Contractor payments – what are the obligations?

Posted on 02 July 2012

Further to our recent blog regarding the new reporting system applicable to the Building Industry regarding contractor payments,  here is a reminder about what actually constitutes a person being employed as a contractor and how their payments will need to be reported from 1st July 2012.   Dooley and Associates recently ran a series of workshops based around the topic of who is and who is not a contractor and who should actually be deemed to be an employee.

The ATO has in it’s sights both businesses reporting their contractor payments and those subcontractors who should also be reporting these payments.  For many businesses, this is where they will need to clarify that their contractors are compliant as many contractors may be deemed to actually be employees and the business may neglect to pay PAYG withholding tax and meeting their Superannuation obligations, not to mention minimum wages payments and statutory entitlements due to employees.  Many businesses believe that having an ABN establishes an individual as an independent contractor.  In fact, all an ABN confirms is that an individual is registered with the ATO to collect and pay GST.  There are a great many (and complicated) factors that need to be considered to determine whether someone is a genuine independent contractor or an employee. The table below, from the FWA website, sets out the general guildline for differentiating between an Employee and an Independent Contractor.

Indicator

Employee

Independent Contractor

Degree of control over how work is performed

Performs work, under the direction and control of their employer, on an ongoing basis.

Has a high level of control in how the work is done.

Hours of work

Generally works standard or set hours (note: a casual employee’s hours may vary from week to week).

Under agreement, decides what hours to work to complete the specific task.

Expectation of work

Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period).

Usually engaged for a specific task.

Risk

Bears no financial risk (this is the responsibility of their employer).

Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.

Superannuation

Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.

Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).

Tools and equipment

Tools and equipment are generally provided by the employer, or a tool allowance is provided.

Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).

Tax

Has income tax deducted by their employer.

Pays their own tax and GST to the Australian Taxation Office.

Method of payment

Paid regularly (for example, weekly/fortnightly/monthly).

Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.

Leave

Entitled to receive paid leave (for example, annual leave, personal/ carers’ leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees.

Does not receive paid leave.

Source: Fair Work Australia

To ensure that you are prepared to meet the compliance obligations with regard to contractor payments and additionally, that you understand who in your business is likely be deemed to be a contractor and who should be an employee, contact Dooley and Associates and one of our specialist team can assist you with contracts and advice on using contractors within your business to ensure that you fully understand the nature of your obligations and avoid any nasty surprises.  

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