Engaging a subcontractor is not a straightforward process. The simple fact that a worker issues invoices to charge a business client for their services, does not exempt their client business from certain payroll obligations.

There are a number of compliance requirements that still apply between a business and their subcontractors, and serious breaches if such relationship is not assessed correctly.

When engaging a subcontractor, a number of factors should be assessed at time of onboarding and/or checked before finalising a number of key End of Financial Year tasks. 

These factors include:

• Sham Contracting > This happens when an individual worker (sole-trader) is engaged to do work charged at an hourly rate which is less than an the ordinary rate paid to an employee doing the same type of work;
• Superannuation > This happens when an individual worker (sole-trader) may invoice the client but he/she may still be deemed as an employee under the Super Guarantee ruling. This means that, although the payments made to the subcontractor are processed via Accounts Payable, superannuation must still be processed through payroll;
• Taxable Payments Annual Report (TPAR) > a certain number of industries are also required to lodge the Taxable Payments Annual Report to the ATO by 28th of August of each year. Contractors included in this report consist of both sole-traders and companies that provide work that directly impact the business operations;
• Workers' Compensation > all ex GST invoice amounts (and super) must be included as part of the Workers' Compensation actual wages declaration for all subcontractors deemed as employees under the Super Guarantee ruling;
• Payroll Tax > all ex GST invoice amounts (and super) must be included in the Payroll Tax Declaration for all subcontractors deemed as employees under the Super Guarantee ruling.
  Furthermore, all other Contractors' invoices may also be included in the Payroll Tax Declaration as "Relevant" contractors when these contractors do not meet one of the following 7 exemptions:
  
  
  1. Services not ordinarily required by the business
     an business engages a contractor to provide services that are not ordinarily required in the employing business during the financial year.
  2. Services performed by 2 or more people
     when the work is performed by more than one individual. This varies by the contractor's entity type:
     - Company: by two or more employees of the company;
     - Partnership: by at least one of the partners and another person who is not a partner;
     - Sole-trader: by at least the owner and one employee.
  3. Services ancillary to the supply of goods
     the main purpose of the contract is to supply "goods" and any services (labour) provided is ancillary to the supply of goods (generally 50% or more of the cost of the contract relates to the supply of goods).
  4. Services provided by an owner driver
     when the contractor supplies services exclusively related to the delivery of goods by means of a vehicle provided by such contractor (the vehicle used to perform the delivery cannot be owned by the business).
  5. Services provided to other businesses/customers
     when the contractor provides services to other businesses/customers and when such contractors works exclusively for the business for a period not exceeding an average of 10 days per month.
  6. Services Required for 180 days or less in a Financial Year
     when the contractor provides services of a kind that is ordinarily required by a business for less than 180 days per year.
  7. Services Provided for 90 days or less in a Financial Year
     when the business engages a contractor to provide services for no more than 90 days in a Financial Year.

We are currently developing a tool to help our clients effectively engage with their subcontractors, including gathering the correct information and assessing the contractor's requirements at the time of engagement. However, it is also important to process a full audit of these subcontractors prior to completing the following End of Financial Year tasks:

• Lodgement of the Taxable Payments Annual Report;
• Preparation and review for the final Activity Statement for the Financial Year (Apr-Jun or Jun);
• Lodgement of the Annual Payroll Tax Declaration;
• Lodgement of the Workers' Compensation Actual Wages Declaration
  for all States and Territories where this declaration is completed at End of Financial Year.

We developed a comprehensive process and an audit tool which will ensure all subcontractors are assessed correctly, included in the relevant annual reports and finally, that all contractors' invoices have the correct GST treatment, based on the contractor's GST registration and any changes to their entity structure that took place during the Financial Year. 

