In the Australian building industry, the distinction between contractor vs employee is significant, not just for legal and operational purposes but also for taxation.
Understanding the differences between these two classifications is essential for businesses and individuals alike, as it affects taxation obligations, employee superannuation, and potential liabilities. This article explores key implications for both employees and independent contractors in Australia.
Most builders rely on independent contractors in some capacity. From a business perspective contractors can be great for accessing specialised expertise, flexibility to meet demand fluctuations, and filling the skills gap. It also allows businesses to avoid the often time-consuming process of employing workers. However, recent legal developments have provided guidance to identify the relationship between businesses and workers. Why is this important? Because getting it wrong can be costly – both in time and money.
Let’s broadly look at the obligations of both:
Employers must withhold tax from an employee’s salary or wages and remit this to the ATO under the PAYG withholding system. This ensures that the employee’s tax obligations are met progressively throughout the year.
Employers are required to make superannuation contributions on behalf of their employees, currently at a rate of 11.5% of their ordinary time earnings. This is a significant consideration in the overall cost of employing someone.
Employees are generally entitled to a range of benefits, including annual leave, employee sick leave, rostered days off and other forms of paid leave, which independent contractors generally do not receive.
Contractors running their own business, such as sole trader contractors, may need to register for GST if their annual turnover exceeds $75,000. They are required to charge GST on their services and remit this to the ATO, while also claiming credits for GST paid on business expenses.
Contractors can claim a broader range of tax deductions compared to employees, including freelance business expenses like tools, equipment, travel, and home office costs, provided these are used to produce assessable income.
Contractors may need to pay their income tax through the PAYG instalments system, which involves making regular payments towards their expected tax liability.
Even as an independent contractor, there are certain conditions under which the businesses may still need to make superannuation contributions for you. The obligations are significantly simpler if the worker is a contractor, which is one reason why many on a building site operate with their own ABN.
There are pros and cons to contractor vs employee agreements, and new guidance from the Australian Taxation Office (ATO) has clarified the independent contractor criteria making it easier to determine which option is right for you. The ATO uses a multifactor approach, considering factors such as control over work, independence, and financial risk. If a contract has been created and is legitimate, the contract will determine the outcome, provided a few key criteria are met being:
Both parties understood what the classification meant.
The business obtained specific advice confirming the contract and communicated with the worker.
This "multifactor approach" determines whether a worker is an employee or an independent contractor. This means they assess several factors, such as:
Control over work: Employees have less control, following their employer's direction. Contractors control how and when they work.
Independence: Contractors often provide their own tools, equipment, and training, while employees use the resources provided by their employer.
Risk: Contractors usually bear the financial risk of their work, including correcting defects at their own cost, whereas employees do not.
No written contract: This could leave the business exposed to workers being classified as employees, requiring employee entitlements like leave and employee superannuation.
Change in worker status: Has the role of your independent contractor evolved? Review and update contracts to reflect current arrangements.
Contract renewal: Ensure that contractor agreements are regularly reviewed to avoid outdated terms and legal risks.
Ensuring compliance with worker classifications requires proactive contract management and a thorough understanding of your obligations. Regularly reviewing contracts and seeking expert advice are essential steps in avoiding costly misclassification issues.
Get clarity on whether your workers are contractors or employees by speaking to a Findex business advisor today. Our advisors will help you navigate complex tax obligations, superannuation requirements, and contractor agreements, so your business remains compliant and protected.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
Find an office