| Update
on Contractor Taxation Issues
Tax File Number Declaration
This is now available as a downloadable document. The links for this
download is on the left hand side of this page.
Important Information for Independent
Contractors
On the 30th June 2000,
federal parliament passed legislation in respect of PERSONAL
SERVICES INCOME. Personal Services Income is income generated by the
personal services or skills of an individual (that includes
contractors eg: engineers or drafters). The rule can be applied to a
Sole Trader, Partnership, Trust or Company structure.
The Tax Office has devised a series of tests that these entities
must now satisfy on an annual basis. There is only one exception:
that of a contractor who can prove they operated in the PPS
(Prescribed Payments System) on the 13th April 2000. These
contractors have a reprieve until 1 July 2001.
The Tests are as follows:
Unrelated Client Test – The test is passed if during the year of
income, the entity provides services to 2 or more other unrelated
entities to perform work and those entities comprise at least 20% of
the market value of the principals’ business income. The business
must show that it has obtained and maintained this income by way of
offers to the public via advertising, marketing etc.
Employment Test – The employment test is met if, during the year
of income the entity engages one or more other entities (ie: staff
or sub-contractors) to perform at least 20% of the “work” for
the year. The test is also satisfied if the Principal employs an
Apprentice.
Note: payments made to spouses for the purpose of carrying out
administration, banking, phone answering etc do not qualify as a
legitimate payment under the test
The Business Premises Test – The test is passed if at all times
during the year, the business maintains premises validated by
evidence of a lease or title deed. A home office does not qualify
– the business premises must be separate from the premises of the
service requirer (the client site) or its associates.
A final measure can add weight to an entity that can demonstrate its
operation as a legitimate business.
The Risk Test – The entity accepts a measure of risk for its
services. This can be proved by holding appropriate insurances and
by providing Guarantees such as refunds, or the ability to make good
any error or omission that can reasonably be attributed to the
activities of the contractor.
* Please note that you may not need to qualify on all of the above
tests.
In order to retain the
legitimacy of your business structure we recommend the following
preventative action:
1. Read your contract with AZ-Tech Recruitment & Contracting Pty
Ltd again. It is specifically written to couch the wording of the
terms of your engagement so that the services of your entity do not
refer in any way to “the performance of work”. It also places
the onus upon you for the quality of your output, as the matter of
taking risk in respect of guaranteeing your workmanship.
2. Make certain that your Tax Invoices clearly describe services
rendered and not hours worked.
3. Take steps to show that you advertise and market your business.
Do you have a listing for your business in the yellow pages or local
services directory of your local paper – this small investment may
be critical to your survival under the new system. Do you have a web
site or a marketing proposal with a business capability statement?
4. Can you arrange to hire a casual employee from time to time to
carry out part of the deliverables for your output in respect of
client projects?
5. Can you seek out supplementary minor contracts that you can carry
out in tandem with your principal engagement?
6. The matter of having a separate business premises is a tricky one
that will cause problems. Depending on how the Tax Office views this
over time, some contractors may find it useful to get together with
their peers to secure sub-let space in, say, a serviced office. Many
serviced offices provide mail and phone answering services, a
directory listing etc for a nominal fee and this can become your
registered office without the premises being required to be manned
by you personally. AZ-Tech may be able to assist in this regard.
7. In general terms, you should always conduct your activities as a
Business and treat your business as a separate entity. This can mean
having a business bank account, ensuring adequate accounting
practices with profit and loss statements, timely completion of BAS
returns to the tax office, protection of your business with
appropriate insurances, advertising your services etc.
Remember that under the new taxation system, agencies need to treat
contractors as “suppliers”. Do not expect to receive
“employment entitlements” if you choose to operate as a business
entity. Contractors can no longer sit on the fence between being in
business or that of being an employee.
Please take the time to have a look at your personal situation
again. You should notify us if you become concerned that you may be
unable to comply with tax office requirements, and do maintain close
contact with your Accountant to ensure that whatever action you take
is the best option for your personal circumstances. Our phone number
is 07 3847 3988 – ask for Jan Day.
Update on Contractor Indemnity Insurance
In order for AZ-Tech Recruitment
& Contracting Pty Ltd to be able to engage the services of an
Independent contractor, the contractor must first be able to provide
evidence of Professional Indemnity and Public Liability Insurance
cover with a Certificate of Currency.
This provides the parties the necessary protections in the
event of a negligence claim against the contractor.
As is the case with many of our clients who hire our
contractors, we are contractually obligated to provide guarantees to
ensure all indemnities are covered for the personnel we refer to the
client. However our
business insurers exclude cover to Independent Contractors on the
basis that they are not our employees.
Therefore we cannot refer uninsured independent contractors.
Also be aware that a contractor who
is not insured may be regarded by the Australian Taxation Office is
failing to meet one of the important tests to demonstrate that the
business is a genuine business entity and not a “sham”.
An agency is responsible for ensuring that an Independent
Contractor is indeed a legitimate business entity with an
appropriate structure. In
cases where we are not certain, the ATO directs that we treat the
contractor under the PAYG scheme as an employee for the purpose of
tax. Therefore there
are a number of implications that have to be considered.
As
we recognize both the high cost of insurance (especially
professional indemnity policies) and the indeterminate length of
many contracts, we have negotiated a special policy with our
brokers, ZIB. ZIB are
able to provide cover for the specific period of a contract with us,
on a separate policy that benefits from our buying power.
The premium is paid as a weekly installment calculated as a
percentage of each hour that the contractor invoices us for service
to our client. Hence this becomes a relatively practical way to pay for
insurance’s only for that portion of the year it is needed. |
