As a business the use of contractors makes a lot of commercial sense across Perth and the rest of Australia. The flexibility offered by contractors and the shortage of labour makes contractors a classical recommendation given by smart business accountants. And while contractors can be a simple option – there are a lot of tax traps to consider with contractors. In effect, the increasing use of contractors as a substitute for employment has made the tax treatment of contractors similar in many ways to the tax treatment of employees.
Superannuation
If your contractor is an individual and they are mainly providing labour – you are required to withhold superannuation on their behalf. And this obligation now arises even if the contractor’s payment is very small (say $50). For superannuation purposes individuals who mainly provide labour are treated as an employee – and with the removal of the $450 minimum threshold effective from 1 July 2022 this change to the superannuation tax treatment of contractors is also coming into effect.
The simple creation of an ABN by the contractor will not change the obligation by the business. And the choice by both parties to opt out of the superannuation obligations will also not impact the legal requirement to withhold superannuation by the business owner (not the contractor).
And given the tax penalties for not meeting the superannuation guarantee charge are so high – including when it applies to contractors – it is important to ensure you have strategy to avoid the super guarantee surcharge.
Taxable payments annual reporting
For certain businesses (typically those that involve a lot of contractors) there is an obligation to notify the Australian Tax Office about the total amount of money paid to contractors. The reporting is referred to as “Taxable Payments Annual Reporting” and is due for tax lodgement with the ATO by 28 August 2022.
Typically the TPAR reporting is not difficult. And if you are using a cloud accounting software program like Xero then the software program itself can be lodged directly to the ATO. However the software still needs to be properly setup and the reporting checked by the employer prior to submission. This check and control is ordinarily done by the external accountant or the bookkeeper (provided either he bookkeeper or accountant provide a written confirmation that the reporting is correct).
Of course, not every type of business needs to lodge TPAR. And while the list is not complete – the businesses are typically from building and construction, cleaning services, road freight, cartage contractors, technology services and security services. The definition of your industry, and the share of revenue from that industry, makes a difference to each persons reporting obligations so checking in to make you are are (or are not) exempt from reporting is prudent.
The contractors you need to report TPAR to the ATO include subcontractors, subcontractors, and independent consultants. So if you do need to report TPAR it is important to understand the full range of suppliers who can be captured by TPAR reporting, making sure your systems are designed properly to capture the data and also ensure your current accounting team are properly trained to identify risks and potential TPAR reporting obligations as they arise.
Of course as accountants and business advisors we sometimes find that internal teams have not properly reported their TPAR to the Australian Taxation Office. Thankfully, there is the capacity to lodge an amended Taxable Payments Annual Report to make sure that you report the correct GST, amount paid, tax withheld or ABN. As accountants we often find that doing something properly first time takes a bit longer upfront but is a worthwhile effort when the tax penalties and rework time of correcting mistakes is considered. If you are operating a business an you need an accounting firm in Perth or Melbourne with a single focus, depth of tax knowledge and global connections – Westcourt is a natural fit – so why not call us today!
