Tax and super obligations for contractors

In general, independent contractors work for themselves as their own boss. A contractor can be an individual (sole trader) or working in their own company, partnership or trust. A contractor would generally use their own tools or methods to complete work, and they would normally negotiate their own fee and may work for more than one client at a time.

ABN

Having an Australian Business Number (ABN) is a requirement to work as a contractor.

You need an ABN so that you can invoice your customers, otherwise they’re obligated to withhold 47% of your total payment for tax.

Tax and super obligations

If your worker is a contractor:

• Generally, they would need to look after their own tax obligations, so you don’t have to withhold from payments to them, unless they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments.
• You may still have to pay super for individual contractors if the contract is principally for their labour.
• You do not have Fringe Benefits Tax (FBT) obligations.

It is against the law to wrongly treat an employee as a contractor, so you need to check that you’ve got it right. If you get it wrong – penalties may apply.

If you are a contractor, and you earn more than the tax-free threshold, you are required to pay income tax. The tax rate that applies to you will vary, as the more you earn the higher the rate of tax. As a business owner you need to ensure you keep aside the amount of tax you expect you’ll have to pay, so it’s important to ensure you know what the tax rate is that applies to you.

Making superannuation contributions is advisable when you are self-employed, as you are putting money aside for your retirement – enabling you to hopefully have enough money to live on when you reach retirement age.

As an incentive, the Australian Government offers a co-contribution scheme to boost retirement savings. If you are a low or middle-income earner and make a personal, after-tax contributions to your super fund, the government may also make a contribution up to a maximum amount of $500.

Goods and services tax (GST)

If you are registered for GST, the services you provide will be subject to GST. You will need to register for GST if:

• Your business has a GST turnover of $75,000 or more
• Your non-profit organisation has a GST turnover of $150,000 or more
• You want to claim fuel tax credits for your business

Personal services income (PSI)

This is income produced mainly from your personal skills as an individual.

When working out if your income is PSI, you need to analyse the income received from each separate contract or invoice.

• If more than 50% of the income received for a contract/invoice was for your labour, skills or expertise, then all income received is PSI.
• If 50% or less of the income received for a contract/invoice was for your labour, skills or expertise then none of the income received is PSI.

Contact your local TaxAssist Accountant for help and advice with anything discussed in this article.

Last updated: 16th February 2021