The Australian Taxation Office (“ATO”) has flagged on past Compliance Programs that they would be targeting certain contractor arrangements. Based on past audits, they found that some employers have tried to avoid their tax and superannuation responsibilities by improperly engaging workers as contractors rather than employees even though, legally, they were employees for tax purposes.
As a result of the ATO’s increased audit activities, there has also been a corresponding increase in the number of cases heard at the Administrative Appeals Tribunal of Australia (“AAT”) and the Federal Court level. The majority of these cases were won by the ATO.
One Recent Case
In one of the recent cases, the AAT held that plumbers working for the taxpayer were not independent contractors but rather employees for Superannuation Guarantee Charges (“SGC”) purposes.
Applying the established principles, the AAT considered the following factors:
- Contractual terms – all of the plumbing workers, be they formal employees or contractors, had the same contract with the same terms, which was more akin to an employer-employee relationships as one would expect that at least some of the terms and conditions would be different for independent contractors.
- Provision of tools and equipment – although the workers would use their own tools, equipment and vehicles, they would use the taxpayer’s tools, equipment and vehicles where specialised or larger work was required. Further, the plumbing supplies were purchased by the workers using credit cards provided by the Taxpayer.
- Control – although the Taxpayer stated that the workers could refuse work, they generally did not refuse work allocated to them.
- Risk – the workers did not rectify any of their defective work at their own cost.
- Delegation or sub-contracting – the right to delegate was only with the consent of the Taxpayer and was in any event illusory as none of the workers delegated or subcontracted.
- Integration or organisation test – although each of the workers had ABNs, they did not quote for jobs and simply did the jobs at an hourly rate for their labour. Further, although the workers had set up their own businesses, they did little work for others and worked almost exclusively for the taxpayer. They did not invoice on their own business letterheads, and invoicing and payment of the invoices was not results based. The workers wore clothing with the company logo on them and in doing so, they presented themselves as part of the taxpayer’s business.
- Remuneration and entitlements – the hourly rate charged by the workers to customers was largely set by the Taxpayer which was less than other plumbing contractors but greater than a regulator employee rate. Although the workers were not separately paid for travel time nor leave, they were paid a higher rate than permanent employees which was consistent with casual employment arrangement. A number of workers worked 40 hours per week and some worked at least 25 hours per week which the AAT noted that such hours on a regular basis were in keeping with employees, not independent contractors.
After considering the totality of the relationship and the evidence before it (having regard to the above factors), the AAT concluded the plumbing workers were employees and not independent contractors. The workers were paid principally for their labour and therefore they came within the expanded definition of “employee” in section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (“SGAA”).
Payments through an entity
Of note, the ATO in SGR 2005/02 states where an individual operates through an entity, such as a company or trust, payments made to the entity are not subject Superannuation Guarantee as it is the entity that has entered into an agreement rather than the individual. In addition, the PAYG Withholding provisions for employees and the FBT provisions would not apply either. Payroll tax would not apply to the payments either if genuine principal and independent contractor relationship can be established.
Coalition Government Policy on Independent Contactors
The Coalition Government had announced policy for small business as part of its election campaign that includes protecting the “rights” of independent contractors and the self-employed.
As part of the policy implementation, the Minister for Small Business Bruce Billson has recently stated that he had instructed senior Treasury officials to “stick to the letter of the law” when determining whether an individual is an independent contractor or an employee. The Minister also wants the ATO, the Fair Work Ombudsman and the construction watchdog to “back off” independent contractors.
It remains to be seen whether this will translate into less ATO audits in the future.