Contractors and employees – Beyond the common law distinction

It is so important for employers/principals to get the distinction between employee and contractor correct. Misclassifying a worker can have severe consequences, not least because if you get it wrong for one area (e.g. PAYG withholding) it is likely that you will be wrong for another (e.g. super guarantee or payroll tax).

However, each area of the law is a little different and it is important to look at each separately. That is what this article is about – a very brief look at the different and/or expanded definition of employee (compared to the common law meaning) under different state and federal taxes.

Starting Position – The Ordinary Meaning (Common Law Definition) of Employee

The key question is – is it a contract of services or a contract for services? The key factors to consider are;

Control Own account Results
Delegation Risk Tools
Business expenses Uniform Other

These questions have been considered in numerous cases. However I would like to focus on other areas in this article.

PAYG Withholding

PAYG withholding obligations extend to;

  • Directors fees
  • Payments to members of parliament, the defence or police forces
  • Payments to religious practitioners
  • Return to work payments
  • Payments covered by voluntary agreements to withhold
  • Payments to labour hire firms

If you’d like to go straight to the source and see the complete list, refer to Subdiv 12-B of Schedule 1 to the Taxation Administration Act 1953.

Superannuation Guarantee

The expanded definition of employee for SGC purposes, found in section 12 of the SGAA 1992 expands the definition of employee to

  • Directors
  • Members of parliament, local councils, the police or defence forces
  • Performing artists
  • A person who works under a contract that is wholly or principally for their labour
    • Renumerated (wholly or principally) for their personal labour and skills
    • Must perform the work personally (cannot delegate)
    • Is not paid to achieve a result

Paragraph 15 of SGR 2005/1 (SGR is a superannuation ruling issued by the ATO) states “where an individual performs a work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party, either at common law or under the extended definition of employee”.

However, this isn’t necessarily the end of the matter. For example, in Roy Morgan Research some of the contractors were engaged through an interposed entity. This didn’t stop the court from determining that SG did apply to the workers. Another example is the AAT case of SR & K Hall Family Trust v FC of T.

The key issue is whether the business is engaging the individual or the interposed entity . If it is truly the individual that is being engaged then the fact that the payments are directed to the interposed entity may not be sufficient to prevent SG obligations from arising.

Payroll Tax (Victoria)

There are provisions in state and territory legislation which deem payments to certain contractors to be liable for payroll tax. Generally, the aim is to impose payroll tax where a contractor works exclusively or primarily for one business and the contract is for their labour.

In Victoria section 34 of the Payroll Tax Act 2007 says that a person who performs work under a ‘relevant contract’ is taken to be an employee. Section 32 defines relevant contracts widely. It includes a contract where a person, in the course of carrying on a business, supplies services for or in relation to the performance of work. However, there are numerous exceptions such as;

  1. Where the supply of services are ancillary to the supply of goods
  2. Where the contractor ordinarily provides the same services to the public generally and   the services are not ordinarily required by the payer
  3. Where the services are ordinarily required for less than 180 days
  4. The services are provided for 90 days or less
  5. The Commissioner is satisfied that the services are performed by a person who ordinarily performs services of that kind to the public generally in that financial year.

Where an agreement is made with an interposed entity and the effect of the arrangement is to reduce or avoid payroll tax then the Commissioner has the power (in section 47) to disregard the agreement and determine that the payments made are taken to be wages.

Remember that whilst payroll tax legislation has been harmonised there are still differences between the states and these should not be forgotten.

WorkSafe (Victoria)

Remuneration includes payments made to a natural person performing work which is not part of a business conducted by the person and a person supplying services, unless an exception applies. The exceptions are very similar to the payroll tax act.

There are special rules dealing with particular industries e.g. owner drivers, outworkers, municipal councillors, jockeys, taxi drivers, door to door salespeople, timber contractors, students on work experience, parliamentarians, judges and religious leaders.

FBT

For FBT to apply benefits must be provided to an employee or their associate. FBT does not have its own definition of employee, it refers you to the PAYG withholding rules.

