Employee or contractor?

PAYG Withholdings cannot be circumvented by treating a person as if they were a contractor and have them quote an ABN.

The Australian Taxation Office outlines key areas to consider when deciding whether the nature of the arrangement is an employer/employee or contractor. These are listed as following:

• Control over work: An employee works in the business of the employer and has an implied obligation to undertake duties as directed by his or her employer. A contractor on the other hand will be contracted to perform a specific duty or outcome d they are in control (subject to contract conditions) as to how that is done.
• Independence: An employee performs work in accordance with an employment contract, whereas a contractor provides the service as per the contract and further services are only by agreement.
• Payment: An employee is often paid on the amount of time worked, whereas a contractor is usually paid on performance of the contract services.
• Commercial Risks: An employee generally bears no commercial risk in undertaking their job. They work for an employer who is legally responsible for the work of the employee. A contractor assumes legal responsibility for their work. They can either profit or loss from a contract and are liable to defects at their own cost.
• Ability to Delegate: An employee usually performs the work personally and does not have the ability to delegate their duties to others. A contractor (unless specified in the contract) can delegate to others or subcontract the work.
• Tools of Trade: In most cases an employee will be provided with all the necessary tools of trade to complete their tasks. A contractor would normally provide their own tools of trade.

An important consideration in this is the master servant test that applies in court as well. There needs to be a master and a servant relationship relation if the contractor test fails.

Contact your nearest TaxAssist Accountant for advice on this subject, as the ATO has a zero-tolerance approach to contractors with no ABN.

Last updated: 9th January 2017