Do we have to pay ‘subbies’ super, Work Cover?
Published: August 9, 2012 – 12:13AM
Q. We are a small civil construction company and feel like we are drowning. We’ve been in operation for more than 20 years and use sub-contractors, but with the current laws we can’t get clear answers from the tax office on who we do and don’t have to pay superannuation and Work Cover for.
We have about eight full-time staff, and the remainder are ‘subbies’ – for example concretors and plumbers on piece work. Some have their own ABN, some are Pty Ltd. The rules seem to state that if they provide labour for you 80 per cent of the time or work for you more than 90 days a year, then you have to pay their super and Work Cover.
We pay our subbies hire rates because they pay their own super, Work Cover and insurance.
Our cash flow is at breaking point, as a government contract was recently deferred and left us with no work for eight weeks. We’ve now had to take on any work we can. We don’t want to do the wrong thing but feel we are double dipping if we have to pay again for these companies and don’t really have the money to do so!
With changes in GST, reporting occupational health and safety, and clients covering their own backsides we are struggling to make money and are feeling like we need to get out. We went to a business coaching company to tweak our business, but they ended up rolling over on us for $20,000 that we’re still paying it off.
We have been given so much bad advice, so how do we keep our business going in this climate? Any advice would be appreciated.
Engaging contractors is a complex and confusing area, mainly because of the misunderstandings that prevail. This fact has not been lost on the Australian Taxation Office, the State Revenue Office and WorkSafe who all focus heavily on auditing those industries that use high volumes of contractors – ie building and construction.
A great benefit of engaging contractors is that they allow greater flexibility compared to employees, particularly in industries with highly fluctuating levels of work. However, there are still many obligations which you must be aware of including superannuation guarantee, Work Cover and payroll tax. Having a contract with the contractor stating that they are responsible for such matters doesn’t mean you don’t need to consider them.
The first thing you must satisfy if you engage a person who you treat as a contractor is that they are not in reality your employee. This is particularly relevant if the contractor is a sole trader, even if they quote an ABN.
If they work in the same way as an employee, are subject to your direct control and are not contracted to produce a specific outcome or result, you may have to treat them as your employee.
As a result, you will have to meet all employment obligations in the same way as for any employee.
If you treat a person as a contractor where they are in reality an employee, or you force a person to become a contractor, you could be liable for harsh penalties under the Commonwealth’s independent contracting legislation for sham contracting arrangements.
Generally, a person engaged through their own Pty Ltd company can’t be your employee, and this will remove such risks. So that the arrangement is not a sham, you must make sure that all contracts, payments, dealings and correspondence are with the person’s company, and not the person directly.
Regardless of whether a contractor works as a person or through a company, you may be liable for one or more of the following: superannuation guarantee, Work Cover and payroll tax.
If you engage a contractor who doesn’t work through a company, and they must do the work personally, it is highly likely that you will have an obligation to contribute superannuation on their behalf, particularly if they are paid based on a fixed-piece rate or an hourly or daily rate.
If the person works through their own company, you won’t have an obligation for superannuation guarantee. However, the same cannot be said for payroll tax or Work Cover in Victoria.
Work Cover in Victoria can apply to all contractors, including those who work through their own company, even if that company has its own Work Cover policy.
You will have an obligation if the contractor is engaged mainly for labour, one person does most of the work, and the contractor earns 80 per cent or more of its contracting income from you during the year.
While the payroll tax rules are technically different, the end result is generally the same: if the contractor provides mainly labour, one person does most of the work and the contractor works solely or mainly for you, you will have an obligation.
This will also depend on whether your total wages exceed the threshold, which in Victoria is $550,000 for the 2012/13 financial year.
As your business is in the building and construction industry, you are required to report payments to suppliers of building and construction services to the ATO. This is an annual requirement with the first report due by July 21 next year covering payments made during the 2012/13 financial year.
Given the complexity of the issue, we recommend that you seek specialist advice as mistakes are costly if not recognised and addressed.
Theo Sakell is a tax partner with Pitcher Partners accountants, auditors and advisors. His advice here is intended as guidance only.