ABN/GST

Employees are not eligible for an ABN but independent contractors are. However, just because a worker has an ABN doesn’t mean they are an independent contractors.

Employees cannot be registered for GST but independent contractors may be.

Want to go deeper?

ATO/SRO guidance

Recent and important cases

  • ACE Insurance Ltd v Trifunovski [2013] FCAFC
  • Dominic B Fishing Pty Ltd v Commissioner of Taxation [2014] AATA 205
  • FC of T v De Luxe Red and Yellow Cabs Co-Operative [1998] FCAFC
  • Floorplan Pty Ltd v Commissioner of Taxation [2013] AATA 637
  • Hollis v Vabu [20001] HCA 44
  • On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366
  • Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52
  • Xvqy v Commissioner of Taxation [2014] AATA 319
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What expatriate employees should consider salary-sacrificing

A number of my clients have brought over employees from overseas. They want to know if there is anything they can do to pay these employees in a tax-effective manner.

Since October 2012 it has been far more difficult for these employees to be paid a living away from home allowance in a tax-effective manner. This is because, in order to access favourable tax treatment, the employee must now, amongst other requirements, maintain a home in Australia at which they usually reside.

However there are still a number of other tax-effective benefits that such employees can receive. This article will outline some of these benefits which an employer could consider providing.

EXEMPT BENEFITS

Relocation consultant costs

A relocation consultant may provide services such as obtaining removalist quotes, finding accommodation, negotiating leases, providing information about transportation to the new location and providing information about education and community services at the new location.

The costs of such a consultant would be exempt from FBT if they were incurred solely because the employee is relocating, whether temporarily or permanently, their place of residence in order to perform their employment duties

Removal and/or storage of household effects

This exemption covers transport, packing, unpacking and insurance of tangible personal property.

To be exempt from FBT, the costs must occur within 12 months of commencing duties at the new place of employment and must arise solely because the employee is relocating, whether temporarily or permanently, their place of residence in order to perform their employment duties.

Sale or acquisition of dwelling as a result of relocation

This exemption covers things like stamp duty, advertising, legal fees, agent’s services, discharge of a mortgage, borrowing expenses and other similar matters. However it would not include loan repayments, loan service fees, insurance or rates.

To be exempt, the sale of the old dwelling must be within two years of the employee commencing duties and the purchase of the new dwelling must be within four years. Furthermore, the costs must arise solely because the employee is required to change their usual place of residence to perform employment duties.

Connection or re-connection of certain utilities

This covers connection and re-connection of telephone and re-connection of gas or electricity.

These costs must be incurred within 12 months of the employee changing their residence. Furthermore, they must be incurred solely because the employee is required to live away from home or change their usual place of residence in order to perform their employment duties

Relocation transport

This exemption covers transport incurred solely because the employee is required to live away from their usual place of residence to perform their employment duties. It also extends to meals and accommodation on the journey (e.g. stopovers) as well as accident insurance, airport or departure taxes, passenger movement charge, a passport, a visa or a vaccination or any similar matter such as residency application costs and immigration agent fees.

This exemption can be very broad. It covers both the trip to Australia and the return journey. It would also cover a trip to visit Australia in order to find suitable accommodation before the secondment and/or a visit back to the employee’s usual residence to arrange the removal of tenants, making repairs or having utilities reconnected before the employee returns.

Compassionate travel

This exemption is for employees who, unfortunately, have a close relative (a parent, parent-in-law, spouse or child) who is seriously ill or has passed away. The transport, as well as meals and accommodation on the journey, incurred solely because to visit the relative or attend their funeral is exempt from FBT. The exemption applies to employees who are travelling or living away from home in the course of performing their employment duties.

