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Project contractors—what are your tax obligations?

Sue Williamson
December 23, 2011

The cost of getting the classification of contractors wrong is high and anyone with contractors on their books needs to make sure that they have been correctly classified for tax, superannuation and fair work purposes.

Between the three regulatory bodies, the Australian Taxation Office (ATO), State Revenue Office (SRO) and Fair Work Australia (FWA), a business can expect a review of all contractor arrangements. Getting it wrong has ramifications for the entity that engaged the worker and possibly also directors, human resources personnel and other officers, including project managers.

The issue of the misclassification of employees or ‘sham contracting’ has attracted attention over recent years, particularly:

  • recent court cases which have dealt with disputes about whether a person was an employee or a contractor
  • the ATO announcement of sham contracting as an area of focus and that at least 28,000 employers will be targeted in the ATO Compliance Program 2011-2012
  • the recent release of a report on sham contracting by the Fair Work Ombudsman (FWO).

It is often assumed that a person is definitely not an employee if:

  • the worker’s contract states they are a contractor
  • the worker provides an Australian Business Number and/or is registered for Goods and Services Tax
  • the worker invoices for their services
  • the worker can refuse work and/or work for others (this can also apply to casual employees)
  • the worker is paid on a result rather than hourly basis; and/or
  • there are no employment tax obligations for incorporated contractors.

While each of these factors may affect whether a person is a contractor or employee, a worker can fit into one or more of these categories but still be considered an employee. Even if a worker is a contractor as determined by common law, the worker may still be deemed an employee for certain tax purposes.

There are a range of potential implications if someone is misclassified, from incorrectly treating employees or deemed employees as contractors, including:

  • failure to pay payroll tax on the salary and wages of those employees
  • failure to make compulsory 9% superannuation contributions on behalf of those employees
  • breach of income tax rules about PAYG withholding
  • failure to pay workers’ compensation amounts on behalf of the employees
  • possible GST issues
  • fines from FWA
  • interest and penalties.

Some businesses may already have received letters of caution or other formal correspondence from the FWO or Australian Building and Construction Commissioner or other industrial relations bodies. These businesses should obtain professional advice as soon as possible. Because of the increased sharing of information between government departments, there is a real risk that the ATO and SRO may also follow up.

Businesses that have not been contacted yet should review their contractor arrangements and consider whether the ATO or SRO would treat contractor arrangements as employment contracts; the exposure to risk including potential interest and penalty exposure; and whether making voluntary disclosure to revenue authorities and preparing submissions for the remission or reduction of interest and penalties.

Sue Williamson
Sue Williamson is a partner at Ernst & Young specialising in tax controversy in relation to all federal and state taxes.
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