Xero Set Up

To correctly identify the various types of contractors, the Xero file should include the following set up items:

Contact Groups

1. Go to Contacts > All Contacts
2. Click on [Groups] > New group
3. Create the following Contact Groups:
   • Subcontractors - Employees > this group will include all subcontractors that are deemed employee under the Super Guarantee ruling;
   • Subcontractors - Consultants > this group will include all contractors that provide any of the following services:
     • Admin, Bookkeeping and Accounting services;
     • Legal services;
     • Consulting services;
     • Training services;
     • Advertising services;
     • Cleaning services.
       These contractors must be assessed if "Relevant contractors" for Payroll Tax. Therefore, they will need to be reviewed at EOFY to check if their invoices are either liable or exempt for Payroll Tax. 
   • Subcontractors - TPAR > this group will include all subcontractors that need to be included in the Taxable Payments Annual report.
   • Subcontractors - Labour Hire > this group will include all businesses that provide Labour Hire.
     These businesses are excluded from the TPAR and exempt from Payroll Tax.
   • Subcontractors - PTA Relevant > this group will include all subcontractors (Companies and Trusts) that do not meet any of the 7 Payroll Tax exemptions and therefore deemed 'Relevant Contractors' for Payroll Tax.
   • Subcontractors - PTA Exempt > this group will include all subcontractors that are either Sole-traders non-employee under the Super Guarantee ruling and all Companies and Trusts entities that have met one of the 7 Payroll Tax exemptions.
   • Suppliers - ABN Cancelled > this group will include all suppliers whose ABN has been cancelled. This means that no invoices can be issued by the supplier under such entity.
   • Suppliers - ABN to Verify > this group will include all suppliers whose ABN needs to be checked
     it could be because the last check was done years ago or their current invoice displays a different ABN.
     

Tracking Category

1. Go to Accounting > Accounting Settings
2. Click on Tracking Categories
3. Click on [Add Tracking Category]
4. Set the Tracking Category name to: Engagement Type
5. Add the following options:
   • Contractor - Employee
   • Contractor - PTA Relevant
   • Contractor - PTA EX1 Supply of Goods
   • Contractor - PTA EX2 Not Ordinary Services
   • Contractor - PTA EX3 180 Day or less
   • Contractor - PTA EX4 90 Days or less
   • Contractor - PTA EX5 Services to others
   • Contractor - PTA EX6 2 or more workers
   • Contractor - PTA EX7 Owner Driver

If you don't have another Tracking Category assigned to the Payroll Timesheets, you can also use the same Tracking Category to identify various types of employees. In this instance, you would also add the following options:

• Employee - Admin
• Employee - Apprentice
• Employee - Management
• Employee - Labour

You will then go to Payroll > Payroll Settings and assign this Tracking Category to the Employee Groups.

Audit Reports

The following custom reports will help identify any subcontractors not added to the relevant groups during the Financial Year.

TPAR Review Report

1. Go to Reporting > All reports
2. Run the Account Transactions report
3. Select/Enter the following options:
   • Accounts > Select the Subcontractors account(s)
   • Date Range > Select: Last Financial Year
   • Columns > Gross (AUD) and GST (AUD)
   • Grouping/Summarising: Select: Summarise by Contact
4. Click on [Update]
5. Change the report name to EOPY - Subcontractors TPAR Review
   
   è  The Subcontractors TPAR Review report
   
6. Click on [Save as] > Custom, name the report: EOPY - Subcontractors TPAR Review

Consultants Review Report

1. Go to Reporting > All reports
2. Run the Account Transactions report
3. Select/Enter the following options:
   • Accounts > Select the accounts: bookkeeping, training, consulting, legal fees, cleaning
   • Date Range > Select: Last Financial Year
   • Columns > Gross (AUD) and GST (AUD)
   • Grouping/Summarising: Select: Summarise by Contact
4. Click on [Update]
5. Change the report name to EOPY - Subcontractors Other Review
6. Click on [Save as] > Custom, name the report: EOPY - Subcontractors Other Review

Contractors Review Report Pack

1. Go to Reporting > All reports
2. From the search bar on the top-right hand side of the screen type: Report Pack
3. Click on: Create new report pack
   
   è  The create new report pack screen opens
   
   
   
4. Click on [Add report]
5. Add the following reports:
   • EOPY - Subcontractors TPAR Review
   • EOPY - Subcontractors Other Review
6. Remove the 'EOPY - ' part from the report names
7. Click on [Save as] > Custom, name the report: EOPY - Contractors Group Review

You can now delete the two custom reports as they are now saved as one report pack.