EMPLOYEE OR CONTRACTOR? THE RAMIFICATIONS OF GETTING IT WRONG!
Primarily associated with the building industry but not confined to it, has been the practice of using alleged “independent contractors” to provide services to a company. In these circumstances the contracting party pays the GST to the independent contractor for the service provided.
Alternatively an employee of that same company would be paid their hourly rate for their hours worked plus superannuation. The company would also pay superannuation, PAYG withholding and pay any state based associated taxes such as payroll tax.
In the 2012/2013 financial year the ATO introduced the Taxable Payments Annual Report for businesses operating in the building industry which must be lodged with the ATO, disclosing exactly how much was paid to independent contractors.
This type of reporting has a number of benefits for the ATO. The obvious ones are the ability for the ATO to recover hidden or lost revenue. It also has the flow on effect of companies needing to ensure the validity of contractor ABN registrations and that they are receiving valid tax invoices.
Speak to your accountant about implementing an auditing and ongoing system in respect of the above.
What else could the ATO uncover?
In addition to the direct revenue and reporting benefits the above type of reporting and data matching may provide the ability for the ATO to determine whether some of the alleged “independent contractors” are actually employees or at least determine the at risk companies for auditing.
Our directors have had recent experiences with a number of companies, including many outside the building industry, that have received ATO audits to determine whether independent contractors should be classified as employees. In a number of circumstances the audit came as a result of a disgruntled ex-“independent contractor” making a claim as an “employee” for outstanding employee entitlements and superannuation.
If the ATO conducts such an audit and determines that the “independent contractors” are in fact employees the results can be quite catastrophic for both the company and its directors.
What happens if I get it wrong?
Firstly, as a result of the deemed employee status the ATO will utilise the average wage/hourly rate as a basis of the rate of pay and calculate the unremitted, unreported PAYG withholding that should of been paid plus penalties.
Secondly the ATO will calculate the unremitted, unreported Superannuation plus and additional SGC charges that should of been paid.
Thirdly there is also likely to be an underpayment of workcover and/or payroll tax.
Finally there will be unpaid employee entitlements including leave entitlements and potentially severance entitlements.
This is regardless of any arrangement that may have been agreed to between the company and the independent contractor that their payments included all PAYG, Superannuation (SGC), workcover and other charges.
The Director Penalty Notice Regime (DPN)
As fate would have it, on 29 June 2012, around the same time the ATO introduced the reporting mechanism for the building industry, the ATO also made changes to the Director Penalty Notice (DPN) Regime which has the effect of making the director of a company personally liable for unpaid PAYG and Superannuation in certain circumstances.
This includes retrospective adjudications resulting from any subsequent audit. For PAYG it is for the entirety of any debt, for Superannuation debts it is for all debts incurred after 1 April 2012.
New directors have a 30 day grace period from the date of their appointment before they can become liable, resigning directors remain liable, regardless of the resignation.
What does all this mean?
The result for a company and its directors that have failed to correctly identify an employee versus an independent contractor is likely to include:
- Significant outstanding employee entitlements, PAYG liabilities, Superannuation (SGC) liabilities, workcover and payroll tax liabilities plus penalties and any interest applied.
- The director/s of the contracting company to be automatically personally liable for the PAYG and Superannuation applied to the independent contractor payments.
I am at risk or unsure, what should I do?
Contact your accountant to arrange a review of your contractor / employee relationships including ABN registration checks.
The ATO has also issued an employee/contractor decision tool to assist you in identifying whether the person is an employee or independent contractor. www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/.
If you have received a Director Penalty Notice (DPN) which will be formally titled “Notice of Director’s Liability to Pay a Penalty to the Commissioner of Taxation” do not hesitate (remember there is a 21 day time period) to contact any of our directors to receive the best advice tailored to your specific circumstances.