Did you know you may be responsible to withhold PAYG tax and pay Super for subcontractors?
The Australian Taxation Office (ATO) is continuing to crack down on businesses for sham contracting, masking employees as contractors to circumvent tax and super obligations. Ignorance is not a legal defence. You must be, therefore, acutely aware of when such obligations arise with your subcontractors, in order to avoid unnecessary fines and penalties. This article aims to provide bit more clarity on the topic.
Contractors and sub-contractors will be used inter-changeably to mean the same thing in this article.
When do I need to pay PAYG tax and Super for subcontractors
Generally, you do not have to deduct PAYG tax and pay super when you enter into a contract with a company, trust or partnership.
On the other hand, if you are contracting with individuals or sole traders ‘wholly or principally for labour’, you are under a legal obligation to withhold PAYG tax and pay Super for them, even if they have an ABN number.
How do I tell if Someone is a Contractor or Employee
PAYG withholding and superannuation guarantee are default obligations when you hire anyone who is an employee. Therefore, you must first decide if a person you hire is an employee or a contractor.
The ATO provides online tools to help determine if someone is an employee or contractor. They provide guidance as to both taxation and superannuation entitlements:
1. test for taxation purposes; and
2. test to understand superannuation requirements.
We note that these tools provide guidance but are not definitive. We recommend professional advice should you require further guidance.
The ATO tool provides 6 points of differentiation between employees and contractors:
1. Ability to delegate: contractors can delegate the contracted work, whereas employees cannot.
2. Basis of payment whether payment is based on a timesheet or commission, versus a quote and price.
3. Equipment and tools: where employees are provided with the tools and contractors source their own.
4. Commercial risks: whether the employer bears the risks, or the contractors.
5. Control: employees must follow specific instructions, whereas contractors have freedom in the process, methods and timing for their work, subject to the specific terms of the contract.
6. Independence: employees work within and are part of your business; Contractorrs operating their own business independently of your business, performs services as specified in their contract and are free to accept or refuse additional work.
Can I agree with my Contractor not to pay superannuation?
Superannuation is a legal obligation and cannot be negotiated or contracted out of.
What Happens if You Do Not withhold PAYG Tax and Pay Superannuation?
The ATO has broad powers to review your contracts to determine whether you are compliant with your PAYG tax and superannuation obligations. You can face severe penalties, interests and administration fees if your business fails to pay on time.
If you continue to fail to pay, you may face debilitating fine and/or up to 12 months imprisonment.
Disclcaimer: The information provided within this article is general information only. None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.
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Wilson & Assoc Chartered Accountants provides taxation and business advisory services to individuals, investors and businesses wherever you are based. We provide specialist services to startups and health care providers.
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