28 July 2002
Tax and Independent Contractors working through agencies
In October 2002, the ATO released updated information on PSI impacts for independent contractors working through agencies. ICA recommends that independent contractors read and take note of this helpful information.
Background
In about August 2002, the ATO released an information sheet on their Website explaining the PSI implications for independent contractors working through agencies/labour hire companies. The issue is of particular interest to IT contractors because of the heavy use of agencies in the IT industry.
ICA was highly critical of the ATO information, stating that it was ‘ATO spin doctoring’ and, in effect, misleading. We believed that we needed to be forceful in stating our opinion because (in our view) the information did not accord with the Personal Services Income legislation.
Following the release of ICA’s view, we found ourselves in discussion with the ATO on this issue.These discussions and exchanges of opinion were highly professional and focused on the facts. We thank the ATO for the opportunity to put our views as part of its review of the information. Further, for an organisation that is frequently criticised, in this instance the ATO was very ready to review its information. For independent contractors this is a welcome and constructive development.
The Outcome
The ATO information is a reasonably accessible layperson’s explanation of fairly complex tax legislation. In essence, it states that
- if an independent contractor passes the ‘results’ test when working through an agency, they pass PSI.
- if a person fails the results test, they can apply the 80/20 test to see if they pass PSI.
- if the 80/20 test is failed, application can be made to the ATO.
Of particular help is that the information gives examples of where persons would pass or fail the PSI tests under labour hire. This gives practical assistance to people who are trying to fathom their personal circumstances.
Some general perspectives on ‘agency’ tax facts. What do independent contractors do?
ICA’s experience is that many policy-makers are confused by agency arrangements. However, agencies fall into a small number of alternative models. Independent contractors should check with their agency to ascertain which model is being applied. Sometimes, several models apply through any given agency.
- Employment agency: The contract you have with the agency is employment. (Contract of service). Because you are an employee of the agency you automatically fail PSI.
- Employment agent: The agency that pays you is an ‘agent’ of the user of your services and you are employed by the user. (Contract of service). Because you are an employee of the user of your services, you automatically fail PSI.
- Recruitment agency: The agency recruits you and you become either a direct employee of, or independent contractor to, the user of your services. If you are an employee of the user of your services, you automatically fail PSI. If you are an independent contractor (contract for services), you are eligible to apply the results (or other) tests to pass PSI.
- Independent contractor agency: This is described under the labour hire PAYG (click here arrangements of the ATO. Because you are an independent contractor (contract for services), you are eligible to apply the results (or other tests) to pass PSI.
When you check with an agency you will generally find that:
Independent contractor agencies are clear on their ‘contract for services’ arrangements and can give you information on this.
Recruitment agencies are clear that they recruit for clients. You need to determine the nature of the contract before you are employed or engaged as an independent contractor to ensure the contract type reflects your intent.
Employment agencies/agents will sometimes supply confusing answers as to the nature of the contract. They can use the language of ‘contract’, but in fact mean employment contracts. You need to ensure that you receive clear evidence of the contract arrangements.
Salary packaging. Some agencies refer to themselves as ‘salary packaging’ agencies. With these agencies it is critical to verify with whom you have your contract/s and whether the contract is employment or independent contracting. If the agency is not clear, this must raise potential tax issues regarding the salary packaging arrangements, because salary packaging is likely to have different structures and outcomes for employment and independent contracting. Employment salary packaging does not have business-tax arrangements. Independent contractor ‘salary packaging’ may have business-tax arrangements.
What difference does having business-tax status make to my tax?
The answer to this question will depend on your individual circumstances. However, the major tax deduction items the ATO indicates you are denied if you fail to achieve business tax status under PSI are:
1) The capacity to claim rent, mortgage interest, rates or land tax for your home that is a place of business.
2) The capacity to claim more than one car that is used partly or solely for private purposes.
3) The capacity to claim reasonable amounts (including superannuation contributions) paid to an associate (or fund on behalf of an associate) for the associate doing solely non-principal work.
Make sure you check directly with the ATO and/or your accountant.