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The Australian Taxation Office (ATO) has released new guidelines for determining the difference between employees and independent contractors, following two landmark judgments delivered by the High Court in February 2022. Here's what employers need to know.
Under the updated ATO guidelines, the relationship between an employer and an individual engaged to work will be based on the contractual terms of the agreement. This means that businesses can more easily determine the nature of the relationship, provided all relevant information is included in the agreement. If the ATO finds evidence that the contract is not being carried out as per the agreement, other factors may come into consideration, such as the date the contract was established, contractual terms, subsequent agreements, or whether the contract was a sham.
To determine whether a worker is an employee or independent contractor, the ATO will assess factors such as the worker's ability to delegate, level of control, tools and equipment used, level of risk, and ability to generate goodwill. The ATO will also consider whether the worker serves in the business and as a representative of the business or acts as an independent contractor providing services.
Employers must review their contractor agreements and ensure that all terms and conditions are outlined in writing. Avoid using a checklist to classify workers and instead undertake a review of the proposed or current relationship between the worker and the business. If uncertain, employers are recommended to engage a professional to ensure compliance with the legislation.
The ATO's updated guidelines for differentiating between employees and independent contractors can have a significant impact on businesses from an accounting perspective.
If a worker is classified as an employee, the business will be responsible for withholding and remitting Pay-As-You-Go (PAYG) withholding tax on their behalf. Employers must also pay Superannuation Guarantee (SG) contributions and may be liable for other employment-related expenses, such as leave entitlements and workers' compensation insurance.
On the other hand, if a worker is classified as an independent contractor, the business will not be required to withhold PAYG withholding tax, pay SG contributions or provide other employment-related entitlements. However, the contractor may be required to pay their own tax and insurance obligations.
Therefore, it's crucial for businesses to correctly classify their workers to avoid potential tax liabilities and penalties. With the ATO's updated guidelines based on the contractual terms of the agreement, businesses need to ensure that their contractor agreements accurately reflect the nature of the relationship between the business and the worker. It's recommended that businesses seek professional advice to ensure compliance with the legislation and avoid any potential tax implications.
The Government has reinvigorated the 120% skills training and technology costs deduction for small and medium business.
An election ago, the 2022-23 Budget proposed a 120% tax deduction for expenditure by small and medium businesses on technology, or skills and training for their staff. This proposal has now been adopted by the current Government and details released in recent exposure draft by Treasury.
From 1 July 2022, the standard Superannuation Guarantee (SG) rate increased from 10% up to 10.5%. It’s part of the government’s commitment to increase the SG by half a percent each year until 2025, when the SG rate will reach 12%.
The Australian Federal Budget 2022 was delivered on 29 March 2022 by the Federal Treasurer Josh Frydenberg.
See our breakdown of the tax measures impacting small business in Australia.
Smith Shearer, in collaboration with Kitto and Kitto Lawyers, will be hosting the ECCI Business After Hours on 12 August 2021
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