Sub-Contractor Advice

A subcontractor, or commonly also known as an Independent Contractor can operate as an individual (sole trader) or in a business type structure (company, partnership or trust).

They work with their own clients to provide goods or services, rather than working as an employee for an employer.

The difference between operating as a subcontractor and as an employee has become a quite complicated area for tax purposes.

Even when you may be calling yourself a subcontractor and operating through a company, trust or as a sole trader, the ATO may 'deem' you to be an employee.

if this is the case, the business engaging in your services may be liable for additional things such as superannuation, etc.

Accountants are aware of the ATO legislation around subcontractors/employees and personal services income (PSI).

They will be able to assist in determining if you are operating as a subcontractor, or what you need to do to ensure you meet the relevant requirements to do so.

They will be able to assist in determining if your business is a personal services business (PSB) and if your income is personal services income (PSI), in which case other ATO obligations apply.

Accountants assist in ensuring all relevant tax obligations are complied with. This may include GST registration, tax lodgements and taxable annual reports etc.

Accountants can also review your subcontractor business and make appropriate recommendations for business growth/optimal business structures etc.

There are many things to consider when becoming an independent contractor.

Some of the basics are as follows:
- Choose a business structure that best suits your requirements;
- Apply for an Australian Business Number (ABN);
- Register for GST, where required;
- Consider if you need to be registering a business name;
- Applying for relevant licences/registrations;
- Obtain relevant insurances; and
- Do you need to register anything on the Personal Property Securities Register?

Yes, you can engage a subcontractor for help!

When engaging contractors to perform work for your business, it is important to be aware of the obligations involved. Such as:
- Is the contractor an individual (sole trader) and are they a contractor or an employee?
- Would the ATO 'deem' them to be employees?
- Will you be responsible for their superannuation?
- Should you have a written Independent Contractor Agreement?
- Will you be responsible/liable for the contractor?

These are just some of the issues you should consider when engaging a contractor.

We recommend discussing these with your accountant to ensure you are complying with the ATO.

Contractors are taxed relevant to their structure and whether Personal Services Income (PSI) applies.

For example, sole traders will get taxed at the ATO marginal rate as per all individuals.

The difference is that you would not have had an employer withhold any PAYG withholding from your income already (like in an employee/employer relationship). You will therefore need to pay your own tax.

Once the ATO has been made aware of this business structure and anticipated profit (after the first year of tax return lodgement), the ATO will require you to make quarterly pre-payments towards your annual tax amount. This will be reconciled upon lodgement of the next return.

If you are trading through a company, then you are taxed at the ATO company tax rate, whereas trusts may be able to allocate profit to other entities/individuals. Again, they will be taxed accordingly.

It is important to note here, that under some circumstances, the ATO may asses you as generating personal services income (PSI). In this case, it doesn't matter what type of structure you operating in, all the income is required to be attributed to yourself, with tax payable at ATO individual marginal rates. (If this is the case, the ATO may also deny certain expenses).

Due to the complexity of this, we recommend discussing it with your accountant.

Charging GST will depend on whether you are registered for GST or not.

Under current tax legislation you must register for GST when your business has a turnover of $75,000 or more. You can also choose to register for GST when your business turnover is under $75,000.

Either way, once registered it's important that you start charging the additional 10% on your invoices.