NFPs cautioned on traps with contractor classifications
Engaging staff as contractors rather than employees can pose significant risks for not-for-profits, particularly directors, warns HLB Mann Judd.
Many Not-for-Profits tend to engage staff as contractors for administrative simplicity and to reduce employee costs but this practice can lead to risks for these organisations, according to HLB Mann Judd.
In a recent article, HLB Mann Judd partner, tax consulting, Josh Chye warned that the risks of misclassifying contractors are particularly serious for directors.
Chye noted that directors can be personally liable for an organisation’s tax debts related to PAYG withholding and superannuation guarantee and can face reputational damage if they are perceived as non-compliant with their employer obligations.
“Directors and volunteers engaged by NFPs as contractors can often be classified as employees for PAYGW and SG purposes,” said Chye.
“This classification typically applies when individuals are compensated for attending board meetings or for providing their professional expertise voluntarily, rather than for producing a specific result or achieving a specific outcome.”
Chye said it is critical that NFPs analyse the entire relationship, focusing on the legal rights and obligations that constitute that relationship.
“The core question is whether the worker is operating within the business of the engaging entity. The Australian Taxation Office (ATO) provides guidance on distinguishing between employees and contractors in Taxation Ruling TR 2023/4,” he said.
He gave an example of a company where a contractor is not treated correctly as an employee for tax purposes.
“On 1 July 2023, Company A engages Mr. X and Ms. Y as non-executive directors under service contracts, paying each $50,000 per annum to attend monthly board meetings. Mr. X and Ms. Y must personally attend at least 80 per cent of the board meetings each year,” Chye explained.
“Mr. X and Ms. Y are both employed full-time by separate Company B and claim the tax-free threshold with Company B. Neither Mr. X nor Ms. Y is registered for GST.
“By 30 June 2024, Company A has made total payments of $100,000 to Mr. X and Ms. Y, recorded as contractor expenses in the profit and loss statement.”
In this scenario, Chye said Mr. X and Ms. Y are likely considered “employees” of Company A according to the ATO’s guidance in TR 2023/4, as they are paid to work “in the business” and for their personal efforts.
The accounting and advisory firm said it is best practice for organisations to regularly review their contractor engagements and assume new contractors are employees for tax purposes unless proven otherwise.
Organisations should have robust internal policies to ensure each contractor relationship is carefully considered by the appropriate staff, he said.
“For genuine contractors, organisations should work with their advisors to establish formal contracts that clearly support a legitimate contractual relationship,” he said.
“Organisations that have not complied with their PAYGW and SG obligations can self-correct by making a voluntary disclosure to the ATO for underreported PAYGW and lodging Superannuation Guarantee Charge (SGC) statements for previous underreported SG.”
