The ATO still finds that there are several assumptions adopted by both workers and employers when determining the tax status of a job appointment, and that employers continually rely on some inaccurate factors when working out whether a worker is an “employee” or “contractor”. Getting that assessment wrong can have significant tax consequences for employers’ tax and super obligations.
To separate fact from fiction, here are a few of the common myths the ATO says can often get both businesses and workers into hot water.
Having an Australian Business Number (ABN)
Myth: If a worker has an ABN they are a contractor.
Fact: Just because a worker has an ABN does not mean they will be a contractor for every job. Whether the worker has or quotes an ABN makes no difference and will not change the worker into a contractor. To determine whether a worker is one or the other, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.
Myth: If a worker submits an invoice for their work, they are a contractor.
Fact: Submitting an invoice for work done or being “paid on invoice” does not automatically make a worker a contractor. It is necessary to examine the specific terms and conditions under which the work is performed. If based on the working arrangement that a worker is an employee, submitting an invoice or being paid on the basis of an invoice will not change the worker into a contractor.
The 80% rule
Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.
Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and how a contractor:
· reports their income in their own tax return, and
· determines if they can claim some business-like deductions.
It is not a factor a business should consider when they determine whether a worker is an employee or contractor.
Registered business name
Myth: If a worker has a registered business name, they are a contractor.
Fact: Having a registered business name makes no difference to whether a worker should be an employee or contractor for a particular job. Just because a worker has registered their business name does not mean they will be a contractor for every job or working arrangement.
Myth: “My business should only take on contractors so we do not have to worry about super.”
Fact: A business may in fact be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the labour of the person, you have to pay super contributions for them.
Myth: Employees cannot be used for short jobs or to get extra work done during busy periods.
Fact: The length of a job (short or long duration) or regularity of work makes no difference to whether a worker is an employee or contractor. Both can be used for the following:
· casual, temporary, on call and infrequent work
· busy periods, or
· short jobs, specific tasks and projects.
To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.
Contracting on different jobs
Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.
Fact: If a worker is a contractor for one job, it does not guarantee they will be a contractor for every job. The terms and conditions under which the work is performed will determine whether a worker is an employee or contractor for each job.
Depending on the working arrangement, a worker could be an:
· employee for one job and a contractor for the next engagement, or
· employee and a contractor — if completing two jobs at the same time for different businesses.
Specialist skills or qualifications
Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.
Fact: If a business takes on a worker for their specific skills it does not automatically mean they are a contractor. A worker with specialist skills or qualifications can either be an employee or contractor depending on the terms and conditions under which the work is performed. Qualifications or the level of skill a worker has (including whether they are “blue” or “white” collar) makes no difference to whether a worker is an employee or contractor.
Past use of contractors
Myth: “My business has always used contractors, so we do not need to check whether new workers are employees or contractors.”
Fact: Before engaging a new worker (and entering into any agreement or contract), a business should always check whether the worker is an employee or contractor by examining the working arrangement.
Unless a working arrangement (including the specific terms and conditions under which the work is performed) are identical, it could change the outcome of whether the worker is an employee or contractor.
Sometimes a business may also have incorrectly determined their worker is a contractor. Continuing to rely on the original decision would mean the business is incorrectly treating all future workers as contractors when they are employees.
It is common industry practice
Myth: “Everyone in my industry takes on workers as contractors, so my business should too.”
Fact: Just because “everyone” in an industry uses contractors does not mean they have correctly worked out the decision. Do not consider common industry practice when determining whether work is undertaken as an employee or contractor.
The ATO usually views expenses associated with a person’s home as those of a private nature. But if you produce your income at home, or some of it, and incur expenses from using your home as your “office” or “workshop”, you will generally be able to claim certain expenses as deductions.
Tax deductions are available from the use of your home to earn income in two circumstances. First, if your home is used in connection with your income earning activities but isn’t a place of business (that is, your home is not your principal place of business, but you might do a few hours of work there).
The second situation in which you can claim a tax deduction is when the home is being used as a place of business. The tax implications are different depending on which of these circumstances applies.
In broad terms, expenses fall into the following categories — running expenses, occupancy expenses, and depreciation on equipment.
You can generally view running expenses as those costs that result from you using facilities in your home to help run the business or home office. These would include electricity, gas, phone bills and perhaps cleaning costs. But again you can only claim a deduction for the amount of usage from the business or home office, not general household expenses.
Using your floor area may be an appropriate way of working out some running expenses. If the floor area of your home office or workshop is 10% of the total area of your home, you can claim 10% of heating costs. An alternative can be to compare before and after average usage for each cost. Another possibility is to keep a representative four-week diary to work out a pattern of use for your home work area for the entire financial year.
Instead of recording actual expenses for heating, cooling or lighting, you may be able to claim a deduction of 34 cents per hour based on actual use or an established pattern of use. This rate is based on average energy costs used in home work areas.
If you use a phone exclusively for business, you can claim a deduction for the phone rental and calls, but not the cost of installing the phone. If you use a phone for both business and private calls, you can claim a deduction for business calls and part of the rental costs.
You can identify business calls from an itemised phone account. If you do not have an itemised account, you can keep a record for a representative four-week period to work out a pattern of business calls for the entire year.
Mostly what the ATO wants to see with all of the above expenses is that an effort has been made to establish a reasonable claim, and that the private or domestic part of these expenses has been excluded. Talk to this office about what will be most appropriate to your circumstances.
Deductions for occupancy
Occupancy expenses are those expenses you pay to own, rent or use your home, even if you are not carrying on a home-based business. Occupancy expenses typically include:
· rent, or mortgage interest
· council rates
· land taxes
· house insurance premiums.
You must pass what the ATO calls an “interest deductibility test” before you can claim occupancy expenses (ask us about this). This generally means however that the ATO expects you will have an area of your home set aside exclusively for business activities, such as an office or workshop, and that this area has “the character of a place of business” rather than simply being an office you use incidentally for income producing purposes.
You can generally claim the same percentage of occupancy expenses as the percentage area of your home that is used to make income. One common way to work this out is to use the floor area put aside for work. This is calculated as a proportion of the floor area of your home as a whole (as can be used for some running expenses, as mentioned above).
So if, for example, your home office is 10% of the total area, then you may be able to claim 10% of rent costs or mortgage interest, council rates, insurance etc. In some situations it may be necessary to adopt a basis other than floor area, for example where say a huge workshop attached to the home may take up a great amount of floor space but contribute much less to the value of the overall property.
Note that where you are running a business from home rather than having a home office you can opt to claim occupancy expenses, such as mortgage interest. However, you’ll be expected to account for any capital gains attributable to the business area of the home when you sell the house. Generally the family home is exempt from capital gains tax (CGT), but if you’ve carried on a business based on the above, that portion of the home attributable to the business activity will be subject to CGT. There are however some CGT concessions for small businesses, which we can detail for you should this be relevant to your situation.
There are also deductions available for a “decline in value” (depreciation) of items such as electrical tools, desks, computers and other electronic devices, as well as for carpets, curtains, chairs and so on.
If you use your depreciating asset solely for business purposes, you can claim a full deduction for the decline in value (generally over its “effective life”). Remember however, that if you qualify as a “small business entity” (less than $2 million a year turnover) you can immediately write off most depreciating assets that cost less than $6,500 (from the 2012-13 income year onward). You may also be able to pool most other depreciating assets and claim a deduction for them at a rate of 30% (15% for the first year of purchase).
However, if you also use the depreciating asset for non-business purposes, you must reduce the deduction for decline in value by an amount that reflects this non-business use. Talk to this office for more information about claiming depreciation expenses.