Tax Issues for Independent Contractors
This is intended to be a summary of general information related to the tax situation for Odco contractors, following the July 2000 reforms to the tax system. It does not constitute legal or taxation advice and must not be construed as such
Agency Contractors and PAYG
Odco contracting is aptly described in the Labour Hire provisions of the PAYG system, refer Guide to PAYG for Business, p32.
TCS has a clear statutory responsibility to withhold and remit PAYG on behalf of individual contractors, and supplies all contractors with a remittance advice detailing that withholding.
Rate of Tax Withheld
Contractors have the option of being taxed under the PAYG tax tables or may elect to have tax withheld at a flat rate of 20%, as all licensed Odco agencies are party to a Class Variation. Verification of this Class Variation can be supplied if required.
Contractors may also elect to have a higher rate deducted, but must complete an Upwards Variation Withholding Declaration and lodge that with the agency.
The option of either the tax tables or flat tax enables the contractor to assess their personal tax situation, in conjunction with their tax or financial advisor, and choose the method that best suits their affairs.
Contractors trading as an entity - see section below.
Alienation of Personal Services Income - or the '80%' Rule
Contractors providing their services through an agency may be affected by the alienation of personal services income measure.
This rule does not apply to individual contractors or sole traders. This only applies to contractors supplying their services through structured entities.
The ATO results test is a trigger for other tests to determine the tax nature of the entity's business. It does not affect the obligation of the agency to withhold PAYG tax where it applies.
Simplified Tax System
Contractors operating their own business may be able to elect to pay Tax on the Simplified Tax System. As a result they may be able to claim the Entrepreneur's Tax Offset (ETO) which can reduce annual tax payable by 25% for income up to $50,000 per annum reducing by 1% for every $1000 of income from $50,000 up to $75,000 per annum.
The ETO was first made available from 1 July 2005. The offset may not be available if contractors obtain income from other sources, and it is family means tested.
Professional advice, from a registered tax agent is recommended, and, if after that advice a contractor elects to pay tax under the Simplified Tax System, the following indicates the potential annual taxation savings available.
The agency is required to make SGC payments to a superannuation fund for sole trader contractors.
Contractors may make arrangements with the agency to assist in the administration of their personal superannuation deductions.
Personal superannuation contributions are tax deductible for a contractor if total annual income, from sources other than contracting, (employment) do not exceed 10% of that contractor's total annual income.
Contractors operating through an entity do not have SGC superannuation contributions paid by TCS.