If your business engages contractors, it’s crucial to understand your obligations concerning your their classification, superannuation contributions, and tax withholding requirements.
Employee vs. Contractor
Historically, some employers preferred hiring individuals as contractors to circumvent compulsory superannuation payments. However, the Australian Taxation Office (ATO) has tightened regulations to address this issue. Understanding the distinctions between employees and contractors is essential:
- Ability to Subcontract/Delegate: An employee cannot subcontract or delegate their work; they must personally complete the tasks assigned. In contrast, a contractor has the freedom to subcontract or delegate tasks to others.
- Basis of Payment: Employees are typically compensated based on time worked, per item or activity, or through commissions. Contractors, however, are paid for achieving specific results as outlined in a quote, which may be calculated using hourly rates or per-item pricing to determine the total project cost.
- Provision of Equipment and Tools: In an employment arrangement, the business usually supplies most of the necessary equipment and tools, or reimburses the worker if they provide them. Conversely, contractors generally supply their own equipment and do not receive allowances or reimbursements for these expenses.
- Commercial Risks: Employees bear no commercial risks, with the business being legally responsible for their work and any associated costs of rectifying defects. Contractors assume commercial risks for themselves, being legally accountable for their work and any necessary corrections.
- Control over Work: Businesses direct how employees perform their tasks, whereas contractors have the autonomy to decide how to complete their work, within the bounds of any contractual agreements.
- Independence: Employees operate within and are considered part of the business structure, while contractors run their own businesses independently.
Contractor Superannuation
In what circumstances does a contractor need to be paid super?
You are required to make super contributions for contractors if you pay them:
- Under a verbal or written contract that is mainly for their labour (more than half the dollar value of the contract is for their labour).
- For their personal labour and skills (payment is not dependent on achieving a specified result).
- To perform the contract work (work cannot be delegated to someone else).
How is the payment required to be made?
Just like employees, if you have a requirement to pay superannuation to a contractor this means it needs to be paid under the superannuation guarantee rules. You will need to pay the statutory rate of superannuation (currently 11.5% at the time of posting) and it will need to be processed through a superannuation clearing house. The 11.5% is on the labour component of the payment only and should not be calculated on GST or any material or equipment costs that are paid.
Paying an additional 11.5% directly to your contractor on their invoice does not satisfy your obligation to pay their superannuation. It must be paid through a clearing house to their fund or you are non-compliant.
What other rules must be followed with regards to superannuation?
All rules apply in this case as they do with employees, you are required to offer the contractor a choice of their superannuation fund to be paid to and must also adhere to the due dates. The same penalties apply for paying contractors super late (or not paying) as the ones that apply when paying employees.
Contractor ABN Requirements
- The total payment is $75 or less, excluding any goods or services tax (GST).
- The supplier is an individual under 18 years old, is not your employee, and the payments you make to that person do not exceed $350 per week.
- The supply is not wholly input taxed under GST – this includes:
- most financial supplies
- supplies of residential rent, residential premises and some precious metals
- food supplies by school tuckshops and canteens that have chosen to be input taxed
- The supply is made in the supplier’s private capacity or as their hobby.
- The payment is exempt income for the supplier – for example, the supplier is an endorsed charity.
- The payment is to a non-resident who is not carrying on an enterprise in Australia or through an agent in Australia.
- The supplier is not an enterprise because they have no reasonable expectation of profit or gain.
What to do with withheld amounts
Withheld amounts must be declared on your business activity statement for the period. You will also need to complete a PAYG payment summary – withholding where ABN is not quoted and provide it to the supplier at the same time you pay them the net amount (payment after tax withheld). The supplier will require this payment summary to claim the withheld amount as a credit when they lodge their tax return.
What happens if no ABN/an invalid ABN is cited and you don’t withhold?
The most simple answer to this: it’s not deductible.
If you don’t adhere to the rules with regards to ABN requirements and withholding, any payments made to the contractor are not eligible to be claimed as a tax deduction and this could cost your business thousands in tax.
How to check if an ABN is valid?
To check if an ABN is valid or if the contractor is registered for GST, type their ABN or name into the ABN Lookup on the ABR website here: https://abr.business.gov.au/ This will provide you full details on who the ABN belongs to, what dates it has been active and what dates they have and have not been registered for GST.