Last week we discussed the distinction between a common law employee and an independent contractor for superannuation guarantee contribution (SGC) and PAYG withholding purposes.
So what are the practical implications for employers?
(1) Is a worker considered to be a contractor if he holds an ABN?
The short answer is no. The worker may still be deemed an employee for SGC purpose. The employer needs to consider the criteria in part 1 of “Employees vs. Contractors”, together with the substance of the contract with the worker.
Simply labelling an employee as a contractor in the contract will not be effective if it contradicts the contract as a whole.
(2) If a worker is engaged through a company, is the worker precluded from being an employee?
Traditionally, payments made to a company, partnership or trust do not constitute payments to an employee. However, in a recent case, the Court looked through the interposed entity (a company) and concluded the underlying relationship between the parties is one of employer and employee. The employer is liable for SGC and PAYG for all payments made to the company.
This case has been appealed to the High Court. And the ATO has not released any decision impact statement. We believe the ATO will not change its position at this stage.
Considering the complexity in the determination of an employee or a contractor for SGC and PAYG purposes, we suggest the employers apply the employee/contractor decision tool from the ATO for each individual contractors and keep the reports on file in case of an ATO audit.
The employee/contractor decision tool can be found in the following link http://www.ato.gov.au/businesses/content.asp?doc=/content/00095062.htm