It is a common oversight by many business owners in that they believe that engaging a contractor automatically means that they are not responsible for paying any super entitlements or withholding tax. This isn’t necessarily correct, and in fact the ATO and the Office of State Revenue looks closely at the true relationship between a contractor and an employer to determine whether any super should be paid, tax withheld, or payroll tax paid.
It is important for business owners to look past the initial label of a contractor and to investigate further to determine whether a true independent contractor relationship actually exists, or if under legislative and common law definitions, those workers actually fall under an employee relationship.
It is a common misconception that a contractor having their own ABN is enough to establish that a business has no further entitlement obligations to that contractor, however the actual circumstances of the relationship must be examined, and an employer cannot use terms in their contract to reduce their obligations and ‘contract out’ of meeting these.
The true nature of the relationship will determine your obligations to pay super, withhold tax, and possibly pay any payroll tax associated with payments that have been made. For example, a person that received payments for work under a contract, which is wholly or principally for labour alone, will in most cases be considered an employee.
Both the ATO and Office of State Revenue have detailed guidelines on how business owners can determine whether a true independent contractor relationship exists. It is important to note, that each state has different definitions of an employee for payroll tax purposes.
The ATO considers the following factors that are distinct to a genuine independent contractor:
Is the person:
- contracted to perform a specific task within a specified time frame for an agreed amount of money
- has freedom in the way the task is performed, for example where and when the task is performed
- may have the labour performed by another person, for example an employee of the contractor
- provides their own equipment
- normally renders accounts payable by invoice
- does not have the normal entitlement of employees such as long service leave, annual leave and sick leave
- bears the responsibility and liability for losses
- is generally not eligible for workers compensation from the principal
- is generally available to perform services for the public at large.
Please contact your relationship manager at NCA should you wish us to review the nature of your relationship with contractors.
Alternatively the ATO website has an employee/contractor decision tool which may be useful to aid in determining the true nature of the relationship which can be found here.