Rick Kimberley, a Director in the Global Employer Services group at Deloitte, discusses how businesses can work through the difficulties of managing contractor employment tax obligations. The discrepancies between various Revenue Authorities and the overall complexity which this entails is one of the factors amplifying the challenges in this area, he writes.
This article recaps the key aspects from Rick’s presentation on Engaging Contractors and Mitigating the Risks, at the Victorian State Taxes Conference.
It was almost 30 years ago that Justice Gray, in Re Porter, ex parte Transport Workers’ Union of Australia (1989), made the famous remark “…the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.”
Yet almost 30 years on, managing employment tax obligations with respect to contractors continues to be a major headache for employers and regulators.
So why are employment tax obligations in respect of contractors still so difficult to manage?
I believe there are two key reasons.
The first is the discrepancies between Revenue Authorities and the overall complexity which comes with this. There are a separate set of rules applied by the ATO, State Revenue Offices, and Workers Compensation authorities. With respect to workers compensation, these rules can vary widely between States and Territories.
For example, where an individual is engaged via an interposed entity, the ATO would usually not impose a superannuation guarantee, PAYG withholding or FBT obligation on the basis that only a natural person can be an employee.
For Payroll Tax however, State and Territory Revenue Offices (with the exception of WA) apply Payroll Tax to contractors via various deeming provisions (unless an exemption exists).
Further, Worksafe Victoria will apply an 80/20 rule for determining whether payments made should be included in an employer’s rateable remuneration.
The second key reason relates to the failure at the outset of the engagement to consider the fundamental question raised by Justice Gray, ‘Have you engaged a rooster or a duck?’
More often than not this stems from the internal disconnect between the various business units within an organisation who are involved in the contractor engagement process, along with their failure to communicate both the purpose of the engagement and the services that will be performed.
As a result, there is often little alignment between the contract in place, and what the worker is actually doing.
Allow me to explain.
In most organisations there are generally four or so business units involved in the engagement of a worker.
First there is the team who requires the worker. For this example let’s assume this is the Project team.
In order to fulfil the contract they have in place they reach out to the Procurement team to qualify the person with suitable skills and availability. Procurement will then reach out to the Legal team to source the appropriate contract for the worker.
The Legal team will generally have a standard ‘independent contractor’ engagement pro-forma which is passed to procurement to complete and agree with the worker. The worker is then engaged.
Following all of this, generally at year end, the Finance team will be responsible for determining, (usually after the fact), whether or not the organisation has any employment tax obligations in respect of the worker (and will be heavily reliant on what was written in the contract).
Unfortunately, this often results in an incorrect assessment and the organisation not meeting their employment tax obligations with respect to the worker.
So what can employers do?
Employers should have a formal contractor guideline in place to ensure all business units involved in the engagement of workers are on the same page and all have a firm understanding of what the worker will actually be doing for the organisation.
As part of this guideline, organisations need to incorporate a specific process to support the determination of whether the worker is a rooster or a duck, and the employment tax obligations arising. This is not just a good idea for managing your employment tax obligations correctly, but good overall tax governance. A practical way to make these determinations is through the use of decision trees for each obligation.
A formal process plan really does go a long way in managing your contractor employment tax obligations, but won’t necessary result in the correct determination every time. When in doubt, consider getting professional advice to obtain clarity on what the likely costs will be and how to ensure that obligations are met in a timely manner.
Rick Kimberley is a Director in the Global Employer Services group at Deloitte and specialises in Employment Tax and Expatriate Tax. Rick is best known for his ability to work with organisations to optimise mobility arrangements, and the provision of benefits to employees. Contact Rick at [email protected] or connect via LinkedIn
 Re Porter, ex parte Transport Workers’ Union of Australia (1989) 34 IR 179 at 184