Employees v contractors – keeping the ATO auditors happy

The ATO is increasing its audit focus on businesses that use contractors. The risk is that if the ATO concludes that individuals are employees rather than contractors, the client will be exposed to shortfalls of superannuation and PAYG. There is also the additional risk of interest and penalties.

Where the ATO has raised assessments, we have seen substantial amounts involved. This is often because the issue is systemic in the business and the assessments are made across multiple income years.

In some cases, the ATO identifies the audit target due to the industry: e.g. building and construction, cleaning, fishing. In other cases, the ATO has been tipped off by disgruntled employees.

We have resolved disputes that clients have had with the ATO on employee/contractor issues.

This has been done during the course of the audit, at objection or by successfully appealing to the Administrative Appeals Tribunal. Our client in Dominic B Fishing Pty Ltd and Commissioner of Taxation [2014] AATA 205 recently satisfied the Tribunal that the fishermen it contracted with were contractors and not employees.

The common issue that arises in these audits and disputes is the quality of the documentation.

• Is the agreement properly documented?
• Do the parties’ actions reflect the written agreement?

Often we see poor quality (or non-existent) documentation, which directly affects the client’s chances of proving it contracts with independent contractors rather than employees.

The key is to improve the quality of the documentation. We can provide assistance by drafting agreements and reviewing other documentation and processes (e.g. invoicing and payment arrangements) to maximise the prospects of satisfying the ATO that you or your client’s contractors are not employees.

Alternatively, we can help manage any audit or dispute you or your client has with the ATO.