Employees vs. Contractors: What Sets Them Apart

The Australian Taxation Office (ATO) has recently revised its guidance on differentiating between employees and independent contractors. This change follows several court rulings that clarified the criteria for determining whether a worker is genuinely an employee or an independent contractor. 

Whether you’re a worker or a business owner, understanding these differences is crucial, as they have an impact on tax, superannuation, and workplace entitlements.

Why does the difference matter?

How a worker is classified – either as an employee or a contractor – impacts who is responsible for paying taxes, providing benefits like superannuation and leave, and who carries legal responsibilities. Misclassifying a worker can lead to serious financial consequences, including unpaid entitlements and penalties from the ATO.

Key differences between employees and contractors

The primary difference lies in how the worker interacts with the business:

The contract between the business and the worker is crucial in determining a worker’s classification. While day-to-day work practices play a role, the legal rights and responsibilities outlined in the contract hold the greatest significance.

Here are the ATO’s most important considerations:

Superannuation and contractors

Even if someone is considered a contractor, they might still be entitled to superannuation if:

Workers who are always employees

Some workers are always considered employees, no matter what. This includes apprentices, trainees, labourers, and trades assistants.

Apprentices and trainees work while completing recognised training to earn a qualification, certificate, or diploma. They might be full-time, part-time, or even school-based and usually have a formal training agreement.

Most of these workers are paid under an award, meaning they have set pay rates and conditions. Businesses hiring them must follow the same tax and superannuation rules as they do for other employees.

Companies, trusts, and partnerships are always contractors

If a business hires a company, trust, or partnership (rather than a person) it’s always considered a contracting arrangement. However, people working for that entity could still be employees of that entity, rather than the business hiring the services.

Why this matters to you?

For workers, knowing your status helps ensure you receive the correct pay and benefits. For businesses, classifying workers correctly helps avoid fines and ensures compliance with tax and employment laws.

If you need more details or want to check your situation, reach out to us for more information. Proper classification today can prevent costly mistakes in the future.

Good CGT records can save you money

Congratulations! Your investment has done well, and you’re cashing in. You’re happy, and so too is the ATO. That substantial capital gain has brought wealth and a hefty tax bill. 

Sharing might be part of the deal but when it comes to your hard-earned profits, you might prefer to keep the ATO’s share to a minimum. Keeping good records will help do this. Here are some tips to help you hold onto more of your windfall and avoid that hefty tax bill.

How much did your investment really cost?

Good record-keeping is essential; it helps your accountant ensure that you pay no more tax than you must. You probably already know that what you get paid for your investment isn’t necessarily your gain. Basically your ‘gain’ on an investment is what you get less what it cost you, but do you really know what it cost you? 

The most obvious cost to keep a record of is the asset purchase price or ‘acquisition cost’ but there are some lesser-known costs that are often forgotten. Keep records of anything falling under these four categories as well.

1. Incidental costs of acquisition

These are costs directly associated with acquiring the asset, including such things as:

2. Non-capital ownership costs

You can sometimes add certain ownership costs to your cost base if they weren’t previously claimed as tax deductions. These include:

3. Capital expenditure on improvements

Your expenses covering things to increase or preserve the value of the asset are also relevant. Some examples include:

4. Costs of establishing, preserving, or defending ownership

Hopefully you don’t have too many legal expenses but if you do they too can be taken off the gain. If you have incurred costs related to defending your ownership in court or any legal fees incurred in a dispute over title keep a record of them as they will reduce the gain.

You’ve identified all the costs, but can we further reduce the gain? 

That capital loss you made earlier in the year wasn’t nice but there is a silver lining: it can offset that gain. If that’s not enough to wipe out the gain, dig deeper into your records. Was there any unused loss in a prior year? We can use that too!

Keep note of when you bought it

If you bought that asset prior to 20 September 1985, yippy no CGT! If you bought it over 12 months ago only half the net gain (after costs and losses) is assessable. So, if you’re thinking of selling an asset but haven’t held it for a year, consider hanging on to it just that little bit longer.

Final thoughts

By understanding what the costs are and keeping thorough records, you can legally minimise your CGT liability. 

Speak to us about what things you should keep records of to take full advantage of any applicable deductions and exemptions.

Market volatility: Super’s silver lining

If your super balance has suffered from recent market volatility there may be opportunities available now that weren’t before. Here are a few worth exploring.

Entitlement to an Age Pension

If you’re 67 or older, a lower super balance may mean you now qualify for the Age Pension or a higher payment if you are already getting an Age Pension.

Most assets, including super and super pensions, are assessed under the Centrelink asset test to determine eligibility.

The Age Pension is subject to both income and asset tests, and the one resulting in the lower payment applies.

If your assets fall below the cut-off threshold, you may qualify for a part Age Pension (subject to the income test). If they’re below the full pension asset test threshold, you may receive the maximum entitlement.

