Protect Yourself from Subcontractor Tax Liabilities with Clear Subcontractor Agreements
Avoid Potential ATO Liability When Your Independent Contractor Doesn't Pay Their Appropriate Taxation (2024)
Subcontractor Agreements are designed to combat changes in legislation made by the ATO, which now requires certain Industries that use Subcontractors to have formal agreements in place to avoid the potential liability, and of course the 10’s if not 100’s of thousands of dollars that go along with that liability.
So today we are going to discuss,
- What are the Australian Tax Office changes in legislation,
- What are the Potential costs of not having Subcontractor Agreements?
- What Steps Can I Take To avoid $100 000 + Losses?
ATO Legislation Changes
Taxable Payments Annual Report
TPAR or Taxable Payment Annual Report is the ATO Reporting Requirement in which businesses in certain industries are required to notify the ATO of all payments made to their Independent Contractors within a 12 month period. TPAR’s are generally due around the 28th of August each year.
TPAR Affected Industries + Plus
Industries Affected include,
- Building and Construction industry,
- Commercial Cleaning Industry,
- Courier and Transport industry,
- IT Services,
- and the Security Industry
The Use Of TPAR As A Weapon
However, businesses in other industries should also use Independent Contractor Agreements to avoid potential liability as they may still be held liable.
Formalising an agreement between a business and its Independent Contractors or Subcontractors is always best practice.
Businesses not in the above Industries should keep reading as the same legislation also affects your businesses.
Results From Legislation Changes
ATO Announces $172 000 000 000 Of Undeclared Income
In a recent report by the Australian Taxation Office (alongside), you will notice that they have identified $172 Billion in undeclared income by Independent Contractors. You will also notice that they are using the data collected from TPAR to proactively contact contractors regarding forgotten income.
The Australian Taxation Office (ATO) has revealed it is using data from its Taxable Payments Reporting System (TPRS) to ensure that more than $172 billion of payments to contractors have been properly declared.
Contractor Reaction
It doesn’t take a very big leap to realise that a number of the businesses being contacted will start questioning their obligations and association with their head contractor. The idea is to shift the liability from themselves into their Head Contractor.
“More than 158,000 businesses have now reported all payments made to contractors in the 2019–20 year to us. This data, combined with our sophisticated data and analytics capability, means our field of vision to detect unreported income is better than ever.”
The ATO is using the data to proactively contact contractors to make sure they haven’t forgotten to declare the income reported through the TPRS.
Suspected Tax Evasion
The article also goes along to say “The ATO encourages the community to Report Suspected Tax Evasion” giving the details for the ATO Tip Off Hotline and a link to their Online Form.
https://www.ato.gov.au/general/gen/making-a-tip-off/
Formalising an agreement between a business and its Independent Contractors is always best practice.
Steps to Avoid Potential Losses
Multiple Independent Contractors
A Great Option to avoid potential liability is to broaden your options when it comes to engaging Independent Contractors. Look at increasing the overall number of Independent Contractors engaged by the business to minimise the total number of hours any one contractor is engaged during a given period.
Formal Agreements
Formalising an agreement between a business and its Independent Contractors is always best practice no matter the industry and is the linchpin in avoiding potential liability. It defines the relationship between any business and its Independent Contractor.
Formal Agreements
Limiting any Independent Agreement to 12-month period is another way to help avoid the Independent Contractor vs Employee argument which can come up from time to time.
Foreseeable Conclusion
What do you think happens when one of your Independent Contractors, who haven’t paid their tax on 172 Billion, is contacted by the ATO (ATO doing exactly what you just read) and asked for a please explain?
I don’t think it will take long before you hear the words, Oh I thought I was an employee, or well I have been thinking about it, and I would probably class myself as an employee rather than an Independent Contractor.
Who do you think is going to be the next business on their call list?