ATO Crackdown on Contractors and Superannuation

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Insights From MCA Accountants

ATO Crackdown on Contractors and Superannuation

Action Points

If you engage contractors, DO NOT IGNORE THIS POST. The ATO are keen to ensure all contractors that should be getting paid superannuation, are getting superannuation, and you may be up for claims going back to 1992.

If you engage contractors, you should at the very least do a review of your current contractors and see if you are liable for super on those.

Key Links

DON'T BURY YOUR HEAD IN THE SAND

We know running a business is hard work, but don’t bury your head in the sand on this issue. If you employ a contractor that is mainly for the labour of one individual – chances are you are liable to pay superannuation.

FYI: Did you know it is a myth that Ostrich’s bury their head in the sand? They lay their eggs in holes and rotate them with their heads every day – providing that perfect photo opportunity that fosters the myth.

WHAT THE ATO IS DOING

Our tax system runs on a “self-assessment” model, with the ATO generally assuming that what you tell them is reflective of your actual obligations and tax postion. It is designed this way simply so they don’t need to employ a million people to go over all tax returns with a fine-tooth comb at the time of lodgment.

The ATO instead run sophisticated systems and programs to red-flag people and then devote their resourses to check those people. Essentially instead of wasting resourses on checking everyone (including all the honest people), they focus on those that they know (or highly suspect) are doing the wrong thing.

When it comes to contractors and superannuation, they have some systems in place but far and away the most efficient and effective is the “dob-in” system – where contractors dob-in their boss for not paying super. Be it un-Australian or not, it is highly effective for the ATO.

So effective in fact, that we have reports that the ATO is now contacting contractors to educate them about super entitlements in the hope that they will dob-in their bosses. Think about it. How many people in the world, if given the opportunity, would spend 5 minutes giving the ATO your details if it meant they received thousands (or possibly tens or hundreds of thousands) of dollars of unpaid superannuation in return?

Self-interest rarely loses at the best of times, let alone if the contractor is in anyway disgruntled.

BUT MY CONTRACTOR HAS AN ABN

The fact that your contractor has an ABN means absolutely nothing. Zero, zilch, nada, naught. The Law effectively says that if you are paying someone for their labour, you are liable for superannuation. Whether they are an employee or a contractor is irrelevant.

It is also irrelevant if your agreement (written or not) with the contractor is that their rate of pay includes all superannuation. Because super is imposed by Law, you can’t “contract out” of paying it. There are many cases of the ATO taking businesses to court – and winning – where the business argues that the contractor agreed that their pay rate included super and the contractor would take care of their own super payments

HOW FAR BACK CAN THE ATO GO?

We often get asked how long people need to keep receipts for – what they are actually asking is how long until the ATO can’t amend their tax return and they are “safe”. The answer is never simple, and it has never been a cut and dry x years because all of your tax and business obligations are covered by different Laws that were created and amended by different Governments (not to mention they have an unlimited period for suspected fraud).

When it comes to superannuation and missed super payments however, it is cut and dry. The ATO can go all the way back to 1992 (when employer sponsored superannuation started). You read that right. 1992 – which is (as of the date of writing) 30 years ago. No need for the ATO to claim fraud, they have the legal right to investigate back as far as they like.

Any contractor you have ever used could potentially be a ticking time-bomb waiting to go off and sink your business.

WHAT ARE THE RULES?

So the big question is therefore – when is a business liable for superannuation on a contractor? The technical answer is – when they are a “common law employee”. This is to say, when the agreement between the business and the worker is similar to what an employer/employee relationship would be, then superannuation is payable.

There are a large number of factors to consider in making this assessment, but the important ones are:

  • Is the payment to the worker mainly for the labour of that worker?
  • Does the person working for you have the right to delegate that work to another person?
  • Is the person being paid for a result (i.e. upon completion of a set, quoted project)?

If we think of the construction industry, a large majority of the “subbies” running around fail these tests:

  • The subbies are paid for their time. They aren’t providing substantial machinery (such as an excavator) or bringing their own materials to the job, so the amounts paid to them are for their personal labour;
  • The subbie can’t send their neighbour to do the job for them. The boss expects that subbie to turn up; and
  • The subbie is being paid on a per hour basis. They haven’t quoted $x to do a distinct set of tasks on one job, and accepted the risks associated with this (i.e. non-completion = no payment, inferior completion = rectified by the subbie at no cost to the business, etc). They are paid to turn up and do what they are told – just like an employee is.

While the above doesn’t not cover all factors, we can say that if you “fail” the above tests, no amount of other factors are going to change the ATO’s opinion that the business is liable for superannuation.

If you “pass” the above tests… Then you’re not entirely out of the woods. Passing these tests doesn’t definitively result in no super, and now all other factors of your relationship will need to be considered and its a case of whether the contractor is closer to an “independent business, or an employee”. Factors to consider include:

  • Is the contractor providing all the tools and equipment necessary to preform the job?
  • Does the contractor control how and when the job gets done?
  • In the eyes of a client, does the contractor appear to be integrated into the business, or their own business?
  • If any intellectual property is created, who owns it?
  • Does the contractor advertise their services to the public?
  • Does the contractor have their own business insurance?

IF YOU THINK YOU ARE AT RISK

If you’ve read the above and thought, “oh dear, I think I might have a problem, ” you should contact us immediately to start with. We need to work out whether you do have a problem or not. Assuming you do for a moment…

Next up, deal with your current contractors so you don’t make the problem worse from today onwards. If they aren’t under written agreements, that would be the first priority. Secondly, ask them for their superannuation details (click here to get the ATO approved form) and let them know you will be paying them super. If you had previously agreed that their pay rate included super, tread carefully – because you may make them unhappy if you dock their pay 10.5% so you can put that money into super. Remember, an unhappy contractor is more likely to dob you in to the ATO.

Once you have that sorted, you need to determine what sort of risk exposure you have. Go through your contractors (past and present) and work out how much super you have potentially been liable for. Whatever the above amount is, we need to add penalties and interest.

The amount of these penalties and interest varies depending on whether you disclose these to the ATO before they find them or not, so the next logical step is to chat to us about your options.

Don’t be a (mythical) Ostrich and stick your head in the sand. As much as the above amount may be daunting, imagine it doubled in 5 years because you chose to do nothing about it… get on the front foot and protect your business before it’s too late.

OTHER RISKS

We’ve focused on superannuation in this article, but if your business is paying contractors that are actually “employees” by law (i.e. going by the factors outlined earlier in the article), then your business may also be liable for:

  • Unpaid PAYG Withholding tax on “wages” (i.e. if you were paying them correctly as an employee, how much tax would you have been required to withhold from their wages);
  • Unpaid workcover;
  • Unpaid payroll tax; and
  • Income tax on contractor payments (because these payments could be considered not tax deductible because you did not withhold the correct amount of tax from the payment of “wages”).

We’ve seen and heard of businesses forced to close due to the simple act of a disgruntled contractor triggering a superannuation audit. Years and years of hard work down the drain.

Don’t be an Ostrich. Please.

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