Budget 2018/19: No Tax Deduction for Payments to Contractors

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Insights From MCA Accountants

Budget 2018/19: No Tax Deduction for Payments to Contractors

The Coalition will look to deny tax deductions to businesses that pay workers as contractors, when in a legal sense that worker should be an employee.

Take a small construction company with 5 workers all setup as contractors. They earn $400k between them.

If the ATO does an audit and finds that these workers fit the definition of employee, that business will not be allowed to claim the $400k of “wage” payments as a tax deduction. It will be a MASSIVE penalty to a business that could very well send it bankrupt.

The message is clear – get your contractor arrangements right. The ATO have a tool that will tell you whether your worker is a contractor or employee. Use it.

The short summary on why contractors are a problem for the Government is:
a) Most payments to contractors are not reported to the ATO, so a contractor could put one figure on a tax return, but have actually received another
b) Contractors generally have no tax withheld from their payments, so if a contractor doesn’t do a tax return for 5 years, the ATO can easily be out of pocket $150k. If a wage earner did the same, the ATO has already had the $150k paid to it
c) Businesses use contract arrangement to try and avoid super, leave, penalty rates, and other entitlements that employees have
d) The flow on effect is that contractors have lower super balances, and therefore rely on Government services more in later years

Make no mistake, contractors are a target.

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