BENEFITS ELIGIBLE FOR A REDUCTION IN TAXABLE VALUE (i.e. LESS FBT WILL BE PAYABLE)

‘Overseas employees’

The following two concessions apply only to overseas employees. This is a defined term that includes somebody whose usual place of residence is outside of Australia but is temporarily posted to Australia for work. It could also include Australian employees posted overseas. In order to access the concessions the overseas posting must be for a period of not less than 28 days

Crucially the benefits are only subject to a reduction in taxable value where they are either;

  • Provided under an industrial agreement i.e. a registered Australian workplace agreement, an award or legislation or
  • It is customary in the employer’s industry to provide the same kind of benefit in similar circumstances. The ATO’s view is that such benefits do not need to be provided to a majority of employees in the industry but nor can it be ‘rare or unusual’.

Holiday transport for overseas employees

This exemption covers transport to the holiday destination, as well as accommodation and meals on route, for the employee, their spouse and children. It also covers accident insurance, airport or departure taxes, passport costs, visa fees, vaccinations or other similar costs in connection with the transport.

Other requirements include; the employee must be on holiday and not performing their employment duties and the holiday must be for three or more days. Note also that remote area holiday transport falls under a different provision.

If the travel is the most direct practicable route between the overseas employment place and the employee’s home country then the taxable value is reduced by 50%. If the travel does not meet the above conditions (e.g. it is not a trip home) then it is reduced by the lesser of 50% and the benchmark travel amount – broadly the usual cost of return travel between the overseas employment place and the employee’s usual place of residence (e.g. a return economy air fare).

Education of children of ‘overseas employees’

This includes school, college or university fees, additional tuition costs and other costs (e.g. a car fringe benefit) that are in respect of the full-time education of the employee’s child. The child must be under 25 years and if the the benefit is a property (e.g. a computer) or residual fringe benefit it must be solely for their education.

The taxable value is reduced to the extent that it relates to the period of the overseas posting or the academic period.

Like the exemption for holiday transport the education of children must be provided under an industrial agreement or is customary in the industry.

Temporary accommodation relating to relocation and temporary accommodation meals

This covers temporary accommodation and leasing of furniture and household goods in relation to such accommodation. Temporary accommodation may be a hotel, motel or guesthouse. It must be paid solely because the employee is required to change their usual place of residence to perform their employment duties

The temporary accommodation can be at the former locality because the employee’s home becomes unavailable or unsuitable (e.g. due to furniture removal, storage or other arrangements). In this case the taxable value is reduced to extent that it is attributable to the 21 day period leading up to the employee commencing work at the new locality

The temporary accommodation can also be at the new locality. To be eligible the employee must commence sustained and reasonable efforts to find long-term accommodation as soon as reasonably practicable. A reduction in taxable value is not available if the employee does not occupy a long-term home within four months of commencing work or does not give their employer a declaration that they are making sustained and reasonable efforts to purchase or lease long-term accommodation

Meals consumed at time when employee and their family were in temporary accommodation are only subject to FBT on the first $2 of each meal (adults and children 12 or over) or the first $1 (children under 12).

Disclaimer

This article is intended to be a general introduction to the topic for information purposes only. It does not constitute advice. I strongly urge you to seek professional advice that is tailored to your personal circumstances.

A Beginner’s Introduction to Superannuation in Australia

Superannuation is a way to save for retirement. Money is contributed to a superannuation fund (fund), either by a member of the fund or their employer. The fund then invests these contributions and, hopefully, the balance of the fund’s assets accumulates over time. Once a fund member retires or reaches a certain age they can access this money without incurring penalties.

Employer Contributions

Employers are required to contribute 9.5% of an employee’s salary into the employee’s nominated fund. This is known as Superannuation Guarantee (SG). These contributions are taxed in the fund at the rate of 15%, rather than in the employee’s own name at their personal tax rate. Employers are entitled to claim a tax-deduction for these contributions.

An employee may agree to sacrifice additional amounts of salary in order to receive greater superannuation contributions. To be effective, the agreement should be entered into before the employee’s services are provided.

Personal Contributions

A fund member may contribute their own money to their superannuation fund. In certain cases they will be entitled to a tax-deduction for the contribution. Broadly, a deduction is available to people who receive less than 10% of their income from employment activities. Examples of such people are the self-employed and those who receive more than 90% of their income from investments.

