Independent contracting can occur:
(1) Directly between an independent contractor and their client; or
(2) Can be arranged through a labour hire company.
- If handled directly, both the independent contractor and the client have to be specialists at ensuring that they get all of the indicators of independent contracting correct. There is a cost in terms of time and money to ensure that this is handled properly.
- If independent contracting is arranged through a labour hire company, the labour hire company can ensure that all the indicators are handled correctly. This is included in part of the fee that the labour hire company charge for its services.
In relation to tax, the Australian Taxation Office has made it clear that they accept either direct or labour-hire independent contracting as legitimate, and that withholding tax is required under both forms. In other words, tax must be sent to the ATO when income is earned.
The ATO has supplied clear definitions of independent contracting under the Pay As You Go system.
Extract from Australian Taxation Office Guide to Pay As You Go (PAYG) for business
Issued March 2000
‘In PAYG withholding, the term ’employee’ has the usual or common meaning of the word. In most situations it is obvious whether a worker is an employee or not.’
‘Payments under labour hire’
‘Labour hire arrangements commonly involve at least two contracts. A user of labour (the client) typically contracts with a labour hire firm for the provision of labour of a specified kind. The labour hire firm does not contract to perform the work; it merely contracts to provide labour under the direction of the client. The labour hire firm then contracts with the worker and pays the worker. The worker is not an employee of the labour hire firm or the client. There is no contract between the worker and the client.’
- If you are an employee you cannot pass the PSI legislation and achieve business tax status. Under this form of independent contractor labour hire described by the ATO it may be possible to pass PSI because no employment contract exists between any parties.
- For independent contractors working through labour hire agencies however you can self assess against the results test for PSI but you may want to check with your agency to assist with the assessment.