Independent Contractors and CMC's.
Working through CMC as an employee
One of the most common ways CMC's work with professional contractors is under an employee, or PAYG, engagement model.
This means the CMC becomes your legal employer for the duration of the assignment, regardless of length. Consequently they cover you for all employment related insurances, including workers compensation, public liability and professional indemnity, and remit all insurances and statutory obligations. Under this model you will generally be entitled to access discounted partner offers and arrange salary packaging and more complex payroll benefits, such as living away from home allowance.
At the end of the financial year, the CMC will send you a payment summary and may allow you to access to discounted third-party accountant services, should you wish to utilise them.
In such scenarios the CMC will sign an employment agreement with you, the worker, and a client agreement with your nominated host employer. They will invoice them on agreed rates and terms for the details of work performed during the payroll cycle.
Depending on the arrangement negotiated with the client, the CMC will either remit funds once received from the client organisation, or remit funds under a finance arrangement.
Many professionals now work directly with CMC's to avoid having to navigate the complexity of tax and employment legislation and lower the costs of their casual/contract engagement.
FAQ: Why not work under my own company structure?
A common misconception that still exists is the idea that an individual working as a sole trader or through a proprietary limited company structure allows more tax effective options. Unfortunately, in many cases, this is far from the reality and often leads to increased costs and large tax bills at year end.
Personal Service Income (PSI) legislation specifically deals with sole traders or companies whose majority business is the provision of the skills, knowledge and expertise of the individual(s) engaged. In effect, if the payments made to the sole trader or company are deemed to be PSI, the government expects those payments to be taxed in the same method as wages. If the payments have not been treated as such, you will be expected to pay the difference to the ATO at the end of the year, which can amount to tens of thousands of dollars
To quote the ATO website:
‘Many consultants and contractors operate their business through a company, partnership or trust. In many cases, the income received for the work they do may be classified as PSI'. This is an important point for those individual contractors working through their own companies.
This means that by running your engagement through your own structure, you may end up with more total cost and negligible benefit, especially if the work performed is intermittent. Just think, you need to submit 2 x tax returns (1 for Structure and a Personal Tax Return), administration (billing, chasing monies, remitting taxes, superannuation, etc), paying for employment insurances, software, home office expenses, etc.
Working through a CMC allows you to alleviate those burdens and generally reduce engagement costs.
ATO PSI Guidelines (PDF 535kb)
ATO Website Link
Sub-Contracting
CMC operating as a principal contractor
Want to work through a company structure? Most CMC's will work with a Pty Ltd organisation and can help lower your costs and increase efficiencies.
Under a sub-contractor engagement model, the CMC will officially act as a principal contractor to the end client while your company is engaged as a sub-contractor to the CMC. One of the benefits of operating through this model is that the CMC is able to provide you coverage of appropriate employment insurances for the duration of the engagement, saving time and costs of short-term policies, or under-utilisation of annual insurance policies.
Some may also be able to provide access to their online services to streamline submission and confirmation of timesheet information, ensuring submitted invoices are authorised and processed as soon as possible.
Many also offer both client remittance and financed options for invoice payment, depending on the preferred model of all stakeholders involved.
A reminder to be aware of and work to satisfy the conditions required to ensure compliance with the PSI legislation:
ATO PSI Guidelines (PDF 535kb) ATO Website Link
Salary Packaging
Salary Packaging involves restructuring your salary by choosing to receive your salary as a combination of cash and approved fringe benefits that are paid out of your pre-tax salary.
It simply allows you to elect to take part of the salary as a noncash benefit rather than take home pay. Benefits received in lieu of cash salary are not assessable under the PAYG system and are taxed in accordance with the Fringe Benefits Tax (FBT) Act.
A number of benefits are either exempt from FBT or are treated concessionally for FBT purposes and may provide the employee with a tax advantage by taking the benefit rather than salary. The level of benefit is dependent upon the employee's marginal tax rate.
Employees can customise their Salary Package by choosing benefits that best suit their individual needs. Salary Packaging provides individuals with the option of including a range of benefits that offer both convenience and the advantage of using their income more effectively. Salary Packaging is not compulsory and may be entered into or cancelled at any time.
There is no restriction on the types of benefits that can be sacrificed. The important thing is that these benefits form part of your remuneration, replacing what otherwise could have been paid as salary. The types of benefits generally provided in salary sacrifice arrangements by employers include fringe benefits, exempt benefits and superannuation.
Living Away From Home Allowance (LAFHA)
Living Away From Home Allowance (LAFHA) is an allowance that must be in the nature of compensation to the employee for additional expenses incurred as a consequence of an employee being required to live away from their principle place of residence in order to perform the duties of that employment. The ATO defines the payment of a living away from home allowance (LAFHA) is a living away from home allowance fringe benefit.
For FBT purposes, a LAFHA is:
- an allowance you (the employer) pay to an employee, and
- to compensate for additional expenses incurred and any disadvantages suffered,
because the employee is required to live away from their usual place of residence in order to perform their employment-related duties. The term 'additional expenses' does not include expenses the employee would be entitled to claim as an income tax deduction.
Who can claim LAFHA?
- Australian residents moving locations within Australia
- Overseas long stay visa holders
- Australians working overseas.
There are two parts to LAFHA:
Exempt accommodation component
The exempt accommodation component of a LAFHA is that portion of the allowance that is compensation for additional expenses on accommodation, that the employee could reasonably be expected to incur at the alternate location.
Where the allowance paid includes an amount for accommodation which is not reasonable, that part of the allowance will be included in the taxable value of the LAFHA.
Exempt Food component
The exempt food component of a LAFHA is the amount of the allowance paid to compensate the employee for additional food costs because the employee is required to live away from their usual place of residence.
To calculate the exempt food component, you must first calculate the food component of the LAFHA. The food component is the amount of the LAFHA that is compensation for expenses the employee could reasonably be expected to incur on food and drink.
Where the allowance paid includes an amount for food which is not reasonable, that part of the allowance will be included in the taxable value of the LAFHA.
It is crucial that you work with knowledgeable professionals when considering using LAFHA. Should you or your employer get the implementation or calculations wrong, any overpayment will have to be paid back to the ATO by the contractor/employee in all cases, without exception. It may be a big shock if processed incorrectly and you end up receiving a huge tax bill with payment required within 30 days to the ATO.
CMC's will generally not engage in any recruitment activities. Recruitment companies, especially newly established recruiters, form part of the client base.
