CONTRACTOR OR EMPLOYEE?
Many business owners assume that if they hire independent contractors they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations. However, each set of rules operates a bit differently and in some cases, genuine contractors can be treated as if they were employees. Also, correctly classifying the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong.
Two decisions handed down by the High Court recently clarify the way the courts determine whether a worker is an employee or an independent contractor. While the High Court has not disturbed the well-established practice of looking at the totality of the relationship in determining whether a worker is an employee, the Court decisions confirm that it is necessary to focus on the terms of the contract between the parties to establish the nature of the relationship.
In CFMMEU v Personnel Contracting and ZG Operations Australia v Jamse, the court placed a significant amount of weight on the terms of the written contract that the parties had entered into. The court took the approach that if the written agreement was not a sham and not in dispute, then the terms of the agreement could be relied on to determine the relationship. However, this does not mean that simply calling a worker an independent contractor in an agreement classifies them as a contractor. In this case, a labour hire contractor was determined to be an employee despite the contract stating he was an independent contractor.
That is, if it walks like a duck and quacks like a duck, it’s probably a duck, even if on paper, you call it a chicken.
For employers struggling to work out if they have correctly classified their contractors as employees, it is important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement. Merely labelling a worker as an independent contractor is not enough if the
rights and obligations under the agreement are not consistent with the label.
A genuine independent contractor who is providing personal services will typically be:
- Autonomous rather than subservient in their decision-making;
- Financially self-reliant rather than economically dependent upon the business of another; and,
- Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.
Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time. Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.
TEMPORARY FULL EXPENSING CONCLUDES 30 JUNE 2023
Temporary full expensing enables your business to fully expense the cost of:
- New depreciable assets
- Improvements to existing eligible assets, and
- Second hand assets
in the first year of use.
This measure enables an asset’s cost to be fully deductible upfront rather than being claimed over the asset’s life, regardless of the cost of the asset. The last day to utilise the expensing measures is 30 June 2023 at which point, normal depreciation arrangements will apply.
Certain expenditure is excluded from this measure, such as improvements to land or buildings that are not treated as plant or as separate depreciating assets in their own right. Expenditure on these improvements would still normally be claimed at 2.5% or 4% per year.
The car limit will continue to place a cap on the deductions that can be claimed for luxury cars ($60,733 in 2021-22 and $64,741 in 2022-23).
SMALL BUSINESS POOLING
Small business entities (with aggregated annual turnover of less than $10 million) using the simplified depreciation rules can deduct the full balance of their simplified depreciation general pool at the end of the income year while full expensing applies. The provisions which prevent small businesses from re-entering the simplified depreciation regime for five years if they voluntarily leave the system are suspended.
OPT-OUT RULES
Taxpayers can choose not to apply the temporary full expensing rules to specific assets, although this choice is not currently available to small business entities that choose to apply the simplified depreciation rules for the relevant income year.
TAX TREATMENT OF DISASTER AND PANDEMIC RELIEF PAYMENTS, GRANTS & LOANS
If you received a government grant or relief to help soften the blow of a disaster, the way these grants and loans are taxed might vary.
The following pandemic related grants can be tax-free if they are received in either the 2020-21 or 2021-22 income year by a business with an aggregated turnover of less than $50 million:
ACT state grants
- COVID-19 Business Support Grant
NSW state grants
- 2021 COVID-19 business grant
- 2021 COVID-19 JobSaver payment
- 2021 COVID-19 micro-business grant
- NSW Accommodation Support Grant
- Commercial Landlord Hardship Grant
- NSW Festival Relaunch Package
- NSW Performing Arts COVID Support Package
- NSW Performing Arts Relaunch Package
- 2022 Small Business Support Program
QLD state grants
- 2021 COVID-19 Business Support Grants
SA state grants
- COVID-19 Additional Business Support Grant
- COVID-19 Business Hardship Grant
- COVID-19 Business Support Grant – July 2021
- COVID-19 Tourism and Hospitality Support Grant
VIC state grants
- Alpine Business Fund
- Alpine Resorts Support Program (Streams 1, 2 and 3)
- Business Continuity Fund
- Business Costs Assistance Program Round Two
- Business Costs Assistance Program Round Two – July Extension
- Business Support Fund 3
- Impacted Public Events Support Program
- Independent Cinema Support Program
- Licensed Hospitality Venue Fund
- Licensed Hospitality Venue Fund 2021
- Licensed Hospitality Venue Fund 2021 – July Extension
- Live Performance Support Program
- Melbourne City Recovery Fund – Small business reactivation grants
- Outdoor Eating and Entertainment Package
- Small Business COVID Hardship Fund
- Sole Trader Support Fund
- Sustainable Event Business Program
If the grant you received is not tax-free, you carry on a business and the payment relates to your continuing business activities, then it is likely to be included in your assessable income for income tax purposes unless a specific exemption applies. The position can sometimes be different where the payment was made to enable you to commence a new business or cease carrying on a business.
When it comes to GST treatment, the key issue is whether the grant is consideration for a supply. That is, was the business expected to deliver something for the grant? If not, GST does not apply.
DIRECTOR ID REGISTRATION DEADLINE LOOMING
The new director ID regime was introduced to prevent the use of false and fraudulent director identities and to reduce unlawful activity, such as phoenix activity.
All directors who are subject to the regime will apply for a director ID once through the Australian Business Registry Services (https://www.abrs.gov.au/director-identification-number ) and keep this ID for their lifetime, regardless of whether they change companies, stop being a director or move overseas.
