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If your business is looking to put on more staff, first of all: congratulations. But secondly, a warning. The engagement status of workers is an important distinction – whether they are employees or independent contractors – and has consequences that can get many employers into unforeseen hot water.
Sometimes contracting is necessary, for example when you require specialist skills that are not easily covered by placing a job ad. Some workers only want to be put on as a contractor, particularly where they service multiple clients. Contracting can also prove more cost efficient than employment.
However, there are dangers in engaging an individual as a “contractor” without having a proper understanding of the law. You may find that the individual is considered to be an “employee” regarding several and different legislative requirements, and this brings with it a range of legal obligations – and liabilities if you get it wrong. The Tax Office even encourages taxpayers to dob in a business incorrectly treating employees and contractors.
The Tax Office says businesses that incorrectly treat employees as contractors face penalties and charges, including:
There are several areas of both tax and employment legislation that can trip up employers regarding the contractor/employee divide.
Naturally the Tax Office expects that PAYG withholding is withheld from payments to employees, and it has an online employee/contractor decision tool to determine the status of workers (there’s a separate one for the construction industry).
If you enter into an arrangement that is through a partnership, trust or company, that operates under a bona fide contracting arrangement and provides an ABN, this may mean that no PAYG withheld. But this is the sticking point for many Tax Office decisions — whether arrangements are genuine or sham.
The Superannuation Guarantee (SG) law requires that contributions are made on behalf of “employees”, which is a term that is even defined in the relevant ruling. “If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”
This extended definition of employee means that, if you engage an individual as a contractor, you may need to pay superannuation contributions for their benefit, even if your written contract with them does not provide for this, and even if they use an ABN.
Most states and territories (all except Western Australia) have provisions written into their payroll tax laws to cover the use of contractors (scroll down). These generally deem payments made to contractors to be “taxable wages” and thus subject to payroll tax — although there may be concessions and exemptions depending on the jurisdiction, so it’s best to check. This Payroll Tax Australia page has links to each state and territory legislation.
Be aware that in some jurisdictions in Australia, workers compensation legislation may require such insurance cover for workers taken on as contractors. In Queensland for example, this is required for any “worker”, the definition of which includes a contractor put on for “labour only or substantially for labour only” (this WorkCover Queensland site explains this). And this page of the business.gov.au website has links to guidance for every state and territory WorkCover authority.
As far as the Tax Office is concerned, Uber drivers are taxi drivers. They’ve just enforced rules that lump the disruptive ridesharers in with a special class of independent contractors who have to pay GST and withhold tax from all their takings. That’s only the beginning of their obligatory gauntlet, though.
Many Uber drivers have never had to be a small business before. Many won’t know what they have to do to stay legally compliant and able to keep taking fares for years to come.
That means there’s a business opportunity for business-minded tax and BAS agents. Here’s why they need help.
Because Uber drivers are taxi drivers now, they have to register for GST no matter what their annual turnover is. That means they have to collect 10% GST on all fares they offer. That in turn means the 10% comes out of their cut from Uber, not Uber’s share of the fare – is this fair? Regardless, it’s their lot now.
Uber drivers need to chart where and when GST is paid. They need to communicate and net off their GST liability on a quarterly BAS.
Most Ubers won’t have ever lodged a BAS before – it’s not something you can just pick up and do right away. You can help with this.
Regardless of their new found status as Taxi drivers, Uber drivers have always needed to work out their taxable income from their Uber activities and put it in with any other work they have performed for income during the year.
Since they now a need to worry about GST and BAS, then there is extra opportunity to look after their income tax affairs as well. Consider all the allowable deductions that Uber drivers can claim.
Their phone, car, and fuel expenses need a closer look. Many Ubers will be using their car privately as well, so they’ll need a hand properly apportioning business and private use. It’s not uncommon for Ubers to receive tips here and there – they’ll need help accounting for those. Given the Tax Office spotlight on disruptive services, it’s a good idea to ensure corners aren’t being cut.
If you have ever or will ever apply for certain tax offsets or concessions or a government benefit of some kind, you may very well be asked to provide your “adjusted taxable income” (ATI).
