Could your business afford to take a hit to its resources, reputation, and the inability to claim tax deductions for penalties and fines incurred for failing to meet your tax obligations?
These are real concerns facing Australian businesses, as the age old ‘employee or contractor’ debate continues and the regulators step up their data matching and audit activity in this space.
Why does it matter?
Engaging contractors is a common activity, often for the purpose of filling roles on a short-term basis. Contractors provide businesses timely and cost-effective means to meet contemporary business demands, free from many of the taxation obligations and recruitment efforts experienced when hiring employees.
The reality of these engagements often strays far from expectations regarding the tax obligations. The nature of any activity, service, or supply is fundamentally important to determining an employer’s responsibilities. In multiple recent case decisions, the courts have emphasised an increased importance on the terms of the contract between the contractor and the business. That is, whilst we are still required to look at “the totality of the relationship”, these recent decisions have highlighted the importance of what the relevant contract says about each element, right and obligation.
It can be difficult for employers to balance the considerations of ‘form’ and ‘substance’ of contractor engagements in order to ascertain their associated obligations; a failure to do so can have significant monetary, regulatory, and reputational consequences.
What are the basic rules?
Payroll tax (“PRT”), superannuation guarantee (“SG”) and pay-as-you-go withholding (“PAYGW”) are levied in relation to employees, but SG and PRT can also apply to contractors. Being clear on the relevant definitions and scope of who is captured with respect to each taxation obligation is the first step in recognising and satisfying your obligations.
PAYG Withholding
PAYGW applies to employees only (other than a 47 per cent withholding for contractors who don’t provide an ABN). Historically, the multi factorial test has been applied to reach a determination regarding who is an employee and who is a contractor. Under this test, an employer or principal should consider factors such as control over service delivery, right of delegation, basis for payment, provision of tools and equipment, quality risk and independence. Whilst this test is still relevant, recent cases, including CFMMEU v Personnel Contracting [2022], have evidenced a shift towards considering the nature of the relationship from a contractual point of view. To assess whether an individual should be considered an employee for PAYGW purposes, regard must be had to the various factors as described in the legal rights and obligations established under the contract. The decision for PAYGW purposes applies equally for fringe benefits tax purposes.
Superannuation Guarantee
For SG purposes, the first step is to consider the same employee versus contractor rules as for PAYGW. If the individual is determined to be a contractor, then the next step is to consider the extended definition of employee that captures contractors for SG purposes where they are engaged “wholly or principally for labour.” Earlier this year, JMC Pty Ltd v CoT [2023] highlighted the importance of inclusions and exclusions of terms in legally binding contracts in determining whether the contractor is providing services for labour. In essence, it is important to contemplate the who, what, when, where and how of any contractor engagement. Note that only individuals engaging in their own names are subject to SG (unless the relevant contract is a sham arrangement).
Payroll Tax
PRT similarly applies to employees as well as a broad range of contractors – who can be individuals or other entities (such as companies or trusts). Whilst there are some variances between the states, PRT typically applies to contractor payments that are predominantly for labour services, subject to a range of exemptions that vary slightly across the states.
Medical centres have been under significant scrutiny for their contractor arrangements in recent times. In the wake of cases such as Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023], a number of the State Revenue Offices have put out a ruling that sets out what constitutes a relevant contract in this regard. This captures payments to medical practitioners in most typical medical practice arrangements. Given this is a change from the previously understood position, both Queensland and South Australia have issued amnesty periods for businesses of this nature. New South Wales and Victoria are yet to announce any amnesty and are, in fact, actively pursuing such businesses for unpaid PRT.
What do we need to do?
No contract is completely foolproof, but there are various factors that can be included in your contractor agreements to mitigate risk. We recommend you:
- Review the elements of the multi-factorial test and ensure the factors are well stipulated in the contract; and
- Appropriately address the ‘who, what, when, where and how’ in the relevant rights and obligations within the contract.
In addition to ensuring the right terms are included in your contracts:
- Consider the lengths of time that contractors are engaged and determine whether any exemptions may apply;
- Note that just because an individual may have an ABN, that will not cause them to be a contractor. Rather, it is necessary to look at the various factors, as outlined above; and
- Attend the ‘Grand Thornton Employment Solutions:
Employee or Contractors Webinar’ on Wednesday 22 November to find out more.
Upcoming webinar: Employee or Contractors
Wednesday 22 November, 12 pm AEDT
Register here
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