Taxation issues for independent contractors working through Odco™ style Labour hire arrangements

This general information is provided to summarise the tax situation for labour hire style contractors following the 1 July 2000 reforms to the tax system and other changes.

AICA Pty Ltd. does not purport to act as a legal or accounting adviser. Independent contractors should seek their own legal and accounting advice. This information is to assist accountants with our understanding of the issues, and is not in any way authoritative.

What are Odco style labour hire contractors?
Odco independent contractors are people who work through specific labour hire arrangements where:
• No common law employment exists.
• Each contractor has a daily hire contract with the labour hire agency.
• No contract exists with the user of the contractor service.

Odco contractors working through the Australian Independent Contractors Agency usually register a business name as a sole trader with the NSW Department of Fair Trading.
Clauses 1 and 2 of the Agreement to Contract stipulate that contractors utilising the Odco contract system accept (or reject) work on an hourly or day to day basis with clients of the Agency. The contractor is available for work where the Agency places him/her.

The 80% rule
The 80% rule
• Does not apply to individuals.
•Only applies to structured entities (Companies, partnerships etc.).
•Is designed to prevent artificial income splitting.
•Does not vary the obligation of the labour hire agency to withhold tax.

Where the Odco contractor is an individual the 80% rule does not apply.
Where the Odco contractor is structured the 80% rule may apply and the contractor should seek accountants advice. The 80% rule is a trigger that causes the application of other administrative tax tests to determine if the ATO can treat the entities income as that of the entity or as income of an individual.

Superannuation
Odco arrangements are not covered by the Superannuation Guarantee Act for superannuation contributions. An Odco contractor may make personal self-employed superannuation contributions which may be tax deductible against the contractor income.

31/01/2001- Recent correspondence from Senator Kemp, Assistant Treasurer has limited the advice we had previously received from Labour Force in their discussions with Treasury. Tax deductions for personal Superannuation contributions may not be available to contractors if some work as an employee is done during a tax year. Under this ruling, if a taxpayer has worked in "eligible employment " (which can generally be regarded as wages earned as an employee) during the course of the tax year, and that income exceeds 10% of the total income, then a deduction will not be allowed for any self employed Superannuation contributions that contractor might wish to make. (Ref TR. 96/25)
We consider that this Ruling to be iniquitous and unfair, and a disincentive for self employed people to make Superannuation contributions. We are working to have this anomaly changed to a fairer system. We will keep you advised of any further developments when this information comes to hand.