Employee or Contractor?
Contractor or Employee
The Undercover Employee
There are many tax details and important business choices you are faced with day to day. Hillyer Riches, your Caulfield Accountants, are here to help you when you need tax advice or up to date information regarding business related issues.
The Tax Office is aware there are many compliance issues that employers face. Some of these are confusing, and hard to understand. One of the most common ongoing compliance issues involve a flawed characterisation of an employer as a contractor.
One of the main concerns from the Tax Office’s point of view is the avoidance of specific obligations pertaining to Superannuation Guarantee (SG) and Pay As You Go (PAYG) tax withholding.
The complexity of the correct classification is compounded by the differing definitions for tax and superannuation purposes. There may be entitlements to sick leave, annual leave and other benefits that an employer could be penalised for if the classification is wrong. The employer may also be liable for work cover and payroll taxes, depending on the various state rules and regulations.
The actual employee and contractor characterisations and factors relevant to PAYG and superannuation are definitions that every employer should be very familiar with, to avoid any penalties or tax issues.
One staff, two possibilities
Essentially the terms “employee” and “contractor” can be defined by the nature of the relationship they have with the organisation engaging them. The relationship can generally be categorised in either of two ways:
Employee / Employer: This is an employment relationship described as “master and servant”. Typically the parties enter into a relationship where the employee is hired for a contract OF services, the employee serves the employer.
Principal / Contractor: This is a relationship where there is an agreement and a contract FOR services, usually the two businesses enter into an agreement to achieve a specific result.
The activities of the person providing the services should be examined first to determine if they are an employee. See the factors below to help you with these categorisations.
Factors for identifying employees:
Control over work: an employee does not control the way the work is done.
Ability to sub-contract and / or delegate work: an employee does not have this ability.
Basis of payment: an employee has a set amount per period or price per activity.
Equipment and / or tools: an employee does not have to provide their own tools to do the work.
Commercial Risk: an employee does not assume the commercial risk.
Independence: an employee does not operate independently.
It’s important to remember that no one factor described above is conclusive with your determination of classification. It is made by examining the entire working arrangement including the contractual relationships and the specific terms under which the work is to be performed.
Let’s look at the arrangement
It’s important to look at the arrangement of each party’s actions and the substance of that relationship. A business taxpayer may have SG and PAYG obligations where payments are made to an individual that provided the services, instead of the business entity. (The individual is usually an employee of the business.)
Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.