Category: Law

When is a contractor really an employee?

Fines of up to A$63,000 per breach of getting it wrong

In Australia, 23 per cent of employers say they now regularly engage contract or temporary staff – with another 44 per cent employing them for special projects – according to the 2017 Hays Salary Guide. The Australian Bureau of Statistics estimates there are one million independent contractors currently working in Australia, representing about 9 per cent of the workforce – an increase of 2 per cent in six years.

As the number of independent contractors continues to rise, so too does close scrutiny of it by watchdog agencies such as the Fair Work Ombudsman (FWO) and Australian Taxation Office (ATO).

In 2018, the FWO has reported that the misclassification of employees as contractors is a persistent issue within many industries in Australia.

According to an FWO spokesperson the FWO has found exploitative cases of sham contracting, where businesses deliberately engaged workers as independent contractors, when they were actually part- or full-time employees. The cases involved “very serious, deliberate and systemic behaviour used to gain an advantage over competitors and resulted in large underpayments”. Migrant and young workers, in particular, may find themselves the target of sham contracting due to a number of factors, including reluctance to reach out for help for fear of losing their job, lack of awareness of workplace rights, or language barriers to properly confirm their working agreement.

Some instances of misclassifications of workers, though, have been unwitting. For instance, arrangements were either formed in partial ignorance, or began as true contractor engagements that slowly changed – unobserved and undeclared – from contractor to employee.

If someone has been engaged as an independent contractor, and the court or the Fair Work Ombudsman determines they’re really an employee, there are provisions under the Fair Work Act 2009, which enable you to be prosecuted for breach of the award, There’s a maximum fine under the Fair Work Act 2009 for a breach of the Act – up to A$63,000 per breach.

It may go further than that. Businesses may also be held legally responsible, as an accessory, if a contractor – or subcontractor – is found to be underpaying staff.

“It’s not just direct employers who can be held liable for contraventions such as underpayments,” the FWO spokesperson warns. “Any person or entity knowingly involved in contraventions could be found legally responsible.”

Put to the test

Unfortunately for businesses and workers alike, the distinction between employees and independent contractors is rarely immediately clear.

According to the FWO, there is “not a singular factor used to determine whether a worker is an employee or an independent contractor. For example, just because a worker has an Australian Business Number [ABN] or issues invoices, doesn’t automatically make the worker an independent contractor.”

ATO and FWO websites offer further information outlining the differences between employees and contractors, as well as tools to assist in determining whether a worker is an employee or contractor. Whether you’re a business or a worker, as models of employment change and contracting increases, they should be essential reading.

Workers can contact the Fair Work Infoline on 13 13 94. A free interpreter service is also available by calling 13 14 50. 

Fines and penalties

According to the ATO, businesses that don’t meet required employer obligations may face penalties and charges including:

  1. A PAYG withholding penalty for not meeting PAYG withholding obligations
  2. Super guarantee charges for not meeting super obligations, comprising: super guarantee shortfall amounts (the amount of super contributions that should have been paid into a complying fund); interest; an administration fee; and penalties up to 200 per cent in the most egregious cases.

ATO renews focus on car deductions

Chris Jordan, Australian Tax Commissioner
Chris Jordan, Australian Tax Commissioner

The tax office has restated its examination of people who claim more than they are entitled to around a car travel deductions as part of a broader compliance crackdown.

The ATO noted that over 3.75 million people made a work-related car expense claim in 2016-17, totalling around $8.8 billion, of which around 870,000 claimed the maximum amount under the cents-per-kilometre method.

The announcement follows comments from tax commissioner Chris Jordan that some tax practitioners were “deliberately scamming or cheating the system”, which then received the backing of Tax Practitioners Board chair Ian Taylor, describing the ATO’s focus on clothing and laundry expenses as “fair”.

 In addition, ATO made a commitment earlier this year to focus on ‘other’ work-related expenses, after $7.9 billion in claims were recorded last year between about 6.7 million Australian taxpayers.

ATO assistant commissioner Kath Anderson said that the ATO’s ability to identify claims that are unusual has improved due to enhancements in technology and data analytics.

“We compare taxpayers to others in similar occupations earning similar incomes. Our models are especially useful in identifying people claiming things like home to work travel or trips not required as part of your job,” Ms Anderson said.

“Unless you have a work-related need to travel while performing your job, you won’t be able to claim a deduction. For example, travelling from home to work is not deductible for most people.”

Ms Anderson said that while the rules can be a bit tricky for some, and that most people want to do the right thing, the ATO is seeing a lot of mistakes.

“We are particularly concerned about taxpayers claiming for things they are not entitled to, like private trips, trips they didn’t make, and car expenses that their employer paid for or reimbursed,” she said.

Last year, the ATO issued a similar warning, with Ms Anderson noting a “significant proportion” of claims were at the limit of the 5,000 kilometres mark that did not require detailed records.

She said the cents-per-kilometre method of calculating deductions for expenses is to simplify record-keeping, not to provide a free ride.

“It’s true that claims of up to 5,000 kilometres using the cents per km method don’t require a log book,” Ms Anderson said.

“However, you still need to have done the kilometres as part of your job and be able to show how you calculated your claim, for example by keeping a diary of places you have had to drive to for work, and how often.”

NSW Land Tax Assessment includes Foreign Person Surcharge when property owned by Family Trust

Revenue NSW (Formerly known as the Office of State Revenue) considers Family Trusts to be subject to the Foreign Persons Surcharge on stamp duty and Land Tax for any New South Wales residential property owned through the Trust, including Trusts that are based outside of NSW.

Revenue NSW has confirmed that they automatically apply the 2% foreign person land tax surcharge on properties where the title indicates that it is owned through a Family Trust.

Revenue NSW gives trustees 6 months (from the assessment date) to update their Trust Deed to remove foreign persons as beneficiaries. After the deed is updated, the trustee can then apply for the surcharge to be refunded.

In short, Family Trusts may have to pay the tax first and then apply for a refund (after they have updated their Deed), regardless of whether there is any history of the trust distributing to a foreign person.

The situation is slightly different for properties in other states held by Family Trusts. Victoria, Queensland and South Australia also impose foreign person surcharges on Stamp Duty and/or Land Tax, with Western Australia due to follow in 2019. Each state has its own legislation which deals with how these surcharges apply to Family Trusts and the legislation in each state differs.