Business LeadershipElite Agent

Independent contractors and the tax man

While independent contractors might seem like a cost effective way to grow your business, John Knight looks at why both sides could end up paying more than they expected.

Everyone wants to recruit and grow their team, but for many the costs and risks associated with adding more employees are prohibitive.

While it may seem like an ideal solution, entering into independent contractor arrangements is fraught with danger for both the business owner and the contractor.

Even before we worry about the industrial relations risks, the main tax risk for a business owner is that any payments made to the contractor are essentially deemed wages.

If such payments are deemed wages a business owner is potentially required to take care of the following:

1. Pay guaranteed superannuation on the amounts paid

2. Deduct PAYG Withholding (income tax) from the payments made – but of course, it is too late after the event

3. Pay payroll tax on the amounts paid, assuming the business exceeds their state payroll tax threshold

4. Pay interest penalties on amounts not paid at the time they are deemed payable.

One of the common ways to reduce the risk associated with independent contractor arrangements is to insist that contractors only operate through a company structure.

This reduces the risk for PAYG withholding and superannuation, provided a genuine contractor relationship exists. However, you can still be liable for payroll tax on these payments which vary from state to state.

There are also risks for the contractor should their payments be deemed wages rather than a contractor payment. These risks include significant unexpected tax liabilities.

The contractor should also not ignore the cost of putting in place such an arrangement which includes:

1. Setting up a company structure

2. Principal real estate licence cost

3. Preparation of company accounts and tax returns annually

4. General bookkeeping services and the costs to prepare quarterly BAS’s

5. Own professional indemnity insurances.

It is impossible to provide an outline of an independent contractor arrangement that meets all the requirements for all the relevant authorities across Australia, but to minimise we suggest:

1. Insist on putting in place a company structure to trade through

2. Ensure the company is fully licensed

3. Formalise with a conjunctional agency agreement

4. Have the contractor identified on the listing forms

5. Allow the contractor to employ others within their company to assist with the delivery of their services, for example, PAs and lead generation

6. Introduce a desk fee to ensure they pay their way like any other independent party

7. Get evidence that professional indemnity insurance is always up to date

8. Ensure their entity has an ABN and is registered for GST

9. Avoid payments being made directly from the business to the independent contractor, for example, payment direct out of trust settlement from the vendor

Overall, the general rule to apply across all jurisdictions in Australia is that the arrangement must be commercial in nature and must reflect a true business-to-business relationship, not one of master and servant.

Some of the factors which would indicate a business-to-business relationship include:

1. The ability of the contractor to delegate to others

2. The contractor reward structure is contingent on achieving a result, e.g. commission only

3. The contractor provides their own tools of the trade

4. Risk of the overall transaction is shared by both parties

5. The contractor has control to deliver the services they provide as they see fit

6. The ability of the contractor to provide services to others with no ongoing restraint

Please note that these requirements are complex and I have only focused on the tax side of things. You must seek your own advice specific to your circumstances.

Overall, the taxman does not like independent contractor arrangements and he is empowered with legislation that gives him the ability to challenge any arrangement he does not consider a ‘legit’ business-to-business relationship.

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