If the member is between 65 and 75 years of age they must be gainfully employed on at least a part time basis (this is known as satisfying the ‘work-test’). Once the member is 75 or older they can no longer make personal contributions to their fund.

Contributions Caps

The maximum amount that can be contributed to superannuation in a given year depends on the type of contribution and the age of the member.

The concessional contributions cap is $30,000 or $35,000 for those aged 49 years or over on 30 June 2015. Concessional contributions are also known as before-tax contributions. Examples of concessional contributions are employer contributions (whether SG or salary-sacrifice) and personal contributions where the member is entitled to claim a tax deduction.

The non-concessional contributions cap is $180,000, regardless of the age of the member. However, under a ‘bring-forward’ rule, three years worth of caps (i.e. $540,000) may be utilised in the one income year.

These caps are indexed periodically.

Excess Contributions Tax

There may be additional tax for those who exceed their contributions caps.

If the concessional, or before-tax, contributions cap is exceeded any contributions made above the cap, along with an interest charge, is included in the member’s assessable income. Members can choose to withdraw some of their excess concessional contributions to pay the additional tax.

If the non-concessional, or after tax, contributions cap is exceeded the member can choose to withdraw the excess non-concessional contributions, plus the earnings on those contributions. The earnings are then included in the member’s assessable income. If the member does not chose to withdraw the excess contributions they will be taxed at the top marginal tax rate.

Tax in the Superfund

Generally, the income of a superannuation fund is taxed at 15%. However, after-tax (non-concessional) contributions are not subject to any further tax in the fund. Furthermore, non-complying funds and special types of income are taxed at 47%.

Withdrawing the money

Generally, super cannot be accessed (without incurring severe penalties) until the member reaches their ‘preservation age’ (between 55 and 60, depending on their date of birth). Those under 65 who have not permanently retired may only be permitted to withdraw a portion of their entitlement each year. Superannuation may also be permitted to be withdrawn in cases of sever financial hardship, compassionate grounds, family law disputes and temporary residents departing Australia.

Superannuation for those on high-incomes

An employer’s SG obligations are limited to 9.5% of $50,810 per quarter. Therefore, an employee on an annual salary of $300,000 would be entitled to contributions of $19,308 (being 9.5% of $203,240) rather than $28,500 (being 9.5% of $300,000). This ‘maximum contributions base’ is indexed annually.

Taxpayer’s on higher-income levels may also subject to an additional charge, known as Division 293 tax. Division 293 tax is calculated by adding the value of before-tax (concessional) contributions to the taxpayer’s income. The portion of contributions above a $300,000 threshold is subject to 15% tax, in addition to the tax that applies to the superannuation fund.

Superannuation for those on low-incomes

Individuals on low-incomes may be eligible for a government contribution to help them boost their superannuation savings.

Those earning $37,000 or less may receive a low Income superannuation contribution (LISC) of up to $500 directly into their superannuation fund.

Those earning $50,454 or less may receive a government co-contribution. The federal government will add 50c to every dollar of after-tax (non-concessional) contributions made to the fund, up to a maximum amount of $500.

Disclaimer

This information is intended to be an introductory guide for general information purposes only. It does not constitute advice. Readers are strongly advised to seek professional advice that is tailored to their particular circumstances.

The Employee Share Scheme rules have changed. Should you be taking advantage of the new concessions?

Recruiting and retaining high-quality staff is essential to the success of almost any business. Research suggests that companies in which employees have an ownership interest are more productive than those that do not. In this article I ask – do the new employee share scheme rules provide an opportunity for the savvy employer?

Background

An ESS is a scheme under which shares, stapled securities or rights (e.g. options) to acquire them (ESS interests) in a company are provided to an employee or their associate in relation to the employee’s employment. If these ESS interests are provided at a discount to market value the discount is taxable in the hands of the employee.

