Modern workplace arrangements have changed the concept of employment. The presence of working from home, flexi time work and the “gig economy” has meant that the concept of employment and contracting has moved significantly over time. This is especially true in Perth with the physical distance of our state requires innovative business solutions.
The concept of employment as opposed to contractors is important for families in business looking at their tax affairs. The Tax Office and Revenue WA will properly apply a range of additional taxes to an employee including superannuation, payroll tax, PAYG Withholding tax and additional employee benefits like leave entitlements. Further, if a person is a contractor for GST and PAYGW tax they can still be an employee for the tax-like superannuation guarantee charge.
In the past the Tax Office has given families in business a “checklist” approach which simplified the review of contractors to ensure they were not employees. However over time the courts and the ATO have applied an “all of business” approach. This means that the entire tax structure of the relationship must be considered in full. Some of the tax factors (that must be considered holistically) include:
- How much control is applied to the contractor;
A bona fide contractor for tax purposes has a lot of say in the quality and work process.
- The extent of tools and machinery supplied by the contractor;
A legitimate contractor for tax purposes often supplies a large portion of equipment to support the work they do.
- Whether the contractor is able to delegate work to another person;
A legitimate contractor for tax purposes is able to choose who does the work without the consent of the principal.
- Whether the contractor has a business location separate from the principal;
Many legitimate contractors as reviewed by the ATO have a physical presence away from the principal.
- Whether the contractor wears a uniform;
Many legitimate contractors will wear clothing that represents their own business and the Tax Office will consider this.
- The presence of an email address for the contractor;
If a contractor has an email address of the principal this indicates a more embedded employment relationship for the ATO and RevenueWA.
- The title of the contractor when representing the outside world;
If the contractor has a job title as determined by the principal they are more likely to be considered an employee when reviewed by the Australian Tax Office.
- How the contractor lodges their tax returns;
If the contractor is lodging business income tax return, rather that employment income, this indicates the contractor intends they are operating a business.
- Whether the contractor is paid for holidays and sick days;
The payment of days regardless of the working conditions indicates the contractor is more of an employee for tax reasons.
- The intention of the parties;
Where the parties intend for the relationship to effectively be an employment relationship is critical to determining the tax profile of the contract.
- The liability of the contractor to correct mistakes;
If a contractor is liable for their mistakes the tax profile is more likely to be that of a legitimate contractor compared to an employee who is not financially exposed for errors.
- How “business-like” the contractors systems are (manuals, proprietary knowledge, systems and process);
A contractor is more likely to have independent systems that a tax employee.
- The ability of the contractor’s business to generate goodwill;
If the contractor is able to generate goodwill, that could potentially be sold later on, this is indicative of a legitimate contractor relationship for tax purposes.
- How the contractor’s agreement is drafted; and
Many contractor’s cover the above issues in their terms of contract and invoices supplied.
- The payment terms with the contractor.
Contractors are typically paid at variable times and employees are regularly paid on the same recurrent date.
If you have individuals who are contractors in your family business you should consider making it clear whether:
- The contractor is paid to generate a result as compared to being paid a time rate;
- The ability, and the actual practice, of delegating work to another person;
- Whether the agreement with the contractor has an indemnity to prevent the contractor “double dipping” on superannuation payments once the contract has terminated.
Further, any old agreements should be reviewed to ensure that the agreements are matching the actual workplace practices.
The superannuation obligations for a contractor is a more simple, and potentially a more complex, position. In the ATO publication SGR 2005/1 the superannuation obligations of an employer to a contractor do not extend to a contractor operating through a company. This is due to the position that an employment relationship can only exist between a business and a natural employee.
There is case law that confuses this topic (Roy Morgan Research case) however we are of the view that an incorporated contractor who is correctly engaged, carries out a business and invoices the family enterprise will not be treated as an employee for superannuation purposes.
The payroll tax position typically applies a “look through” the use of incorporated contractors and looks at the totality of the underlying relationship (in a similar way to the above 15 points).
The additional costs associated with employment are high. Every family in business needs to remain aware of their tax obligations regarding contractors and how poorly drafted documents could potentially impose significant costs that can change the profitability of these businesses.
At Westcourt Family Business Accountants we review each family businesses payroll tax and superannuation obligations of the contractors yearly to ensure that no surprises can come back to the family later-on. And our review is documented so that we will stand by it. This documented, strategic, approach is important to giving a family in business certainty that their holistic tax affairs are being thought of properly.