Employee or contractor? That is the question.
Advice from our Geelong bookkeepers about how the ATO views your subcontractors and the expensive audits that come along with it.
Charlie is a plumber in Geelong, who has been working here and down the Surf Coast for years. He now has five guys working with him that he pays every week, but one of his guys, Tommy, is only keen to work three days a week, so the question arises, is Tommy still a subcontractor, or isn’t he?
The drama started with a call from the ATO stating that Charlie was about to be audited – and just before Christmas. What a nightmare for him!
When Charlie first engaged Diligence Bookkeeping to look after the bookkeeping needs of his business, a full filing and records audit was conducted and the last seven years worth of records were put in order as a part of the Diligence Bookkeeping service, as requested by Charlie.
He was very smart to have had this done, because when he called us to say the ATO wanted to audit him, it was pretty straightforward, even though they wanted wage records, super payment records and more, all the way back to 2012. The ATO also asked for the lists of contractors that he had engaged, for as far back as 2012, including an invoice from each, their ABN, address and contact details.
What the ATO was looking for was whether Charlie was actually correctly subcontracting, or whether he was dodging his employer obligations by subcontracting instead.
In the end over 70 contractor invoices were provided from the past four years, all were complete with all the correct details. However, there were a few contractors who did not send through tax invoices, even though Charlie had paid them.
One missing invoice was from Tommy, the three-day-a-week cruiser. As a part of the generosity shown to Tommy, Charlie always paid superannuation into Tommy’s super fund account, with a view to covering a potential liability he had heard about where a subcontractor should get their super paid if they don’t work for many other contractors during the year.
So what happened with the audit?
The outcome went as follows:
- The subcontractors who hadn’t provided invoices that included an ABN will be getting contacted by the ATO for their own audits. They should always have quoted their ABN and are likely to face strict penalties for avoiding the tax that comes with this. Also, if they wish to work for Charlie again he has to withhold 49 percent of the payment until he is provided with an invoice that includes an ABN. It is also the responsibility of Charlie to ensure the ABN is valid by searching it out on the ABN Lookup website.
- Tommy was assessed by the ATO as an employee and now Charlie has to pay sick pay, holiday pay and superannuation for his slackest guy. Why? Because Tommy’s payments were almost always the same amount, they happened weekly, he got super paid by Charlie, he didn’t often give quotes for jobs, and his invoices rarely if ever included materials. Even his business marketing was shoddy – no Facebook, website, yellow pages, nothing. So when the ATO looks at it, it all says one thing.. Tommy is not running a business he is an employee.
Charlie got lucky this time as no penalties were imposed, but he was staring down the barrel of back-pay and “entitlements” for Tommy as well as being held responsible for “failure to withhold PAYG (as you would for an employee).”
What is there to learn from this..?
- Simply put, the outcome is not yet over. The ATO now will audit Charlie next year again to ensure that he has adhered to the rules set out in their findings.
- Tommy will now have to re-structure his tax and personal affairs to conform to the new payment methodology (to get the deductions as he used to get when he was a subcontractor – otherwise he will pay far more tax).
- Charlie will have to document and provide evidence for all new subcontractors and be very mindful of how this can affect his standing at the ATO.
- Charlie will also need to take advantage of the “attach file” feature of the Xero accounting software he uses. By attaching the quotes, invoices and the ABN searches for all new subcontractors, he ensures that he is able to provide documentary evidence in next year’s audit and that he is operating within the guidelines set out by the ATO, and thus he can have a very very merry Christmas in 2016, rather than the stressful and messy one he had last year.
- Recordkeeping and bookkeeping can be easily done and kept up to date when it is systematic and prepared with an eye on the potential questions that may be posed by the regulators (the ATO and other industry, professional and statutory bodies).
- Filing systems that are basic and stored online can alleviate the old boxes of paperwork and create an effective and efficient compliance management process with very little extra cost.
The final lesson to be learnt here is to talk to your tax agent, bookkeeper or accountant early to avoid being caught out some time in the future when you least expect it.