Recently the laws surrounding the taxation of ESS interests have changed. These changes apply to ESS interests acquired on or after 1 July 2015. The intention of the new law is to make employee share schemes easier, cheaper and more attractive and by doing so;

  • Facilitate better alignment of interests between employers and their employees, thereby leading to more productive relationships, higher productivity and reduced staff turnover.
  • Allow Australian businesses to be more competitive in recruiting and retaining talented employees in the international labour market and
  • Stimulate the growth of start-ups (which are often cash-strapped)

As an employer, now is a good time to consider whether an employee share scheme should be part of your organisation’s remuneration mix.

The previous state of play (i.e. prior to 1 July 2015)

The default position is that the discount is assessable in full in the year that the ESS interests are granted. However, if conditions are met, one of two concessions may be available;

  • A $1,000 reduction or
  • Deferral of the taxing point.

In my experience schemes that defer the taxing point are typically the most attractive and so the remaining of the article will focus on them. Deferral will be available when all of the following apply;

  • The employee has a genuine risk of losing the interests (e.g. by failing to meet performance criteria or being required to continue employment for a certain period)
  • The scheme is made broadly available – i.e. it is available to at least 75% of Australian employees with at least three years of service
  • After acquiring the ESS interest the employee does not hold an interest in the company of more than 5%.

Note that the second requirement only applies to shares and therefore employers who wish to target key personnel are advised to issue rights (i.e. options), rather than shares.

Where such conditions are met no tax will be payable until the earliest of one of the following times;

  • When the employee ceases employment
  • When the risk of forfeiture has been removed and there are no genuine restrictions on the disposal or exercise of the interest and
  • Seven years after acquisition

What has changed?

The new legislation introduces a number of significant changes;

  • The maximum period of deferral has been extended to fifteen years
  • In the case of rights the deferred taxing point is extended, from when the right can be exercised, to when it is actually exercised
  • The maximum level of ownership has been increased to 10%
  • Access to deferred taxation will be available in a broader range of situations
  • The circumstances where employees are entitled to a refund of tax previously paid on forfeited ESS interests has been broadened
  • New valuation rules have been introduced

The additional concessions for ‘start-ups’

The new rules also introduce further concessions for small start-up companies. Both ‘small’ and ‘start-up’ are defined very broadly and many employers will qualify. Under the concession an employee does not need to include a discount on ESS interests in their assessable income if certain conditions, beyond the general conditions that apply to all ESS concessions, are satisfied;

  • The employer must be an Australian company, it, and all companies in the group, must have been incorporated for less than ten years, it must not be listed on an exchange and the combined turnover of the group must not exceed $50m.
  • The employee must hold the interests for three years or until they cease employment
  • If the scheme relates to rights, the exercise price (i.e. strike price) must be at least equal to the market value of the share at the grant date and
  • If the scheme relates to shares, it must be made broadly available (see above) and the discount cannot be more than 15%

For capital gains tax purposes shares are deemed to have been acquired for their market value and rights for the employee’s cost of acquiring them. Furthermore, the exercise price of rights will form part of the cost base of the resulting shares. When a resulting share has been sold the tax on any gain can be halved if the rights were acquired more than 12 months earlier.

New valuation rules

Calculating the assessable discount requires the employer to determine the market value of the company, possibly at multiple points in time during the year. In the case of unlisted companies this can place a prohibitive administrative burden on the employer.

The regulations to the 97 Act contain safe harbour valuation methodologies. However, these are highly complex and, having not been updated since the 1990s, are based on outdated estimates.

New valuation methodologies have recently been issued by the Commissioner. It is expected that these will be simpler and will result in the value of most options being lower than the previous regulations.

Example

Employer Pty Ltd was established on 1 July 2007. On 1 July 2015 it was not listed, had a turnover of $40m and was not part of a corporate group.

At this time Employer granted, for no consideration, 10,000 options to Bob, an important employee. In three years time, if Bob continues to work for Employer, he may exercise the options for $2 each, being the market value of a share in Employer at 1 July 2015.

