Are your ‘contractors’ really contractors or are you really engaging ‘employees’? There are many reasons why businesses engage contractors and the most common are:
- The desire for a simple arms’ length engagement structure.
- Flexibility within the engagement, such as mutual ‘no cause’ termination provisions etc.
- The engagement falls outside industrial law.
- Evidence that contractors are more productive and task oriented, requiring less supervision and time off.
- Higher skills retention due to project ownership.
Many businesses will enter into contracting arrangements without the full knowledge or understanding of the factors that impact upon the engagement, potentially to the detriment of both parties. These can be considered in the following way:
- Do the contractual terms and substance of the assignment reflect the common law characteristics of an Independent Contractor?
- Is the arrangement a Sham Contract (Fair Work Australia Act)?
- Is the arrangement fair to both parties (Independent Contractors Act)?
- Is the arrangement compliant from a taxation perspective (Personal Services Income (PSI) provisions of the Income Tax Assessment Act)?
Our experience is that most businesses would have difficulty answering these questions.
The ABN Myth!
It is a common misconception that the provision of an ABN by an individual is sufficient to establish their status as an independent contractor. Many companies wrongly believe that anyone providing an ABN automatically relieves them of statutory responsibilities for PAYG tax and superannuation guarantee contributions. On its own, the holding of an ABN simply means that the individual is registered with the ATO for the purposes of collecting and remitting GST. Specific taxation and superannuation rulings defer to the common law principles for determination of an individual’s status as employee or independent contractor, and those rulings make it quite clear that an ABN is not automatic presumption of contractor status for the purposes of PAYG and SGC.
Are you Compliant?
If a company merely relies on the provision of an ABN as validation of a contractor’s status without knowing absolutely that the arrangement is compliant, then chances are their contract engagements are not providing an appropriate structure and are more likely to expose one or both parties to statutory liabilities and/or penalties.
Companies & Family Trusts?
The ATO is very clear that contractors working for one company only cannot set up partnerships, companies and trusts to reduce their tax liability cannot use these conduit entities to receive income and pay tax below their individual marginal rate.
Managing Your Risk.
Managing and minimising risk in all workforce engagements is paramount. There is a variety of Federal and State Legislation and statutory regulations that must be adhered to in order to ensure a risk free and compliant contracted workforce. These include but are not limited to:
- state payroll tax
- state workers compensation
- personal service income
- common law requirements
- industrial relations laws
- sham contract provisions
Workforce Advisors Group work with both companies and contractors to introduce a compliant independent contractor engagement model that is properly structured to meet both common law test of independence and the exemption tests under the PSI provisions of the taxation legislation. This workforce engagement structure provides benefits, both tangible and intangible, to the business and the contracted individuals. Contact Business Advisor Network on 07 3105 9121 if you would like further information. by Neil Fairley Workforce Advisors Group
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