Maybe you’ve been asked by your employer or a prospective employer to be “employed” as a contractor rather than an employee.  Or perhaps as an employer you would like to reduce your administrative burden by using contract arrangements rather than an employment agreement.  Just what is the difference between an employee and an independent contractor and what are the implications of each for your business or you as a worker?

What is the difference between an employee and an independent contractor?

Typically, an employee performs work under the direction and control of their employer at the employers designated hours and location. They also have an expectation of ongoing work.

An independent contractor is usually engaged to complete a specific task, is paid to complete that task and has some control over when, how and by whom that task is completed. A contractor often provides their own tools and equipment, has their own ABN and will invoice for work completed.

Tax Implications

An employee has Pay As You Go (PAYG) tax deducted from their wages and is given a PAYG Payment Summary at the end of the financial year.

An independent contractor is paid a gross fee and must account for their own tax. They may also need to register for and pay GST if their annual income from their contracting activities exceeds $75,000.

Superannuation

An employee earning over $450 per month is entitled to have 9% of gross wages paid to their superannuation fund by an employer.

An independent contractor is not entitled to receive superannuation on income received. However if a contract is principally for the supply of labour, then the contractor is entitled to superannuation (unless the contractor is supplying services through a company or trust). For example, a computer expert who supplies ongoing computer consulting to one or two businesses, is principally supplying labour and would be entitled to superannuation.

Leave Entitlements

An employee, depending on their status, is entitled to paid annual leave, personal leave etc.

A contractor does not receive any paid leave.

Workcover

An employee is covered by the employer's workcover insurance policy.

The rules regarding workcover entitlements for contractors are complex:

- If a contractor is using a company or trust structure, they will NOT be covered by the workcover policy of the business they are contracting too.

- If a contractor is supplying "labour" services under their own individual name, then they may be covered by the workcover policy of the business they are contracting too - unless they are running a genuine business of supplying those services, generally to a number of different clients.

Continuing the example above, the computer expert would be included in the workcover policy of the business he is contracting too. However, if the same computer expert was supplying services to a number of businesses, he would not be covered by each individual businesses workcover policy, as he is running his own business.

Fair Work Legislation

An employee is protected by the Fair Work Act 2009.

An independent contractor is governed by the rules of any contract signed and has some protection under the Independent Contractors Act 2006. However the Fair Work Act 2009 does contain provisions which prohibit "sham" contracting arrangements - those which attempt to disguise an employment arrangement as an independent contractors arrangement.

Summary

Whether an arrangement between a business and a worker is an employment agreement, a contract arrangement that is essentially an employment arrangement, or as a genuine independent contractor is a case by case decision and depends on the facts in each individual case.

A genuine independent contractor is usually running a business and provides its services to many different clients. They are typically not eligible for superannuation and workcover.

Some employee arrangements can be reconfigured to be "contracting" arrangements however this does not usually negate the entitlement of those contractors to superannuation and/or workcover (unless they operate through a company or trust structure).

Both MYOB and QuickBooks have released on-line versions of their software.  For many business owners, these may be a cost effective and very useful tool in the financial administration of their businesses. In a nut-shell, users load their data file into MYOB or QuickBooks online and then use the program over the internet.

Advantages:

- Users have access to the most advanced version (QuickBooks Enterprise and MYOB Live Accounts) of the software which is always up to date;

- The program is not installed on the users own computer, and as such can be used on any computer, anywhere in the world, as long as you have internet access. This also means your accountant can work on the actual data file in real time without needing to email files back and forth;

- The data files are backed up and protected.

- Can be used on a Mac or a PC. Previously QuickBooks products were not available for use on a Mac.

- If you regularly update your accounting software, the on-line solutions are cost effective. QuickBooks on-line retails for $295 per licence, per year. This includes unlimited weekday technical support. MYOB Live Accounts retails for $25 per month.

Disadvantages:

- Speed is affected by the quality of the internet connection;

- If you do want to convert back to working on a local computer or server, you must have a copy of QuickBooks Enterprise or MYOB which are expensive to buy.

- You do not ever own a copy of the software (unless you purchase it separately), so if you cease paying the monthly fee, your access is denied.

Scott Turner & Associates is able to provide all QuickBooks and MYOB products (including the on-line version) at prices well below RRP. We can also tailor installation, set up and training services to suit your needs.

Tax Tip: Donations & Gifts

Did you know that the purchase of a raffle ticket from a charity is not a gift and therefore not a tax deduction?  Did you know that you can donate up to $10 to certain charities via a bucket collection (such as those at traffic lights) and claim the donation as a tax deduction without a receipt.

To be able to claim a donation as a tax deduction, you must make it to a "Deductible Gift Recipient", donate over $2, receive a receipt and you must not receive anything of value in return. For example, the purchase of minor tokens like a lapel pin or sticker are accebtable as donations, however. if you receive a raffle ticket or a dinner in return for the donation it is not tax deductible.

The Australian Taxation Office will allow deductions for donations up to $10 made to ‘bucket appeals’ for the recent floods without needing to keep a receipt.

Deductions for Study Expenses against Youth Allowance

It has been a long held view by the tax office that a student receiving Youth Allowance (or similar) for that study is not entitled to claim deductions for studying (such as fees or books).  However, a student has recently challenged this view and won and now the tax office is amending the recent tax returns of affected students with an automatic deduction and potential refund!

After the High Court decision in the case of Commissioner of Taxation v. Anstis on 11 November 2010, the tax office is reviewing the 2007-2010 income tax returns of taxpayers who received youth allowance to undertake full-time study and incurred study expenses.

If you believe this applies to you, you do not need to do anything. The tax office will be writing to you between 1 March and 30 April 2011 to advise that it will be amending tax assessments to include tax deductions for study expenses for the 2007, 2008, 2009 and 2010 income years.

The ATO will amend these assessments to include a deduction of $550 for each year they are eligible.

Eligible taxpayers are those who lodged a tax return for each year and:

- received youth allowance to study full-time and declared it on their tax return;

- did not claim a deduction for these expenses; and

- paid tax.

If you believe your study expenses were greater than $550, you may reject the automatic amended assessments and complete your own. In this case, you must have receipts to substantiate these expenses.

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