The Tax Office's ongoing compliance efforts have some
One of these is the often flawed characterisation of an employee
as a contractor by businesses.
The mischief from the Tax Office's point of view is the
avoidance of employer obligations relating to the Superannuation
Guarantee (SG) and Pay As You Go (PAYG) withholding.
Characterisation is fraught with elements of complexity. This is
because of the differing definitions for tax and for superannuation
purposes and the consequences which may follow if an incorrect
classification is made.
For instance, entitlement to annual leave, sick leave and other
benefits may arise. An employer's liability to work cover and
payroll tax in various states are also driven by this
Notwithstanding these other issues, the actual
employee/contractor characterisation relevant to PAYG and
superannuation obligations are essential issues every business
needs to be familiar with.
One staff member, two possibilities
The ordinary meaning of the word "employee" has been
refined through a body of case law.
The distinction between an employee and a contractor can be
encapsulated by the nature of the relationship these parties have
to the organisation engaging them. Such a relationship may be
categorised in one of two ways:
Employer/Employee: The first category is that
an employment relationship is described as a "master and
servant" type relationship where the parties enter into a
contract of services. In other words, the employee serves the
Principal/Contractor: The second category is
that a contracting relationship and is a contract for service,
which basically means that two businesses enter into a contractual
arrangement to achieve a given result.
The activities of the relevant entity providing the services
should first be analysed to determine whether they are an
"employee" at general law.
The factors that indicate whether there is an
"employer/employee" or "principal/contractor"
relationship are summarised in the table below.
It is important to note that no single factor described in the
table will be conclusive in determining whether the entity is an
employee or contractor at general law. This determination is made
by examining the whole working arrangement including the
contractual relationship between the parties and the specific terms
and conditions under which the work is performed.
In addition to the general law meaning of employee, the
obligation to pay SG is extended to contractors where the contract
is either entirely for the labour of a person or this is the main
reason for the contract. Thus the terms of a contract as well as
all the facts surrounding a particular relationship are important
in establishing whether there is an SG obligation.
Look at the arrangement: Substance over form!
It is necessary to consider the formal contractual arrangement
in light of each party's actions and the substance of the
relationship between the parties.
A business taxpayer cannot simply require that services
providers with whom they contract have an Australian business
number (ABN). The test is more stringent than that.
Further, a business taxpayer is likely to have PAYG and SG
obligations in situations where payments for services provided are
made to the individual who did the work instead of the business
entity which is the counterparty to the formal contract. This
individual is typically an employee of the business entity.
To illustrate this point refer to the figure below.
The liability for SG and PAYG withholding in the illustrated
case would be with "Business entity B" but for PAYG
withholding purposes, because "Business entity A" is
making the physical payment to the individual, it is the one
PAYG withholding and SG represent significant costs of doing
business in Australia. The importance of how a working relationship
is characterised should not be ignored.
Should you require any further information about either PAYG
withholding or the Superannuation Guarantee, please call your Moore
Stephens Director on 08 8205 6200.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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