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Thinking about becoming a Contractor? ABNs and sham contracting

September 14, 2022by Alana Macklin0
Being a contractor offers flexibility, choice and more control over your own schedule. It also means that you have different responsibilities differing from an employee that you may have to fulfil.

For employers, knowing the difference between a contractor and an employee is a must. It can lead to costly ATO penalties if the two get confused. An independent contractor is someone who operates under an ABN and is not an employee of the company that they perform work for. They may also provide services to another person or business.

Sometimes an independent contractor may operate their own business and have many clients, in other cases the independent contractor may only do work for one company. There are a number of factors that determine whether or not you may be classified as a contractor versus an employee, that the ATO will consider. These can include:

·         How much control you have over the work you are conducting for the business – the more control you have, the more likely it is an independent contracting relationship.

·         If you are allowed to pick your own hours when you are working – employees normally have set hours in their agreement.

·         If you are running your own business and have other clients while doing the work for this particular business.

·         If you are able to delegate or subcontract the work to others in place of yourself.

·         If you are the one responsible for your work and insurances – employees are covered by their employer, contractors are responsible for organising their own.

·         If you are expected to have your own equipment prepared for the work that you will be performing – employees will be provided with the equipment that they need.

·         If you bear financial risk for your errors,  you might have to redo the work for no pay if you get it wrong.

In Australia, independent contractors can often use the sole trader business structure when operating and conducting their business. There is a legal requirement that you register an ABN for yourself if operating your business as a contractor/sole trader.

An ABN identities you and your business to the government, and helps with tax and other business-related activities. You may also consider to register a business name linked to that ABN, to assist to identify your business and differentiate you from your competitors.

Not everyone may be entitled to an ABN, especially if considered to be an employee for the work that being performed such as an apprentice, trade assistant or labourer. As a sole trader, you are considered to be starting or carrying on an enterprise which includes activities done in the form of a business.

For those who wish to contract you for your services, an ABN means that your clients will not be required to deduct tax from you. If you invoice an organisation without an active ABN, they are required by law to deduct tax at the highest rate that they can, as well as declare the income you receive from them through to the ATO.

If you’re operating as an independent contractor or sole trader, losing a chunk of your income to tax before you even get paid isn’t something that you’re likely to want to happen. That’s why having an ABN is important for you, to ensure that that doesn’t happen.

If your business is looking into creating a working relationship with a contractor, you need to be careful that you do not fall into a sham contracting arrangement.

A sham contractor arrangement is when a business (or individual) tells a worker that they are an independent contractor. It can exist even if the worker is treated like an independent contractor in some ways such as having an ABN and providing invoices like what a genuine independent contractor might have to do.

It’s illegal to be done knowingly by an employer to avoid taking fiscal responsibility for paying legal entitlements to employees. It is illegal to:

·         tell an employee they are an independent contractor

·         say something false to convince an employee to do the same work for the employer but as an independent contractor

·         dismiss or threaten to dismiss an employee if they don’t become an independent contractor, or

·         dismiss an employee and hire them as an independent contractor to do the same work.

If you are concerned that you may be involved in a sham contracting arrangement, or are an independent contractor looking for assistance in ensuring that you are remaining compliant with your current obligations when it comes to tax, super or business, we can assist. We can also assist to help you with deal with an ABN and the related obligations.

Disclaimer for External Distribution Purposes:

The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. We cannot accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

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Suite 17, 12-14 Soldiers Point Road
Soldiers Point NSW 2317
Liability limited by a scheme approved under Professional Standards Legislation.
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Engage with us on Social Media.

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