payroll tax expenses;
- Liabilities relating to unpaid leave entitlements.
Still unsure?
Businesses looking for further advise in relation to using contractors rather than employees to fill roles within their organisation should contact Inspire CA for assistance.
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