On 1 July 2018, with the value of Employer’s shares being $5 each, Bob does in fact exercise all of his options. Immediately afterwards he sells the shares. Effectively, Bob has made a gain of $30,000 but he will not be taxed on this gain under the employee share scheme rules. Instead he will make a capital gain of $15,000, being half of $50,000 proceeds less an exercise price of $20,000.

Conclusion

Recent changes have made issuing ESS interests to employees more attractive, particularly for options. I would encourage all employers to consider if an employee share scheme is consistent with their overall business strategy and their strategy for retaining and recruiting key staff. If so it may be a good idea to include them in your remuneration mix.

Of course not all employee share schemes are created equal and, if you are considering implementing an employee share scheme, I recommend you contact a professional adviser for assistance in formulating the ideal scheme for your business.

Disclaimer

This post is intended to be a broad overview for information purposes only. It does not constitute advice. I urge you to seek professional advice that is tailored to your personal circumstances.

ESS

The ATO and Uber – Putting the Tax into Taxi?

Uber, and ride-sourcing services like it, have taken Australia and the world by storm. It is not surprising that the ATO wants their cut of revenue. In fact, the ATO has recently launched a ‘data-matching’ program to identify Uber drivers who haven’t complied with their tax obligations. Therefore, while some drivers may think that they can ‘drive away with no more to pay’ this is unfortunately not the case. Uber and other ride-sourcing drivers have GST and income tax obligations they must consider.

GST

The ATO’s position is that Uber drivers are providing ‘taxi travel’ services. This means that, if their activities are done ‘in the form of a business’, they will need to register for GST, regardless of the amount of income they earn. This puts Uber drivers in a different position to, say, Airbnb hosts who must only register for GST if their income exceeds $75,000. Only those Uber drivers who operate very infrequently or in a non-commercial manner may escape this requirement to register.

From 1 August 2015 driver’s must:

  • Apply for an Australian Business Number (ABN). On the application driver’s should choose category 46239 ‘Road Passenger Transport’ and describe their business as ‘ride-sourcing’. Note that if a driver is already registered for an ABN as a sole-trader (for example if they are an IT contractor) they should use the same ABN for their ride-sourcing activities.
  • Register for GST and
  • Lodge Business Activity Statements (BAS)

It is also strongly advisable that drivers maintain a logbook and keep records to substantiate their income and expenses.

GST must be collected on the full fare, before any Commissions are deducted. For example if the fare was $55 and Uber took $11 the driver would need to pay $5 GST.

However, credits can also be claimed to reduce the net GST payable. These credits must be reduced for any private portion of the costs incurred. For example, if a driver uses their vehicle 10% for rise-sourcing and 90% for private purposes and incurs $110 for fuel, they could only claim $1 of the $10 GST paid.

Finally, drivers must provide passengers with a tax invoice for all fares over $82.50 if requested (note that Uber may do this on the driver’s behalf)

Income Tax

The income earned from Uber, exclusive of any GST paid, is assessable and must be reported in the driver’s tax return. Uber drivers should set aside some of the money they earn to ensure that they have enough left over to pay tax at the end of the year. Uber will not do this on their behalf (nor will they pay superannuation to drivers).

Expenses incurred will be deductible but must be reduced by any private portion. Deductible costs may include commission’s paid, fuel, registration, insurance, repairs and maintenance, cleaning, mobile phone costs and parking.

What’s Next?

Uber has indicated that they will continue to fight the ATO and will take their case to the Federal Court. However, I am not optimistic about their chances of success. If I were their adviser I would be telling them that their case is weak and that the ATO are interpreting the law correctly. Their money would perhaps be better spent on convincing the government to either change the definition of taxi travel in the GST Act or repealing the requirement, in s 144-5, for suppliers of taxi travel to register, regardless of their turnover. Time will tell.

In conclusion, Uber is proving to be a nightmare for the taxi industry but with good preparation and record-keeping it doesn’t have to be a tax or administrative nightmare for its growing number of drivers.

Is the ATO correct? Is Uber? Should the law be changed? Let me know what you think.

Uber