New legal precedent (Federal and State case law), data matching initiatives and a trend towards a hybrid working arrangement influenced by the gig economy have led to an increase in ATO and State Revenue Office scrutiny around the engagement with contractors by employers.
Engaging with contractors – are you meeting your employer obligations?

A common misconception by employers is that if you engage with a contractor, this removes any employment tax obligations (PAYG withholding, FBT, superannuation and payroll tax).

This is not always the case, with extended definitions of ‘employee’ capturing genuine contractor arrangements for both Superannuation Guarantee and Payroll Tax. This has led to the increased audit activity by government authorities backed by a more sophisticated and targeted approach to audits through data sharing from sources such as Single Touch Payroll 2 and Taxable Payments Annual Reports, catching out non-compliance.

Furthermore, the Personnel contracting and the Jamsek High Court cases have triggered changes to the way contractors are viewed from an employment tax and Fair Work Commission perspective. Whilst it is important to note that the ATO has released the Decision Impact Statement reiterating their opinion on the continuing importance of the multifactorial test, it shifts the focus somewhat to the underlying contract and therefore the expressed and implied terms of the Agreement to substantiate the relationship.

From a state payroll tax perspective, we have seen the broad inclusion of contracting arrangements pushed further, particularly in the medical profession with the Thomas and Naaz NSW Tribunal case.

Whereas the previous industry standard arrangement of doctors engaging medical practices under a facilities arrangement wasn’t seen by many to be an arrangement that would attract payroll tax, the state revenue offices’ have a differing opinion and have been quick to utilise the outcome of the case and subsequent NCAT appeal to spearhead audit activity.  

Why is this an issue for employers?

  • Data sharing between ATO, SRO, ASIC and other government bodies is increasing – leading to higher employment tax audits triggered and potential Director Penalty Notices issued should there be shortfalls.
  • Employment tax is not the only consideration. Fair Work Commission may deem the individual an employee – thus questioning the entitlements to the individual (i.e. leave entitlements etc.)

Common misconceptions

  • Holding an ABN does not automatically classify one as a contractor.
  • Employment tax obligations are employer obligations and cannot be shifted to the individual.
  • The definition of contractor is not uniform across all employment tax obligations (Payroll Tax, PAYGW, FBT and Superannuation Guarantee).
  • The terms of a contract are key unless the contract is deemed a “sham” agreement.
  • Companies can still be liable for Payroll Tax even when engaging with incorporated entities.

Factors you need to consider in determining if the individual is a contractor or deemed employee (Multifactorial test)

  • Does the individual have the ability to subcontract or delegate?
  • Is the individual paid for a result achieved based on the quote they provided, and not an hourly rate?
  • Does the individual provide all or most of the equipment, tools and other assets required to complete the work without receiving an allowance or reimbursement?
  • Does the individual accept the commercial risks and is legally responsible for their work and liable for the cost of rectifying any defect in their work?
  • Does the individual have the freedom to determine the way the work is done, subject to the specific terms in any contract or agreement?
  • Are they operating their own business independently of your business, and are free to accept or refuse other work?

Ways to mitigate risk

  • Ensure contracts (and their terms) are strengthened, and properly reflect an employer-contractor relationship. This includes making sure that the relevant terms and clauses of the agreement are up to date, and reflect the pertinent factors outlined above.
  • Make sure that the day-to-day ways that contractors operate is consistent with the terms of their agreement (and furthermore, is not more akin to the operation of an employer-employee relationship).
  • Have a robust contractor onboarding process the same way you would for any employment relationship which considers whether you engage with a company or trust, that delegation arises where commercially viable and review the payroll tax contractor exemptions that could apply.
  • Ensure that the remedial action is undertaken prior to an audit through a voluntary disclosure as there is limited powers to remit Part 7 penalties for Superannuation Guarantee (up to 200%).

If you require assistance with understanding the employment tax obligations arising from your employee or contractor arrangements, please get in contact with a member of our Employment Solutions team.

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