ATI is used to assess eligibility for certain offsets and other entitlements, and is also used by Centrelink and the Child Support Agency. It is used to assess entitlement to Family Tax Benefit (both A and B) and the Child Care Benefit, and Parental Leave Pay and Dad and Partner pay thresholds are based on ATI as well.
The Low Income Supplement and Low Income Family Supplement, as well as eligibility for the Commonwealth Seniors Health Card, are subject to ATI thresholds (although deemed income from account-based income streams are now included in the latter). The government’s private health insurance rebate also takes into account ATI for its thresholds, as does the Medicare Levy Surcharge.
The ATI recipe
Simply put, and as the name suggests, ATI starts with ordinary taxable income (the amount you earn above the taxing threshold of $18,200, minus deductions) to which various elements of adjustment are applied.
These adjustments may include any of the following to calculate your ATI (links take you to tax return instructions to explain further):
While most of the above are added to taxable income, for purposes of some government payments or services any child support you pay will be deducted from the final ATI.
The Tax Office has provided several income test calculators to make the job easier.
Important considerations such as the levels of private health insurance rebate are affected by ATI, and also importantly for many taxpayers is retaining eligibility for certain offsets and concessions. As ATI can be affected by the above adjustments, there are particular strategies that can be employed to ensure continuing eligibility through managing levels of ATI.
For example, there is a tax offset available for a spouse who is an invalid or who cares for an invalid, but the offset cannot be claimed if your ATI (for 2015-16) is above $100,000, or if your spouse’s ATI is more than $10,634.
There may be little scope to reduce your or your spouse’s ATI through salary sacrificing to superannuation, as reportable employer super contributions are included. But FBT-free benefits, including work-related items such as tools of trade, mobile phone, laptop computer and more, could do the job of reducing ATI.
*The adjusted fringe benefit amount is the total reportable fringe benefits amounts multiplied by (one minus the FBT rate) — that is, reportable fringe benefit x (1 – 0.49 = 0.51). This reflects the non-grossed-up value of the benefit. As income tax is not paid on fringe benefits, the grossed-up taxable value of a benefit includes the amount of income tax an employee would have paid if cash salary had been received instead.
Start-up small businesses are able to deduct a range of expenses associated with launching their venture, such as the costs of professional, legal and accounting advice.
The government’s “Jobs and Small Business” package (more here), announced with the last budget and effective from July 1 this year, changes the previous rules where such costs were apportioned over a five-year period.
If a small business owner rings up some professional costs related to starting their venture, such as costs for legal and accounting advice, these can be deducted in the same financial year. This applies to all eligible small businesses (turnover of less than $2 million a year).
The expenses must relate to a small business “that is proposed to be carried on” and is either:
What’s covered, what’s not
For the first category of costs includes advice from a lawyer or accountant on how the business may be best structured, as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not however include the cost of acquiring assets that may be used by the business.
Similarly, eligible costs would include professional advice on the viability of the proposed business (including due diligence where an existing business is bought) and the development of a business plan. Also covered would be the costs associated with raising capital (both debt or equity) for the operation of the proposed business including costs incurred in accessing crowd-sourced equity funding.
Deductibility for advice and services does not include other expenses a business may wear in relation to the operation of the proposed business (such as the cost of travelling as part of assessing a location for operations).
The second category (payments to government agencies) broadly includes regulatory costs incurred in setting up the new business. The types of expenditure would be the costs associated with creating the entity that will operate the business (such as the fee for creating a company) and costs associated with transferring assets to that entity (for example, the payment of stamp duty).
It does not include expenditure relating to general taxes, such as income tax. Payment of these general taxes does not relate to establishing a business or its structure, but instead to the operation and activities of the businesses. There may be scope, depending on circumstances, for deductions in this area under other legislation, but a business owner will need to consult their tax professional.
Tax loss also means lost deduction?
As with many start-up businesses, there may be negligible tax payable for the initial period of operation, however there is still value from the new tax relief measures.
But a business can still benefit in the longer term. Any eligible start-up costs that are claimed as immediate deductions [may] not be of an immediate benefit as the company could be operating at a loss. However, any tax losses can be carried forward and be valuable in future years once the company becomes profitable, as the tax payable will be reduced.
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