Know your responsibilities and limits!
1. Key tax responsibilities to your employees and contractors
2. Suggested replies to common tax queries from your employees and contractors
Our last newsletter discussed how you, the employer, can determine if your worker is an employee or a contractor. Once you’ve correctly identified each worker, you need to carry out these key tax and other responsibilities, where applicable:
- Establish whether an Award or Agreement applies to the employee. Ensure that all employment conditions meet the minimum conditions in the Award, and the National Employment Standards. Prepare a detailed, written letter of engagement, or employment contract, which includes all key employment terms and conditions. See www.fairwork.gov.au for more information. For your Occupational Health and Safety issues see http://www.business.gov.au/BusinessTopics/Occupationalhealthandsafety/Pages/default.aspx.
- Register for Pay As You Go (PAYG) Withholding with the ATO (unless already registered).
- Give each new employee a “Tax file number declaration” (and a “Withholding declaration” if applicable), for them to complete and return to you. Complete section B and forward the original to the ATO within 14 days of your employee’s first day.
- Give each new employee (who is eligible to choose a super fund) a “Standard choice form”, and pay superannuation contributions on a quarterly basis to their nominated fund.
- Determine if any “fringe benefits” will be given to the employee. If so, register for Fringe Benefits Tax (FBT), and pay any FBT to the ATO.
- Maintain calculations of employee leave entitlements and payments, including sick leave, annual leave, and long service leave.
- Withhold correct taxes from each salary/wages payment. Report and pay this PAYG Withholding regularly to the ATO, via Business Activity Statements or Instalment Activity Statements.
- Prepare annual documents, such as the PAYG Payment Summary and the PAYG Payment Summary Statement.
- Calculate and pay any Employment Termination Payments to departing employees.
- Obtain a Workers’ Compensation Insurance Policy for all “workers”, as defined in the applicable legislation. Consider your need for other employee-related insurance policies, e.g. to cover the risk of lost revenue due to the loss/absence of a key employee.
- Determine if you are required to register for, and pay, Payroll Tax.
- Keep all necessary records in relation to the employee, including employment contracts, salary/wages records, superannuation, fringe benefits, and payroll tax.
A general principle to remember is that some of the above “employee-related” responsibilities may also apply in relation to your contractors, e.g. superannuation, insurances, payroll tax, record-keeping. This is because each Federal or State-based legislation that governs these obligations may effectively have a different definition of worker/employee/contractor than the income tax laws!
- Ensure that the contract includes all important terms and conditions about the performance of the contract.
- Pay superannuation contributions for individual contractors, where the contract is wholly or principally for labour (even if they quote an ABN to you). For more details, including a useful superannuation decision tool, see http://www.ato.gov.au/businesses/content.aspx?doc=/content/19159.htm
- Withhold correct taxes from each payment, if the contractor does not quote their ABN, or if you enter into a “Voluntary Agreement” (see below) with them.
- Include specific contractors in your Workers’ Compensation Insurance Policy, as described above.
- Keep all necessary records in relation to the contractor, including the agreement/contract, contractor invoices and payments, and superannuation.
As you can see, you have many responsibilities in relation to your workers. In addition, you might receive tax-related queries from your employees and contractors, which can often relate more to their tax issues, not yours! As most tax issues are complex, legal and/or time-consuming, it’s wise to be cautious when helping your workers with these types of queries. Here are some points to remember about some common tax queries, and some suggested replies:
1) “Can I stop being your employee, and instead become a contractor?”
Some workers are unaware of the basic differences between employees and contractors. They may not appreciate the severe penalties you might receive for classifying them incorrectly. If so, you might briefly inform your worker of these issues, and state that you are not able to treat an employee as a contractor.
If there are good commercial reasons why your worker could become a genuine contractor, you might encourage them to go to the ATO employee/contractor decision tool (http://www.ato.gov.au/content/00095062.htm), and get them to see if their proposed arrangement would lead them to be considered as a contractor for tax purposes.
2) “We’ll both benefit by making me a contractor (even though I’m still an employee)…”
Don’t be pressured by an employee to incorrectly treat them as a contractor. Both of you are at risk if that happens. Your employee is effectively asking you to make false statements to many government departments, and ultimately to steal from some of them. If you wish to promote a high standard of ethics, leadership and trust in your business, you might, if appropriate, ask your employee: “If you are willing to lie or steal for me, how do I know you mightn’t also lie to me or steal from me?”
3) “Can we enter into a voluntary (PAYG withholding) agreement?”
Contractors might ask you this question if they would like you to withhold taxes from their payments and send it to the ATO, in a similar way to your employees. For more information about voluntary agreements, see http://www.ato.gov.au/businesses/content.aspx?doc=/content/12879.htm.
The benefits of voluntary agreements are largely for the contractor, not you. If you are happy to accept the increased paperwork and responsibilities related to voluntary agreement, then feel free to make the voluntary agreement with your contractor. However, if for example you have no employees, or if you are struggling to keep up-to-date with your own business paperwork, you might prefer to not enter into a voluntary agreement, and let the contractor be fully responsible for their personal taxes like any other business.
4) “Can I claim this expense as a tax deduction?” or “How do the PSI laws relate to my income?”
We have heard of many occasions where well-meaning employers often give incorrect answers to even simple tax-related queries from their employees / contractors.