Contractor Payments Reporting Under Scrutiny
The introduction of the new contractor payments reporting regime, which will apply to the building and construction industry from 1 July 2012, will also put contract arrangements under further scrutiny.
As outlined below, payers have differing obligations in respect of employees and contractors and it is therefore important to determine whether a worker is an employee or contractor.
Employee Or Contractor?
There is no single definition of ’employee’. The definition of an employee is different for the purposes of pay-as-you-go (PAYG) withholding, superannuation, payroll tax, WorkCover and fringe benefits tax (FBT) obligations.
A number of factors, such as the degree of control that the payer has over the worker, whether workers hold necessary licences and insurances, and the number of organisations they provide services to, are relevant in determining the relationship for PAYG purposes.
Where workers are deemed to be employees, be correct PAYG withholding tax must be withheld from their earnings.
It a worker as a contractor, a payer is only required to withhold amounts from payments where the contractor:
- Has entered into a voluntary agreement with the payer.
- Provides work/services under a labour hire arrangement.
- Has not quoted an Australian business number
Where a worker is deemed to be an employee, the employer must make superannuation guarantee contributions on the worker’s earnings (currently 9%). Contractors are responsible for their own superannuation obligations.
Contractors cannot be deemed to be employees where they operate through an entity.
Each state and territory of Australia has its own legislation governing payroll tax. Payments to workers are taxable if they are deemed to be employees.
Each state and territory of Australia has its own legislation governing WorkCover. Payers are liable for WorkCover for contractors if they are deemed to be employees.
Where a worker is deemed to be an employee, the employer is required to remit FBT (currently 46.5%) on the grossed up the taxable value of benefits provided, subject to any concessions and exemptions.
In summary, the emphasis is on the payer to correctly establish if a worker is an employee or contractor. If a payer incorrectly classifies a relationship they will be liable for any associated penalties.
Therefore, when businesses engage workers, it is important to establish the status under which services are provided.
Source: HLB Mann Judd Newsletter Winter 2012