The ATO are tightening up the legislation around who can be legitimately issued with an ABN. They are taking a two pronged approach to this – firstly, by making it more difficult to obtain an ABN in the first place, and secondly, by auditing those with ABNs and cancelling inactive ABNs.
Why would they want to do this? ABN income is difficult for the ATO to track. Businesses who pay contractors simply claim a deduction for what is paid to the contractor and that is, usually, the extent of their reporting requirements. This means the ATO doesn’t know how much a contractor has earned in any given tax year. However, if the contractor were to become an employee, the employer would be required to not only withhold tax and pay superannuation, but they would report all of this to the ATO each year. This means the ATO has a complete record of what the individual earned that year.
Therefore, anyone who the ATO can shift from being a contractor to an employee is one more person the ATO can more accurately track to ensure they are paying the correct amount of tax.
The new ABN application process articulates the ATO’s position on contractors and what deems them to be legitimate and therefore entitled to an ABN. The ATO states that a contractor is an entity (individual, partnership, trust, or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:
- is paid for results achieved
- provides all, or most, of the necessary materials and equipment to complete the work
- is free to delegate or subcontract work to other entities
- has freedom in the way the work is done
- provides services to the general public and other businesses
- is free to accept or refuse work
- is in a position to make a profit or a loss
- bears legal risk in respect of the work
- must remedy any defective work at their own expense
- has their own liability insurance
The ATO then goes on to ask four questions, three of which are of particular importance, because without a positive response to each, you will be denied the ABN as the ATO does not deem you to be a contractor.
1. Will your work agreement allow you to pay another person to perform work on your behalf?
2. Will the payments you receive be based on a quoted price that you provide to persons making use of your services?
3. Will you be responsible for the cost of rectifying any defect in the work you perform?
Now, what if it turns out you are not eligible for an ABN, what then? Well, it would mean that you should really be an employee. What if the business you are dealing with doesn’t want to deal with you as an employee? The onus is on the payer to comply with the relevant legislation and it might be worthwhile reminding them of this. If the ATO finds out that a payer is not complying they may find themselves the subject of an audit covering employees, superannuation, workers compensation insurance, payroll tax, and more.
Please feel free to contact the office if you’d like to discuss this further.