Australia: Payments to a contractor providing labour, even if through their own Company, may be liable for WorkCover in Victoria!

Last Updated: 23 April 2012
Article by Michael van Schaik, Stephen Adrian and Rachael Searle

From 1 July 2011, changes to the WorkCover legislation deem an individual to be the worker of the hirer for WorkSafe purposes where the contractual arrangement reflects an employment relationship.

This may mean the end of many contractor arrangements in the building and IT industry.

If there is a contractual arrangement between a contractor and a hirer and all of the following conditions apply, the individual will be deemed to be a worker of the hirer for the period.

Conditions

  1. The provision of materials or equipment is not the principal object of the arrangement; and
  2. At least 80% of the work is performed by the same individual; and
  3. At least 80% of the contractor's overall services income in a financial year is earned from the hirer.

These tests are similar to the Personal Services Income ("PSI") tests in the Income Tax Assessment Act.

As the contractor is deemed to be a worker, the amounts paid to the contractor under the arrangement are deemed to be rateable remuneration for the purpose of the hirer's policy.

It is important to note that these rules apply whenever there is a deemed worker – including the situation where the contractor may be a company. Any payment made by the hirer to an incorporated contractor will be included in the rateable remuneration calculation for the hirer's policy. This does not create a duplication of any WorkSafe policy premiums, as the incorporated contractor will not have to include in its rateable remuneration any amount for which it has been deemed a worker of a hirer.

Example

Building Construction Pty Ltd pays Plumbing Contractor Pty Ltd $80,000 under a contract to "do the plumbing at XYZ development using materials supplied by Building Construction Pty Ltd".

This contract is principally for labour and assuming that 80% of the plumbing work is done by one individual and Plumbing Contractor Pty Ltd derives less than $100,000 in income then Building Construction Pty Ltd must pay WorkCover premiums on $80,000 less the allowance for materials and tools explained later. Plumbing Contractor Pty Ltd is liable for WorkCover on its rateable remuneration less $80,000.

Contracts for equipment and materials
Where the main purpose of a contractual agreement with a contractor is for the provision of equipment and/or materials, the contractor will not be a deemed worker of the hirer under the general contractor rules.

Conditions

  1. Under the contractual arrangement the provision of labour is secondary to the provision of materials and/or equipment; and
  2. Under the contractual arrangement the cost to the contractor of the supply of the materials and/or equipment is more than 50% of the contractor's gross contractual income; and
  3. Based on market prices at the time of the arrangement, the amount attributable to materials and/or equipment is reasonable; and
  4. The materials and/or equipment have not been purchased from the hirer or any related entity.

Contactor Deductions
Where a contractor has been deemed a worker of the hirer, the hirer may be entitled to use a deduction to reduce the rateable remuneration to be included in the policy calculation. The deduction would be applied to the gross payment made to the contractor to determine the amount to be included as rateable remuneration.

WorkSafe Victoria have prescribed a set percentage of deductions for certain industries. A hirer will be entitled to use a prescribed deduction where the following conditions are satisfied:

  1. The conditions listed above apply and the contractor has been deemed a worker; and
  2. The contractor provides their own materials, goods or equipment during the period that were not purchased from the hirer; and
  3. The amounts payable to the contractor include payment for the material, goods or equipment; and
  4. The services provided by the contractor are included in the following table:

Type of Contractor Prescribed reduction from gross payments to contactor
Architects 5%
Brick Layers 30%
Building Supervisors (who provide their own vehicle and are required to supervise and inspect more than six (6) different building sites each seven (7) day period 25%
Cabinet Makers 25%
Carpenters 25%
Carpet Layers 25%
Computer Programmers 5%
Draftspersons 5%
Driving Instructors who provide their own vehicle 30%
Electricians 25%
Engineers 5%
Fencing Contractors 25%
Painters 15%
Plasterers 20%
Plumbers 25%
Resilient Floor Layers 37%
Roof Tilers or Slaters 25%
Tree Fellers 25%

If a profession / trade is not listed in the above prescribed table, the hirer can still apply a deduction to the gross amount, however will need supporting evidence on a contract-by-contract basis to support the claim.

If a hirer fails to keep sufficient records to enable them to substantiate that the contract payment includes non-labour amounts, the whole contract amount must be declared as remuneration.

There are a number of complexities around this issue including those where sub contractors are involved. Unsurprisingly, Payroll tax and Superannuation Guarantee Charge liabilities are determined on a completely different basis.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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