When an individual must apply for a director ID depends on when they become a director:
For Corporation Act directors:
| Date you become a director | Date you must apply |
| On or before 31 October 2021 | By 30 November 2022 |
| Between 1 November 2021 and 4 April 2022 | Within 28 days of appointment |
| From 5 April 2022 | Before appointment |
The ABRS has confirmed that if an individual was already a director on or before 31 October 2021 then they have until 30 November 2022 to apply, even if they become a director of another company after 31 October 2021.
For CATSI (Corporations (Aboriginal and Torres Strait Islander) Act 2006) directors:
| Date you become a director | Date you must apply |
| On or before 31 October 2022 | By 30 November 2023 |
| From 1 November 2022 | Before appointment |
If your company intends to appoint new directors, it is important to ensure that the requirements and timeframes to establish their director ID are met.
All directors of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation will need a director ID. This includes directors of a corporate trustee of self-managed super funds (SMSF). Individuals will need to obtain a director ID if they are a director or eligible officer of any of the following entities:
- A company;
- An Aboriginal and Torres Strait Islander corporation;
- A corporate trustee, for example, of a self-managed super fund;
- A charity or not-for-profit organisation that is a company or Aboriginal and Torres Strait Islander corporation;
- A registered Australian body, for example, an incorporated association that is registered with the Australian Securities and Investments Commission (ASIC) and trades outside the state or territory in which it is incorporated;
- A foreign company registered with ASIC and carrying on business in Australia (regardless of where the individual lives).
The introduction of the director ID regime is part of the Government’s Modernisation of Business Registers (MBR) Program. The MBR will unify the Australian Business Register and 31 ASIC business registers, including the register of companies. In effect, the system will create one source of truth across Government agencies for individuals and entities and will be managed by the ATO.
For those concerned about their privacy, the director ID will not be searchable by the public and will not be disclosed without the consent of the director.
FOREIGN DIRECTORS AND THE DIRECTOR ID SYSTEM
Foreign directors of Australian companies have the same requirements and deadlines as Australian resident directors, however, the verification process is only accessible in paper form.
One primary and two secondary forms of identification are required to accompany the application that have been certified by a notary public or by staff at the nearest Australian embassy, high commission or consulate, including consulates headed by Austrade honorary consuls. Primary forms of identification include a birth certificate or passport, and secondary include driver’s licence, foreign government identifier, or national photo identification card.
In the presence of the applicant, the authorised certifier must certify that each copy is a true and correct copy of the original document by sighting the original document, stamping, signing and annotating the copy of the identity document to state, ‘I have sighted the original document and certify this to be a true and correct copy of the original document sighted’. initialling each page listing their name, date of certification, phone number and position.
The form and the accompanying documents will need to be sent by mail to Australian Business Registry Services using the details provided.
MAKING IT EASIER TO UTILISE LOSSES
New guidance from the ATO makes it easier for a sole trader that has made a business loss as a result of floods, fires or COVID-19 to apply the loss against income from other sources.
When a sole trader makes a loss from their business activities the non-commercial loss rules prevent the loss from being applied against income from other sources unless certain conditions are satisfied. If the taxpayer is not able to pass the ‘normal’ tests to utilise their business losses against other income there is an opportunity to seek the Commissioner’s discretion to enable the losses to be used.
One of the situations where an individual can seek the Commissioner’s discretion on the use of their tax losses is where the business activity was affected by special circumstances that were outside the control of the operators of the business.
In recent years, special circumstances such as flood, bushfire and COVID-19 may have led to individuals generating losses from their business activities and might have made it difficult for the individual to pass the non-commercial loss rules. A draft ATO guideline sets out a safe harbour position which allows taxpayers to utilise the losses as if the Commissioner had exercised discretion without needing to apply for this. The ATO intends that the safe harbour approach will apply for the 2020, 2021 and 2022 income years.
To qualify for the safe harbour, a business must meet all of the following conditions:
- Have adjusted taxable income of less than $250,000;
- Make a loss from the business activity;
- The business activity was affected by one or more of the following events:
- Flood (including where receiving ATO flood support);
- Bushfire (including where the business qualified for an ATO bushfire lodgment and payment deferral); or
- A government-imposed lockdown, business closure and/or restriction due to COVID-19;
- The relevant event meant that the taxpayer was not able to carry on the business activity, or unable to carry it on to the same scale as was usual, or some or all of the customers of the business were not able to access the business activity, or access it in the same way as usual;
- Have not applied for a private ruling requesting the Commissioner exercise the ‘special circumstances’ discretion in relation to your business activity in the relevant income year; and
- The taxpayer has evidence to support that they are eligible for the safe harbour.
If you are not able to rely on the safe harbour approach, you can still potentially apply to the Commissioner to seek discretion in connection with the use of business losses against other income.
TEMPORARY LOSS CARY BACK FOR COMPANIES
Temporary loss carry back rules allow companies that have tax losses in the 2020, 2021, 2022 or 2023 income years to offset the losses against taxable profits made in the 2019, 2020, 2021 or 2022 income years.
This relief is provided in the form of a refundable tax offset that is claimed in the company tax return when it is lodged. To utilise the offset, the tax lodgements for the last 5 years need to be up to date.
The loss carry back rules are optional and a number of conditions need to be satisfied. If this is relevant to your company, we will discuss with you whether to claim the prior year losses or carry them forward to future years and the implications of the decisions.
The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.