Does your business pay contractors? If so, it's important to make sure you're aware of all the requirements that come with such, regarding employees vs contractors, the requirement to pay contractors super, and the requirement to withhold tax if your contractor doesn't provide an invoice with a valid ABN.
Read below to find out your obligations.
Employee vs Contractor
In the past, it was a popular option for employers to hire people as contractors instead of employees to avoid having to pay them compulsory super, but in recent years the ATO has been working to close this gap by changing the rules with regards to paying contractor super (see below).
What are the differences between employees and contractors?
Employee | Contractor |
Ability to subcontract/delegate: the worker can't subcontract/delegate the work - they can't pay someone else to do the work | Ability to subcontract/delegate: the worker can subcontract/delegate the work - they can pay someone else to do the work |
Basis of payment - the worker is paid either: - for the time worked - a price per item or activity - a commission | Basis of payment - the worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work |
Equipment, tools and other assets: - your business provides all or most of the equipment, tools and other assets required to complete the work, or - the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets | Equipment, tools and other assets: - the worker provides all or most of the equipment, tools and other assets required to complete the work - the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets |
Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. | Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. |
Control over the work: your business has the right to direct the way in which the worker does their work | Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement |
Independence: the worker is not operating independently of your business. They work within and are considered part of your business | Independence: the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work |
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 10.5% at the time of posting) and it will need to be processed through a superannuation clearing house. The 10.5% 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 10.5% 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.
See our previous blogs with regards to paying super for employees for more information about your obligations.
Contractor ABN requirements
Your contractor invoices must have a valid ABN on them and you must receive invoices for all services. If you do not receive an invoice or it has no ABN/an invalid ABN, it is a requirement to withhold the top rate of tax from their payment- (47% from 1 July 2017) and pay this to the ATO.
You do not need to withhold if any of the following applies:
- 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.
Read the above and still have questions? Feel free to reach out to us at admin@herveybaytax.com or 07 4334 0002.