The tax risks of engaging contractors – focus on Super Guarantee & PAYG

By Ali Suleyman - October 2, 2019

Following on from our recent article looking at the Payroll Tax and Workcover risks that come with engaging contractors, this article focuses on the risks of non-compliance with Super Guarantee and pay as you go (PAYG) withholding legislation.

Read 'The tax risks of engaging contractors – focus on payroll tax & WorkCover'.

Business owners and operators need to understand their compliance obligations in relation to contractors. Non-compliance with contractor obligations can create material risk for businesses and, if not detected in time, can be costly to rectify.

While the rules can be challenging, a robust contractor management system or process could go a long way in mitigating the various risks when engaging contractors.

We have seen an increased number of audits from various revenue authorities specifically targeting compliance in respect of contractors. Driving this is access to various reporting mechanisms which provide revenue authorities with access to a large amount of data to be analysed using data matching tools to specifically target non-complying businesses.

One such reporting mechanism is the Taxable Payments Annual Report (TPAR) which is required to be lodged with the Australian Taxation Office (ATO). TPARs provide the ATO with information in relation to contractors in certain industries. For the construction, cleaning and courier industries, your TPAR should have been submitted at the end of August.

The ATO uses this information as part of its ongoing compliance program. Additionally, the ATO can share this information with other government agencies including State Revenue offices and Workcover authorities. As a result, businesses are subjected to greater scrutiny and a higher risk of detection of non-compliance than ever before.

Further information on the collection and sharing of information can be found in our earlier bulletin. 

The following are two case studies that illustrate the superannuation and PAYG withholding concerns that can often arise when engaging contractors.

Case study 1 - Superannuation Guarantee exposure

ConstructionCo primarily operates in the building and construction industry, engaging over 100 contractors per year. ConstructionCo has prepared a TPAR and lodged it with the ATO. 

The majority of the contractors engaged by ConstructionCo operate via their private structure, whether via a company, trust or partnership. However, there were 10 contractors who were individuals or sole traders engaged principally for their labour. Total payments to those contractors  amounted to $800,000 per year, averaging around $80,000 per contractor per year. These contractors have been engaged by ConstructionCo continuously for 10 years.

ConstructionCo did not make superannuation payments in relation to any of its contractors. 

The contractor information provided by ConstructionCo in the TPAR was reviewed by the ATO Superannuation Guarantee team and the entity was selected for a Superannuation Guarantee audit in relation to its contractors.

The ATO accepted that no superannuation guarantee obligations existed for ConstructionCo in respect of those contractors who operated via their company, trust or partnership.

However, the ATO determined that ConstructionCo had superannuation guarantee obligations in respect of contractors who were individuals or sole traders and who were engaged wholly or principally for their labour. The ATO decision was based on the finding that these contractors were:

  • remunerated for their personal skills;
  • required to perform work personally and had no genuine ability to delegate; and
  • paid by reference to time (e.g. hourly, daily rate) rather than for a specified result.

As a result of the ATO decision, ConstructionCo was required to lodge Superannuation Guarantee Charge (SGC) statements for late superannuation guarantee payments. The entity became liable for the SGC which is made up of superannuation guarantee shortfall, interest and an administration fee. 

An SGC statement is required to be prepared on a per individual, per quarter basis. As the contractors were engaged by the business for 10 years, the SGC statements were required from the beginning of their engagements (i.e. ConstructionCo was required to lodge 40 SGC statements in total). 

The table below provides a summary of SGC liability for ConstructionCo:

Financial Year

No. of Contractors

SGC per Employee*

Total SGC payable

FY09

10

$  15,824.49

$   158,244.93

FY10

10

$  15,064.49

$   150,644.93

FY11

10

$  14,304.49

$   143,044.93

FY12

10

$  13,543.97

$   135,439.73

FY13

10

$  12,782.41

$   127,824.11

FY14

10

$  12,022.41

$   120,224.11

FY15

10

$  11,262.41

$   112,624.11

FY16

10

$  10,501.89

$   105,018.90

FY17

10

$    9,740.33

$     97,403.29

FY18

10

$    8,980.33

$     89,803.29

Total

 

$124,027.23

$1,240,272.33

*Calculation of interest component of SGC is approximate, for demonstration purposes only.

Accordingly, ConstructionCo has a total SGC liability of $1,240,272.33 in respect of 10 contractors. 

Further compounding the above is that late payments of superannuation contributions are not deductible for income tax purposes. Pleasingly, we note a recent Bill that was introduced into Parliament which, if passed, will provide a six month amnesty period to correct any historical superannuation guarantee non-compliance.  As part of the amnesty, the penalties associated with superannuation guarantee non-compliance are proposed to be set aside (including non-deductibility of the payment).

Case study 2 - Denial of deduction - PAYG withholding

CourierCo currently engages a number of contractors. Some of the contractors operate via a company, trust or partnership. However, there are a number of contractors who are individuals or sole traders. All contractors provided CourierCo with tax invoices for their services.

CourierCo was selected for a PAYG withholding audit by the ATO.

At the conclusion of the audit, the ATO determined that CourierCo complied with its PAYG Withholding obligations in relation to contractors operating via a company, trust or partnership.

However, the ATO concluded that CourierCo did not comply with its PAYG withholding obligations in relation to the following:

  1. Contractors who did not supply a valid ABN; and
  2. Contractors who were individuals or sole traders and were found to be deemed employees under the common law tests.

Total payment to those contractors was $140,000. The ATO issued a warning to CourierCo.

The ATO advised CourierCo that from 1 July 2019, where a business fails to comply with the PAYG withholding and reporting requirements, the business would lose its ability to claim tax deductions for those payments. Accordingly, CourierCo would not be able to claim tax deductions for the contractor payments of $140,000 when completing its 2020 income tax return.

How can we help?

The risks of non-compliance with employment tax obligations can often result in a business facing an unplanned and significant liability. We can assist in identifying potential areas of risk and advise on the best way forward in order to manage and mitigate any tax shortfall and penalties.

There are several ways how we can assist, including:

  • Review any contracting arrangements that are currently in place and advise in relation to the employment taxes obligations;
  • Review the existing (or developing new) contractor management system, contractor procedures or questionnaire;
  • Advise which documentation should be collected in relation to contractors in order to substantiate various payroll tax and Workcover exemptions;
  • Ensure that the contractor payments disclosed to the ATO in the TPAR are consistent with the disclosures made to the State Revenue Offices or Workcover Authorities; and
  • Assist with contractor audits from the ATO, SRO or Workcover.

If you have any queries in relation to the above, please contact a member of our employment taxes team.


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