What is the number one issue on the Tax Office’s agenda at the moment? Answer, are you a contractor or are you an employee?
The purpose of this article is not to set out the income tax, superannuation and workers compensation implications of being a contractor versus being an employee. The purpose of this article is to give a real life example of the types of issues that the Tax Office, and in fact the courts, are looking for when making their assessment of your circumstances.
A recent Administrative Appeal Tribunal (AAT) decision has held that a Trust carrying on a commercial and residential plumbing business did not meet its superannuation guarantee obligations in respect of five (5) of its plumbers that it treated as independent contractors.
The taxpayer contended that the five (5) plumbers were independent contractors and not employees based on their contracts as well as the fact that each of the contractors:
- provided their own vehicle and their own tools and equipment (but where larger specialised work was required they would use the taxpayer’s vehicles and/or tools and equipment);
- had the right to delegate, but only with the consent of the taxpayer, and in any event, none of the contractors actually delegated or sub-contracted;
- set-up their own businesses and did some work for others (although they worked almost exclusively for the taxpayer, and the scale of any business conducted by the contractors for their own customers must been very small due to the hours they worked for the taxpayer);
- obtained tax benefits from having their own business;
- had their own insurance;
- refused some work;
- bore the costs of rectifying defective work;
- were paid an hourly rate in excess of that paid to the taxpayer’s employees who were subject to an award/enterprise bargaining agreement; and
- were not paid for sick, holiday or long service leave (although casual employees would also not be paid for leave, and would also be paid at a higher rate than permanent employees).
The taxpayer exercised at best, limited control over the work done by the contractors, although the AAT stated this is not surprising given that each of the contractors were qualified and experienced plumbers.
However, the AAT found that the following factors went against the taxpayer’s contention:
- plumbing supplies for work they carried out were purchased by the contractors on credit cards provided by the taxpayer;
- generally the contractors did not refuse work allocated to them;
- they did not rectify any defective work at their own cost;
- the hourly rate charged by the contractors for the work they did for customers was largely set by the taxpayer and it was less than what would ordinarily be charged by other plumbing contractors;
- a number of the contractors worked largely forty (40) hour weeks, and the rest worked at least twenty-five (25) hours per week;
- although each of the contractors had an ABN, they did not quote for jobs, they simply did the jobs at an hourly rate for their labour and did not invoice on their own business letterheads;
- the contractors wore clothing with the taxpayer’s logo on it and in doing so they presented themselves as part of the taxpayer’s business; and
- in the case of time off, permission was sought of the taxpayer, at least by some of the contractors.
The moral of the story – “the totality of the relationship” must be considered, not just the degree of control exercised by the employer.
The AAT concluded that the workers did not present as independent contractors, pursuingtheir own businesses independently from the taxpayer’s business, but were actually employees.
Effectively some contractors were full time casuals who were paid an hourly rate. In addition, since the contractors charged their clients at a rate of approximately $40 per hour (which was largely set by the taxpayer), they were paid principally for their labour, despite the fact that the hourly rate sometimes took into account the usage of their own motor vehicles and some tools and equipment.
The end result is that the AAT concluded the contractors would come under the expanded definition of “employee” for the purpose of requiring the taxpayer to provide superannuation support.
It goes without saying that you need to get advice in relation to this area of the law. This applies whether you are “on the receiving end” as the contractor, or you are looking to engage contractors.
Feel free to contact Ellingsen Partners to discuss this matter further.