GST and Contractors

Many business owners engage contractors to perform various duties on their behalf. Contractors are engaged to undertake tasks such as cleaning, reception duties, repairs, maintenance, etc. By now, most business owners know to ensure that their contractors have Australian Business Numbers (ABNs), but many people don’t realise that possession of an ABN does not necessarily mean that the contractor is registered for GST.

ABNs
The reason it’s important to ensure any contractors you engage have valid ABNs is that if you are not provided with a valid ABN, you are required to withhold 46.5% of any amount invoiced to you by the contractor. This has to be remitted to the Australian Taxation Office on your next Business Activity Statement (BAS) and a PAYG payment summary must be provided to the contractor at financial year end. So the contractor only receives 53.5% of his/her payment and has to claim the balance back on their next income tax return. In other words, more work for you and less money for them - not a good outcome all round!

GST
Even more importantly, the onus is on you to ensure that your contractors are registered for GST, before you claim 1/11th of any amount you pay them back on your BAS. Many contractors are micro-businesses who have only applied for an ABN because they have been required to do so in order to gain employment. They often have a poor understanding of what this means from a compliance point of view and will assure you that they are “registered”. Some will even go so far as to provide you with a “tax invoice” and add GST to the amount they charge you, when, in fact, they are not registered for GST and therefore not entitled to charge it.

Applying for and obtaining an ABN does not automatically register the holder of the ABN for GST. There is only one sure way to be certain that any contractors you engage are entitled to charge you GST. Log on to the ABN lookup website on business.gov.au at: http://www.abr.business.gov.au/(jkhunfq4nlsda4v1nig0qeji)/main.aspx and type in the supplied ABN. The page that appears will give you the business/contractor name and the date of registration for GST, where applicable.

So why is it important for you to check this? Firstly, to ensure you are not being overcharged. If a contractor who is registered for GST charges you $55 per hour, then the actual cost to you is $50 after claiming the GST back on your next BAS. But if an unregistered contractor charges you $55 per hour for the same work, then the cost to you is $55. In other words, you have been charged a higher rate of 10%. Secondly, if you should accidentally claim the GST back, either because the contractor has represented to you that they are registered or have provided you with an erroneous “tax invoice”, you will be liable to repay any overclaim to the ATO with interest and possibly also penalties.

For more information click here to register your interest or contact your accountant on (07) 5538 3088