Do you use contractors to provide services to your customers?
There are some significant new withholding tax rules that apply from 1 April 2017 which can have an impact on the withholding obligations for businesses engaging contractors to perform services.
When rules such as these are new and their scope is uncertain, errors can occur, in part due to lack of awareness or uncertainty as to the application of the rules.
Direct and indirect penalties can be high, including (for example, a $10,000 initial contract fee):
$5,384 (20% withholding rate plus 15% penalty for no declaration).
$1,077 to $8,076 penalties depending on the nature of your default.
$2,500 use of money interest, assuming approximately 10% compounding per year.
The total tax penalty can, therefore, be equal to the original contract fee. This cost will most likely be unbudgeted and will therefore come directly off the bottom-line profit.
When do the new labour-hire rules apply from, and at what rates?
From 1 April 2017, labour-hire firms must withhold tax from payments to their contractors, including payments to their contractors’ companies.
The default rate of withholding tax is generally 20% for this new category of withholding. However, contractors may elect any rate above 10% and they may apply to the Inland Revenue for a lower rate.
Who do the new labour-hire rules apply to?
Your business will be one of labour-hire:
If you arrange for ‘others’ to perform services (brains and/or brawn related) directly for your clients; and
You are paid for supplying the others – as opposed to being paid for what others do for your client; and
Doing the above represents one of your main (that is, not incidental to any other) activities.****
Does sub-contracting make your business labour-hire?
Subcontracting does not, in itself, make your business a labour-hire firm.
If the client has a house to paint then they can employ and pay a contractor to do so. This is not a labour-hire situation because there is no arranging involved.
If the contractor sub-contracts a third party then this is still not a labour-hire situation because the contractor has contracted to supply an outcome, being a painted house.
Does contracting to supply labour make you a labour-hire firm?
Arranging the supply of labour is likely to be defined as a labour-hire arrangement and therefore the contractors supplied may be subject to the new withholding rules.
If the client has a house to paint they might approach a firm to find some painters. In this case, the firm meets its obligation by supplying people with painting skills and the firm is a labour-hire firm if that activity is one of that firm’s main activities.
Is part of your business covered by the new rules?
Examples where the new rules apply could be businesses providing legal services, wedding planning, training, construction, and modelling agencies. Essentially any service-related business could be a labour-hire firm, depending on the arrangements between the business, the client and the contractor.
We can’t cover every scenario here, but we can assist you to understand whether you need to be concerned. For more information please contact your local Findex adviser.