Recent policy changes has seen the Australian Tax Office (ATO) take a more proactive approach to conducting audits into employee classification. The changes provide that business owners who are not correctly classifying their workers as either ‘employees’ or ‘contractors’ can run in to some seriously costly consequences if caught out.
Certain businesses choose to engage their workers as contractors because it allows the employer flexibility over when and how frequently they engage the worker, and it reduces the company’s liability. This can cut costs in certain areas, however following the ATO crackdown, incorrectly classifying employees could end up costing your company much more than it could save.
What will the ATO look for?
Recent dealings with the ATO have shown that there are a few key factors that the ATO are likely to examine closely in an audit. These are:
- whether the worker is engaged in the business for more than 80% of a financial year, and
- whether the worker falls under the statutorily expanded definition of ‘employee’ in section 12 of the Superannuation Guarantee (Administration) Act 1992 (SGAA).
Under section 12(3) of the SGAA, the traditional definition of employee has been expanded and is defined to mean “a person who was renumerated wholly or principally for the performance of their personal labour or skill”. The expanded definition provides that somebody originally employed as a contractor may, based on their classification and role, now fall within the expanded definition of “employee” and thus be entitled to superannuation payments from the employer.
How do you know if a worker is a contractor or an employee?
There are a number of factors that have been establish to help determine whether a person is engaged as a contractor or employee, including:
- The background to how the worker was engaged;
- Degree of control over how work is performed and who hold this control;
- Hours of work;
- The worker’s expectation of work;
- Who bears the risk for the work performed;
- The worker’s ability to delegate work performed;
- Any requirements to make superannuation contributions for the worker;
- Who is required to supply the tools, equipment and materials for the performance of work;
- Any tax withheld on behalf of the worker ;
- How is the worker paid and what triggers payment; and
- Work entitlements for the worker.
All of these factors are considered on balance, that is, no one factor holds more weight over the other. This means that in the process of determining how a worker is classified, each one of these factors must be satisfied appropriately.
What happens if you get caught?
Where an audit is performed by the ATO and it is determined that there are incorrectly classified employees who have not been receiving superannuation payments from the business owner, several penalties can be levied. Depending on the circumstances, the ATO can levy against a business owner the payroll tax component and superannuation guarantee charge that has been unpaid for the period of the audit. Further, the ATO can penalise the business owner up to 200% of the value of the payroll tax or superannuation guarantee that has not been paid.
There are some circumstances under which a penalty can be partly or fully remitted. If the ATO finds that the business owner believes that they have taken reasonable care by making reasonable attempts to comply with the law in view of their knowledge, experience, education, skills and other relevant circumstances, the penalty may be reduced to 0%.
How we can help
Streten Masons Lawyers specialise in small to medium business in areas of commercial and corporate law. We can assist your business by ensuring that all of your employees are classified correctly, and the correct documentation for the employer-worker relationship is implemented.
Further, if an audit has been performed on your business, we can assist in drafting objection submission to reduce the penalty that may be imposed by the ATO. To make an enquiry, contact us here: http://smslaw.com.au/contact-us/.