The engagement of contractors by employers is facing increased scrutiny from government authorities due to new legal precedents, data matching initiatives, and a trend towards hybrid working arrangements influenced by the gig economy.
As a result, the ATO and State Revenue Office have increased audit activity. They are utilizing a more sophisticated and targeted approach to audits through data sharing from sources such as:
- Single Touch Payroll Phase 2
- Taxable Payments
- Annual Reports.
Non-compliance is being caught out due to this heightened scrutiny.
Additionally, changes triggered by Personnel contracting and the Jamsek High Court cases have shifted how contractors are viewed from an employment tax and Fair Work Commission perspective. The focus has shifted somewhat to the underlying contract and the expressed and implied terms of the agreement to substantiate the relationship.
Employers need to be aware that data sharing between government bodies is increasing, leading to higher employment tax audits triggered and potential Director Penalty Notices issued if shortfalls occur. The Fair Work Commission may also question the entitlements of individuals if they are deemed employees.
There are several common misconceptions about contractor engagement, including:
- Holding an ABN automatically classifies one as a contractor
- Employment tax obligations are employer obligations that cannot be shifted to the individual.
- The definition of contractor is not uniform across all employment tax obligations.
- The contract terms are key unless the contract is deemed a “sham” agreement.
- Companies can still be liable for Payroll Tax even when engaging with incorporated entities.
To determine if an individual is a contractor or deemed employee, employers need to consider the multifactorial test, which includes factors such as the individual’s ability to subcontract or delegate, whether they are paid for a result achieved based on the quote they provided, and whether they provide all or most of the equipment, tools, and other assets required to complete the work.
Employers can mitigate their risk by ensuring that contracts (and their terms) properly reflect an employer-contractor relationship, ensuring that contractors’ day-to-day operations are consistent with the terms of their agreement, and having a robust contractor onboarding process. Employers should also ensure that the remedial action is undertaken before an audit through voluntary disclosure, as there is limited power to remit Part 7 penalties for Superannuation Guarantee (up to 200%).