ATO warns against treating employees as contractors

Steve Vesperman, Deputy Commissioner, Small Business/Individual Taxpayers, Australian Taxation Office

This article appears in the Sep/Oct 2014 issue of Business Franchise Australia & New Zealand

It’s one of the contentious issues facing business owners and operators… are workers employees or contractors?

Just because they have an Australian business number (ABN), work infrequently or only do short jobs, specific tasks or projects, doesn’t mean they are contractors. The ATO’s Steve Vesperman says that an employee works in your business and is part of the business. A contractor runs their own business.

“We’ve got an online employee/contractor decision tool which can help you make the right decision.”

Steve says there are a number of myths that have influenced businesses to get it wrong, possibly exposing them to penalties and charges.

“Just because someone has an ABN, has a business name, submits an invoice for payment or asks to be engaged as a contractor, doesn’t make them a contractor.

“And someone who has been engaged as a contractor for one job doesn’t make them one for all jobs.

“If someone is legally an employee then it doesn’t matter what they are called or whether they have a contract……they are an employee and you have an obligation to withhold tax.

“And, if they are eligible employees, you have to pay superannuation guarantee contributions on their behalf into a complying super fund or retirement savings account at least four times a year.”

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Landscaping and gardening

Ray owns a home gardening and maintenance franchise and has taken on a job which includes concreting a driveway. He engages Bob’s concreting franchise to do the concreting work and also hires two labourers to do the groundwork and planting. The labourers are provided with tools and their work is supervised by Ray. Bob submits an invoice to Ray for the cost of materials and the labour done by him and his employees.

Ray tells his two labourers they are contractors and must invoice him at the agreed hourly rate. He tells them since they are contractors he’s not responsible for their tax or super.

Has Ray got it right?

Employee or contractor

Only partly. Bob’s concreting franchise is a contractor. He has his own business and hires his own workers. Bob’s responsible for his own tax and super obligations.

However, when it comes to Ray’s two labourers, the ATO’s Employee/contractor decision tool would have indicated they are employees, since they don’t run their own business but work for Ray even if it is only on an occasional basis.

Ray is responsible for withholding tax from the labourers’ pay, and possibly making super contributions for both of them. By not doing this, Ray risks significant penalties and charges.