CONTRACTORS AND THE GST

Labour Hire and Tax Reforms

A summary of changes affecting contractors on-hired through ETM Search & Selection from 1 July 2000

This document has been prepared by ETM Search & Selection, the employment division of the Association of Professional Engineers, Scientists and Managers, Australia (APESMA). It is intended as a guide only and contractors are advised to seek further advice from their qualified accountant. For further information contact ETM Search & Selection on (03) 9695 8888, or to contact the APESMA professional accountancy service, telephone (03) 9695 8900.

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Section 1: General Information

1. Registering for the GST and acquiring an ABN

• Contractors operating as individual workers or entities (Partnership, Company or Trust) may register for the GST.
• An ABN is assigned when registering for the GST.
• A contractor operating under a labour-hire arrangement may add GST to his/her charge out rate if:
  • He/she is registered for GST AND
  • He/she operates as an entity (Partnership, Company or Trust)
• Contractors operating as individual workers or entities (Partnership, Company or Trust) may apply for an ABN.
• An ABN may be obtained without registering for the GST.
• Application for an ABN may be made on-line through the Australian Taxation Office website at www.ato.gov.au (select the 'For Businesses' link)

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2. Pay As You Go (PAYG) tax

• PAYG tax will replace PPS tax.
• Labour-hire firms have a PAYG withholding obligation when making payments to:
  • Any contactor who operates as an individual worker under a labour-hire arrangement (whether or not the contractor holds an ABN) OR
  • Any contractor who operates as an entity (Partnership, Company or Trust) but does not have an ABN
• Where the labour-hire firm is obliged to withhold PAYG, this will be at:
  • 48.5% (flat rate) if the contractor does not have an ABN OR
  • The marginal tax rate (based on schedule to be released by the ATO) if the contractor does have an ABN

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3. Tax Invoices

Sample Tax Invoice below.

• Contractors adding GST to their charge out rate must supply ETM Search & Selection with a Tax Invoice in addition to their authorised timesheet.
• A Tax Invoice:
  • Is used whenever GST is charged
  • Displays the words 'Tax Invoice' in a prominent position
  • Displays the ABN (and name and address) of the supplier (eg. the contractor)
  • Displays the name and address of the recipient (eg. ETM Search & Selection)
  • Displays the date of invoice
  • Shows the GST component of the total invoice separately for supplies over $1,000
  • Allows the recipient / payer (eg. ETM Search & Selection) to claim back the tax paid.

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4. Alienation of Personal Services Income

• On 13 April 2000, the Federal Government introduced into Parliament a Bill to address the situation where an individual earning income from labour (personal services income) escapes tax by earning their income through an entity (Partnership, Company or Trust).
• Under these changes to the Tax Laws, tests will be used to determine whether an entity is operating as a personal services business. If an entity is determined to be a personal services business, the income earned will be subject to personal rates of tax.
• This measure does not affect the arrangements between the contractor and the labour-hire firm, covering contract charge out rates, GST and PAYG obligations. It may, however, affect the arrangements between the contractor and the ATO once the income has been earned.
• Contractors operating as entities are advised to seek further advice on the Alienation of Personal Services Income from their qualified accountant.

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Section 2:
Management of contractor payments, GST and PAYG obligations for contractors operating under labour hire agreements (LHA) through placements

Contractor Type (under LHA)	Registered for GST	Holds ABN	Contractor rate	PAYG	Timesheets & Payments	Alienation Test (Between ATO and entity)
Individual	No	No	Cannot add GST to their rate	ETM must withhold PAYG at 48.5% (flat rate)	Payment on receipt of signed timesheet
Individual	No	Yes	Cannot add GST to their rate	ETM must withhold PAYG at marginal tax rate*	Payment on receipt of signed timesheet
Individual	Yes	Yes	Cannot add GST to their rate (Labour Hire Arrangement)	ETM must withhold PAYG at marginal tax rate*	Payment on receipt of signed timesheet
Partnership, Company or Trust	No	No	Cannot add GST to their rate	ETM must withhold PAYG at 48.5% (flat rate)	Payment on receipt of signed timesheet	Apply Alienation Test. If pass 1 or more, taxed as an entity. If fail test, taxed as an individual.
Partnership, Company or Trust	No	Yes	Cannot add GST to their rate	ETM does not withhold PAYG	Payment on receipt of signed timesheet	Apply Alienation Test. If pass 1 or more, taxed as an entity. If fail test, taxed as an individual
Partnership, Company or Trust	Yes	Yes	Can add GST to their rate	ETM does not withhold PAYG	Payment on receipt of tax invoice and signed timesheet	Apply Alienation Test. If pass 1 or more, taxed as an entity. If fail test, taxed as an individual

* Marginal tax rate will be determined from the Tax Instalment Schedule prepared by the Australian Tax Office for 1/7/00.

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SAMPLE TAX INVOICE

Suitable for use by contractors who are on-hired through ETM Search & Selection Pty Ltd and who are charging GST to ETM Placements. An authorised timesheet would need to accompany this tax invoice.