It is a common oversight by many business owners in that they believe that engaging a contractor automatically means that they are not responsible for paying any super entitlements or withholding tax. This isn’t necessarily correct, and in fact the ATO and the Office of State Revenue looks closely at the true relationship between a contractor and an employer to determine whether any super should be paid or tax withheld, or payroll tax paid.
When determining whether a contractor has a true independent contractor relationship with you, or is actually considered to have an employee relationship with you, means looking past the initial label of a contractor. A contractor having their own ABN simply isn’t enough, and an employer cannot use terms in their contract to reduce their obligations and “contract out” of paying super for example.
It is important to carefully consider the true relationship you have with a contractor, as it will determine your obligations to pay super, withhold tax, and possibly pay any payroll tax associated with payments you have made to them. A person that receives payments for work under a contract, which is wholly or principally for labour alone, is considered an employee.
The ATO considers the following factors that are distinct to a genuine independent contractor:
Is the person:
- contracted to perform a specific task within a specified time frame for an agreed amount of money
- has freedom in the way the task is performed, for example where and when the task is performed
- may have the labour performed by another person, for example an employee of the contractor
- provides their own equipment
- normally renders accounts payable by invoice
- does not have the normal entitlement of employees such as long service leave, annual leave and sick leave
- bears the responsibility and liability for losses
- is generally not eligible for workers compensation from the principal
- is generally available to perform services for the public at large.
Alternatively the ATO website has an employee/contractor decision tool which may be useful to aid in determining the true nature of the relationship which can be found here.