Tax & Super Essentials When Working With Subcontractors

Engaging subcontractors can offer your business flexibility and specialised expertise, but it also comes with financial and compliance responsibilities.  From tax and superannuation obligations to record-keeping and expense tracking, understanding the implications of engaging a subcontractor is essential. This article outlines key considerations to help ensure your business stays compliant, efficient and financially protected. 

What is a Subcontractor?

The ATO views a subcontractor as an entity that provides services to your business, however the work they perform is to further their own business.  Companies, trusts and partnerships that provide services to a business are always contractors or subcontractors. 

Who is NOT a Subcontractor?

If a worker is an individual (for example, a sole trader), whether they should be treated as an employee or subcontractor is a question of fact, and each arrangement must be assessed separately. An individual that serves in your business and performs their work as a representative of your business should likely be classified as an employee. 

Factors to consider:

• Control – can the worker choose how, when and where they perform their duties
• Integration – is the worker representing your business, or do they provide services to your business in furtherance of their own business
• Remuneration – is the worker paid a price per hour, or are they paid to provide a specific result for a fixed fee
• Delegation – must the worker perform the work themselves, or are they able to delegate the work to others
• Provision of tools and equipment – does the worker provide all or most of the tools and equipment required to complete their work
• Risk – does the worker bear little or no commercial risk for any cost arising out of injury or defect in their work. 

Let’s take a look at an example:

• A construction company contracts a sole trader to complete electrical work on a residential build. The sole trader quotes a fixed fee upfront to achieve a specific result, and is paid upon completion of each stage of their contracted obligations. The sole trader may delegate work to their own employees who are appropriately qualified. The sole trader provides all of the tools and equipment necessary to perform their work. In this scenario, the sole trader is a subcontractor. 
• The same construction company hires a sole trader cleaner to work on a particular site. There is a comprehensive contract in place governing their relationship. The cleaner is paid for the hours worked at an agreed rate. The cleaner is not able to delegate their work. The construction company provides all of the tools and equipment required by the cleaner to perform their work. In this arrangement, the cleaner should be classified as an employee, and is entitled to superannuation, along with rights and minimum entitlements provided under the fair work act.  

8 Obligations When Engaging Subcontractors

It’s important to manage your records and obligations when engaging subcontractors. This includes:

1. Correct Worker Classification – Carefully assess whether a worker is a subcontractor or an employee, and ensure appropriate contracts are in place.  Misclassification can lead to penalties and back payments.
2. Accurate Record Keeping & Reporting – Comprehensive record-keeping is essential for contracts, invoices, payment records, and verification of the subcontractor’s ABN and GST Status, especially if you are required to lodge a Taxable Payments Annual Report (TPAR) with the ATO.
3. Reviewing GST Obligations – Verify that your subcontractor is registered for GST and that they are issuing you with a valid tax invoice, so you can claim GST credits where applicable.
4. Tracking Expenses for Tax Purposes – Proper documentation of subcontractor costs will ensure you claim the correct deductions in your tax return. Generally, payments to subcontractors are deductible, provided they are properly documented. The ATO can deny deductions due to inadequate documentation during an audit. 
5. Superannuation Obligations – You may be required to pay superannuation to a sole trader subcontractor if they are contracted primarily for their labour. Failing to do so could result in penalties and interest on unpaid super.
6. Payroll Tax – Depending on your state/territory and the nature of the subcontractor’s engagement with your business, their payments may be included in payroll tax calculations.  Exemptions may apply (e.g. for one-off or incidental services).
7. ABN withholding – Ensure your subcontractor has provided you with their ABN. Should they fail to do this, tax is required to be withheld from their payment at the top marginal rate.
8. Cash Flow and Budgeting – Subcontractor costs can fluctuate significantly, so it’s essential to factor this into your cash flow projections and job costings. There may be different payment terms or timing compared to employees (e.g. no regular payroll cycle), so forecasting is key.

Our team at Crest Accountants can help you establish effective processes to manage subcontractor payments, stay compliant with ATO reporting, and ensure that engaging subcontractors is done in a way that benefits your business financially while reducing risk. Contact us today to discuss how we can help your business.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice.