As an employer of contractors it’s important to completely understand the tax obligations associated with this type of employment. Failing to do so may see you under the close scrutiny of any one of three regulatory bodies with severe consequences for those businesses who do not comply.

With the Australian Tax Office, Fair Work Australia and the State Revenue Office all regulating this area, any business employing contractors should expect to have their contractor arrangements reviewed at some stage and therefore be prepared.

In recent years ‘sham contracting’ or misclassification has attracted attention from the regulating bodies and the ATO announced that this would be an area of focus for the 2011 – 2012 year and that at least 28,000 employers would be targeted as part of their Compliance Program.

To provide clarification is can be assumed that a person is definitely not an employee if:

• The contract for the worker states they are a contractor
• The worker invoices for their services
• The worker is paid on result, rather than an hourly basis
• The worker provides and ABN and/or is registered for GST
• There are no employment tax obligations for incorporated contractors
• The worker can refuse work and/or work for others

If you are incorrectly classifying your employees or contractors there are a range of tax implications which may attract penalties some of these include:

• PAYG withholding breaches
• GST issues
• Failure to pay payroll tax on the salary and wages of employees
• Failure to make the compulsory 9% Super contribution
• Failure to pay workers’ compensation

With the three regulatory bodies currently looking at sham contracting some businesses may have already received a letter of caution. If you have received one of these letters you should seek professional advice as soon as possible.  If your business has not yet received a letter now is the time to review your contractor arrangements and to evaluate whether the ATO, FWA or the SRO may treat any of your contractors as employees and vice versa.

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