Do you have employees and contractors working for you? If the answer is yes, have you recently reviewed your Contractors to determine if they still meet the ATO’s criteria for a ‘Contractor?’ Understanding the difference between employees and contractors is important for complying with tax, superannuation, and other government obligations.

The definition (according to the ATO) is: “Employees work in and are part of your business. Contractors are running their own business.”

What questions should you be asking to determine employee or contractor:

• Ability to subcontract/delegate: can they pay someone else to do the work?
• Basis of payment: are they paid based on an agreed quote they provided?
• Equipment, tools, and other assets: do they provide their own tools and equipment needed to get the job done?
• Commercial risks: are they legally responsible for their work and liable for fixing mistakes or defects?
• Control over the work: do they decide how the work gets done subject to specific terms in the contract or agreement?
• Independence: do they operate their own business independently of your organisation?

The onus is on business owners to ensure they have classified workers correctly. When reviewing thresholds for payroll tax purposes, if contractors have been incorrectly excluded this may cause business to fall under thresholds. Upon an audit or review if the threshold has been breached will cause significant penalties and interest. Which can be very costly if completed incorrectly.

Whatever the classification – we often find that companies don’t collate the appropriate level of documentation to support their determination.

Our top tip

Don’t just act in good faith. Ensure all documentation is collated for your contractors which clearly shows they are a contractor and not an employee. You never want a relationship to sour, and you find the contractor makes a claim for super and you find your business is liable due to bad record keeping! For example, if Super is late, it is not deductible, and authorities may impose penalties of up to 200% as well as changing nominal interest.

If you need assistance in undertaking a review, please reach out to your ESV Engagement Partner.