Employment
Contractor
A contractor is a person or business that provides services to another under a contract for services, usually working for their own account, using an ABN and invoicing for their work.
A contractor is someone who is engaged to deliver a result or a service for a client under a contract for services, rather than being employed by the client. Contractors run their own business, often as sole traders but also through companies, partnerships or trusts. They usually have an ABN, issue invoices, supply their own tools, choose how the work is done, and bear the commercial risk of getting the job right.
The tax position of a contractor is quite different from an employee. The client does not withhold PAYG from the invoice in most cases and is not required to pay super guarantee on the contractor's payments, though there are important exceptions, particularly when the contract is mainly for the personal labour of the contractor. The contractor is responsible for their own income tax, may need to make PAYG instalments, and is usually responsible for their own insurance and super.
GST is where contractors differ most. If the contractor's GST turnover reaches the registration threshold of $75,000, they must register for GST, charge 10% on taxable supplies and issue tax invoices. A contractor who earns less may choose to register voluntarily, but must then comply with the same obligations. Rideshare and taxi drivers are special, as they must register regardless of turnover. A client can claim a GST credit on the contractor's invoice only if the contractor is registered and the invoice is a valid tax invoice.
If a contractor does not quote an ABN on the invoice, the client may be required to withhold tax from the payment at the top marginal rate plus Medicare levy. Some contractors and clients agree to a voluntary agreement so that tax is withheld regularly. Clients who pay contractors in certain industries, such as building and construction, cleaning, courier and road freight, and IT, may also have to report these payments each year in a taxable payments annual report.
Contractors should keep good records of income and expenses, because they can deduct the business costs of earning that income, such as tools, vehicle use, insurance and software. They need to separate private from business use and to retain tax invoices for the GST credits they claim. Records generally need to be kept for five years.
A common misunderstanding is that having an ABN means you are a contractor. The question depends on the true nature of the relationship. Many workers called contractors are really employees under the law, particularly where the client controls the hours and methods and provides the equipment. Getting this wrong can lead to back payments of super and withholding.
This is general information only, so confirm your status with the ATO or a registered tax professional.
Worked example
Ben is an electrician trading as a sole trader and registered for GST. He completes a job for a builder and invoices $4,000 plus GST of $400, a total of $4,400. The builder pays $4,400 and claims the $400 credit on the next BAS. Ben reports $400 of GST collected, deducts $300 of GST credits on his materials, and pays the net $100 to the ATO with the BAS.
Practical tips
- Always put your ABN on invoices, and add GST only if you are registered, so clients can pay you without withholding.
- Do not assume an ABN proves contractor status. If you work set hours under direction using the client's tools, you may be an employee.
- Set aside money for income tax and GST throughout the year, as nothing is withheld by the client in most cases.