Posted on June 16, 2020 by Tashia Jayasekera
The classification between employee or contractor affects your tax, super obligations and could even bring about penalties if you get it wrong. It comes down to asking the right questions and weighing up the circumstances of your working arrangement.
What is the difference between an employee and a contractor?
The table below outlines some of the main factors that can help you determine whether a worker is an employee or a contractor. These factors should be taken together as no one feature will guarantee that a worker is an employee.
Are any workers always employees?
Any of the following types of workers are always treated as employees:
- Trades assistants
Apprentices and trainees can be full-time, part-time or school-based. They usually have a formal training agreement in place with the business they work for and are paid under an award and receive specific pay and conditions. The work arrangements for trainees and apprentices is always employment and you must meet the same tax and super obligations as you do for any other employees of your business.
Are any workers always contractors?
An employee must be a person. If you have hired a company, trust or partnership to do the work then it will be a contracting relationship.
What about labour hire arrangements?
If you have obtained a worker through a labour hire firm and pay that firm for the work performed at your business, then your business has a contract with the labour hire firm. The labour hire firm will be responsible for that worker’s PAYG withholding, super and Fringe Benefits Tax (FBT) obligations.
What are the tax and super obligations for an employee vs a contractor?
If your worker is an employee, you will need to:
- Withhold tax (PAYG withholding) from their wages and report this to the ATO
- Pay super at least quarterly to eligible employees
- Report and pay FBT if you provide your employee with fringe benefits
If your worker is a contractor:
- You do not need to withhold tax from their payments unless they don’t quote their ABN to you or you have a voluntary agreement in place with them
- You may still have to pay super for individual contractors if the contract is principally for their labour
- You do not have FBT obligations
What are the penalties for getting it wrong?
It is the against the law for a business to incorrectly treat their employees as contractors. Businesses that do this lower their labour costs by avoiding their tax and super obligations and denying workers their employee entitlements.
Some of the penalties and charges include:
- PAYG withholding penalty – for failing to deduct tax from worker payments
- Super guarantee shortfall amounts – the amount of super obligations that should have been paid to a complying super fund
- Interest charges
- Administration fees
- An additional super guarantee charge of up to 200%
If you have any questions about the employment or contracting relationship with any of your workers, please contact one of our Team on (08) 9316 7000.
Posted on June 17, 2020 by Ida Bourmann
Q: If my assets are transferred to my beneficiaries once I pass away, do I or my beneficiaries have to pay capital gains tax on that transfer of ownership?
A: Death does not in itself constitute a disposal for capital gains tax purposes even though there is clearly a change in ownership of the assets as they pass from the deceased to the executor ( of the deceased estate) and ultimately to the beneficiary. That is, death will not cause a capital gains tax liability to arise.
Section 128-15 of the Income Tax Assessment Act 1997 provides the particular rules by which a beneficiary or executor will acquire any asset for the purposes of calculating any subsequent capital gains tax that may arise through a future sale or other disposal by that person. This section recognises two types of assets from the perspective of the deceased:
- Pre-CGT assets and
- Post-CGT assets
It’s important for the beneficiary/executor to understand what type of asset (Pre or Post CGT) they have received from the deceased estate as it changes the CGT liability payable on the asset if the beneficiary/executor chooses to sell/dispose of the asset in the future.
Q: I have accumulated carried-forward capital losses over the years – can’t my beneficiary/s just use this to offset any capital gain in the future?
A: Unfortunately, capital losses die with the taxpayer. If the deceased had any unapplied net capital losses when they died, these cannot be passed on to the beneficiary or executor. A realised capital loss of the deceased cannot:
- Be used in the first return of the estate to offset any gain made by the deceased estate;
- Be passed on to beneficiaries; or
- Offset other income for the period 1 July to the date of death.
Losses can only be used against capital gains made on CGT assets prior to death.
Q: What is a Pre-CGT asset and a Post-CGT asset?
A: Capital Gains Tax is a piece of tax legislation that was introduced on 19 September 1985. A Pre-CGT asset is an asset that was acquired prior to 19 September 1985 and therefore the new CGT laws did not apply to it. Subsequently, a Post-CGT asset is an asset that was acquired after 19 September 1985.
Example: An asset, such as a house, that was purchased before 19 September 1985 (Pre-CGT asset) and then sold many years later in 2015 would more than likely result in a hefty capital gain. However, because the asset was Pre-CGT, NIL CGT was payable on the proceeds.
Q: I have a Pre-CGT asset. Does that mean that my beneficiary doesn’t have to pay CGT on that asset if they dispose/sell that asset in the future?
A: In the majority of cases however the sale of assets post-death by the executor or beneficiary will result in the triggering of a capital gains tax event in the next generation in the usual manner. The efficient estate tax planning issues adopted by a will-maker now may greatly impact upon the tax paid by their children/beneficiaries in the future.
From the above brief analysis it can be seen that there is an easy way to avoid capital gains tax: never sell, gift or otherwise dispose of capital gains taxable assets apart from through the will, simply continue to gift assets from one generation to the next. This observation may be correct, it is however, impractical.
It is more important to recognise that the design of the capital gains tax will shift the tax liability to the next generation and within one lifetime all assets in Australia will become subject to capital gains tax.
How? When a Pre-CGT asset is transferred to a beneficiary, the executor or beneficiary of the estate is deemed to have acquired the asset on the deceased’s date of death for the market value of the asset on the date of death. Thus, the Pre-CGT asset is transferred into a Post-CGT asset at the date of death.
Where the asset was Post-CGT, the executor or beneficiary of the estate will receive that asset with the same capital gains tax cost base as that held by the deceased. In other words, it would be as though the executor or beneficiary who has subsequently sold the asset and crystallised any capital gains tax liability, had held it from the date it was first acquired by the deceased.
Should you have any queries regarding the above information, please do not hesitate to contact us on (08) 9316 7000.