Are your contractors really employees?

July 2014

It's an old chestnut, but the ATO continues to enjoy a high success rate in challenging the treatment of contractors under the superannuation guarantee (SG) legislation.

Despite recent comment made by the Government that the ATO should "relax" its approach to contractors, the ATO has the law on their side and no intention of walking away from a lucrative revenue stream.

Businesses need to be proactive

Given that there is no real time limit on the recovery of outstanding super guarantee obligations, it's up to business owners to be proactive in reviewing arrangements with contractors to ensure that the business is not exposed to material liabilities, and the start of a new financial year is the perfect time to do so.

An agreement on paper isn't necessarily a 'contract'

The underlying issue is that employers often take the contractor relationship at face value, i.e. a written contract describing what the relationship actually says. Unfortunately the reality is quite different as the law is based on the character of the relationship – not what's stated in writing.

A genuine, independent contractor will be one who provides personal services and be:

Autonomous rather than subservient in their decision making;
Financially self-reliant rather than economically dependent on the business of another; and
Chasing profit (i.e. return on risk) rather than simply a payment for time, effort and skill.

So if your business has contractors (or you are one) performing the same role as an employee, then it's possible the ATO will consider them as employees for superannuation guarantee purposes.

Test your contractor relationship

There are a number of tests that can apply to help determine the status of a contractor, such as:

Control
Whether the worker has been hired to produce a result
The ability for them to freely delegate work to someone else
Risk exposure
Ownership of tools and equipment, and
The treatment of business expenses, etc.

Employers cannot contract out of SG responsibilities by adding fail-safe clauses in contracts. And, there is no certainty that a contractor using an interposed entity (for example setting up a company and operating through it) is fool-proof.

For more information about your contractor arrangements and ensure you've got the right set up in place, please contact us on 02 9957 4033 or via our website contact form.

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Last updated July 2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.