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Traps to know of Subcontractors that can deemed as an employee

Is your business off the ground and successful?  Need to hire people to help with the workload? This is an important decision and an important distinction because whether you hire an employee, or a contractor, will affect your businesses legal and tax responsibilities as well as the rights of the person you’re hiring. Not sure what your business needs? We, at Avenue Solutions, are here to help you with this.

There are 6 key factors that can help determine whether a worker is an employee or a contractor:

  • Ability to Subcontract/Delegate:

This is a characteristic of a contractor because an employee cannot pay someone else to do the work. A contractor can take on the assigned tasks and then pay someone else to perform them.

  • Basis of Payment:

Employee – paid for the time worked, a price per item/activity or on a commission basis. Contractor – paid for an achieved result based on a quote for the services to be provided.

  • Equipment, tools, and other assets:

Employee – your business provides the worker with all or most of the equipment/tools required to undertake their work then they are most likely an employee.  If your business does not supply this, then the Employees is then provided with an allowance or reimbursement for the cost of any equipment or tools.

Contractor – expected to provide all or most of the equipment/tools required to complete the work. They would also not receive any allowance or reimbursement for this.

  • Commercial risks:

Employee – no commercial risk because your business would be legally responsible for the work done by the employee and therefore your business would be liable to rectify any defects.

Contractor – takes on the commercial risk of the work performed.  That is, they would be liable for the cost of rectifying any defects in their work.

  • Control over the work:

Employee – your business has the right to direct the way in which the worker does their work

Contractor – the worker has the freedom to decide how the work will be done, subject to specific terms in the contract/agreement.


  • Independence:

Employee – does not operate independently of your business.  They work within and are considered part of your business.

Contractor – the worker is operating their own business independently of your business.  The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.


Once you have determined whether your worker is an employee or a contractor then you will know your legal responsibilities:

Employee – need to set up the worker on your payroll system.  Will need to deduct PAYG, pay superannuation, provide annual leave/sick leave, have workers compensation cover and be aware of any FBT related benefits.

Contractor – they look after their own tax obligations. You just pay their invoice.  However, if they don’t quote their ABN to you then you may need to withhold 47% off the invoice and remit to the ATO.

There are hefty penalties to those businesses that treat their workers as contractors and not employees in order to avoid the legal responsibilities.  Keep this is mind when deciding to hire workers.




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Is your activity a Business or Hobby?

Ever wondered if what you are doing constitutes a business or a hobby?  You are not alone.

A lot of small businesses start off as a hobby.  Doing something your passionate about and enjoy as a side hobby can very easily turn into a successful profitable business.

Why is it important to differentiate you may ask?  Well, that is because running a business has important legal and tax obligations.

Below is a summary of some of the characteristics to help you determine if the activity you are undertaking is deemed to be a business or a hobby.

REMEMBER: Even if it’s a hobby to start, you may need to keep these factors in mind if your activities change and grow.  It is important to review your activities on a regular basis and consult an Accountant if anything changes.


Characteristics of a Business:

  • You’ve made the decision to start a business and operate it in a business-like manner. For example, registered a business name, obtained an ABN, opened separate bank account, obtained licenses/qualifications
  • You intend to make a profit
  • You repeat similar activities
  • The size and scale of your activity is consistent with other businesses in the industry you operate

As mentioned above, businesses have several legal and tax obligations.  If you believe you are, in fact, running a business, or are still unsure please get in touch with us for further clarification and advice.


Characteristics of a Hobby:

A hobby is defined as an ‘activity done regularly in one’s leisure time for pleasure’.  The important distinctions here are:

  • gain personal enjoyment from the activity
  • have the flexibility to do it in your own time
  • choose to gift or sell your work for the cost of materials. There is no intention to make a profit.

If your activity is a hobby, you do not have any reporting obligations.  Because no income is reported, you also cannot claim any expenses relating to the hobby and hence can’t claim any losses.

Sometimes, its beneficial to set your hobby up as a business, especially if you are looking at claiming losses.  It is recommended to get an Accountants advice if you believe that this may apply to you.



Online selling

If you are engaging in on-line selling, the same characteristics apply as above.  See below a list of questions.  The more you answer yes, the more likely your are carrying on an on-line business.

  • Did you set up your online sales with the intention of being a business?
  • Do you pay for your online-selling presence?
  • Is your main intention to make a profit?
  • Do you make repeated or regular sales?
  • If you make the items, you sell online, do you charge more than they cost you to make?
  • Do you manage your online-selling activity as if it was a business?
  • Is what you are selling online similar or the same as what might be sold in a ‘bricks and mortar’ business?


The Next Steps:

Please contact us immediately if you are unsure or if you believe you are carrying on a business based on the information above.  We can help guide you with setting up your business properly as well as providing training on how to run your business.





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