The table below shows the asset thresholds for receiving a full pension, as well as the cut-off point beyond which you’re no longer eligible:

If your assets were between the thresholds and have reduced, you may be entitled to a larger Age Pension than before. As an example, if you are a single Age Pensioner and not getting the maximum Age Pension because your assets are too high, then a reduction in the value of your assets by $10,000 will increase your Age Pension by $780 per annum or $30 per fortnight under the asset test. This represents a 7.8% increase in entitlements which may be more than the income actually produced on assets.

Ability to make further non-concessional contributions

That dip in your super balance may allow you to contribute more into super from 1 July 2025. How much you have in super and super pensions at 30 June of the previous financial year can impact how much you can contribute as a voluntary ‘after-tax’ non-concessional contribution (NCC) in the current financial year. 

For instance, if your total super balance (TSB) – which includes all your superannuation interests as at 30 June 2025 (including both super and pension accounts) – is lower, you may be able to make a larger NCCs from 1 July 2025.

As a reminder, the ‘bring-forward rules’ allow eligible individuals to contribute up to three years’ worth of NCCs in a single financial year. This can be especially useful if you have a lump sum to invest, such as from an inheritance or the sale of an asset or property.

However, the amount you’re able to contribute under these rules will depend on your TSB as at 30 June 2025. With the TSB thresholds set to increase from 1 July 2025, new contribution opportunities may become available in the new financial year.

The table below outlines the TSB thresholds that will apply when determining your bring-forward cap for 2025/26:

Commence an account based pension

Starting your first account-based pension (ABP) during a market dip can be a smart move, especially if you’re within the general transfer balance cap. The cap is currently set at $1.9 million for anyone starting their pension for the first-time this year, and it limits how much you can transfer into a pension account.

As a background, when you transfer funds into an ABP, that amount counts towards your transfer balance cap. However, any growth on your investments after that point doesn’t affect your cap. So, if markets recover while your money is in the pension phase, the gains stay within your account and you won’t be penalised for going over the cap.

And more good news – if you haven’t yet started a retirement phase income stream like an ABP, the general transfer balance cap is set to increase to $2 million from 1 July 2025, allowing you to invest a further $100,000 in the tax-free pension phase!

Seizing the moment

A drop in your super balance might present new opportunities, talk to us to see how recent market volatility could help shape your retirement strategy.

Downsizer Super Contributions: Dispelling three myths

Billions of dollars in downsizer super contributions have been made since its introduction in 2018. Downsizer contributions are popular, but three common misconceptions keep them from being more so.

Downsizer super rules allow people aged 55 and over who sell their home to contribute up to $300,000 into super. The rules say that you can be too young to make the contribution, but you can never be too old. This is why people who usually can’t make contributions due to their age love downsizer contributions. 

People with large amounts to contribute also love downsizer contributions because they allow you to contribute over and above the ordinary contribution cap limits. 

The “downsizer super contributions” has caused confusion about who is eligible and when. It is important to speak to an adviser to confirm your eligibility, but don’t be fooled by the following three myths which stop people from making a downsizer contribution.

You must“downsize” your home

A common misconception is that you must “downsize” by purchasing a cheaper home. While selling your home is required, there is no obligation to buy a less expensive property – or even to purchase a new home at all. In fact, some people choose to “upsize” and make a downsizer contribution using other savings. This is completely acceptable (see below).

Proceeds must come directly from the sale

The downsizer contribution does not need to come directly from the sale proceeds. If all the sale proceeds are used to purchase a new home, the individual can use savings elsewhere to fund the contribution. Individuals may also make a downsizer contribution in the form of an ”in-specie” contribution of another asset like listed shares so long as the value of the asset is within the allowable limits i.e. the lesser of sale proceeds or $300,000. Remember only self-managed-super funds generally accept in-specie contributions and these are limited to specific assets like listed shares, business real property and units in a widely held unit trust such as a managed fund.

You must live in the home at the time of selling

Another misunderstanding is that you must be living in the home when it’s sold. This is untrue but it is necessary to have lived in the home at some point. This requirement exists because eligibility for a downsizer contribution depends on qualifying for at least a partial main residence capital gains tax (CGT) exemption. While you must have previously lived in the home, it does not need to be your main residence when you sell it. 

Conclusion and helpful checklist

Understanding the downsizer rules will help you to ignore the myths. It is important you speak to a qualified adviser to confirm your eligibility, but the following checklist may help you check off on your eligibility..

Essential reminder

Don’t forget to submit the “Downsizer contribution into super form” (NAT 75073) to your fund with or before the contribution is made.

Seven changes impacting your super in 2025

Superannuation rules are always changing, and 2025 is set to bring some updates that could affect your retirement savings. Whether you’re just starting to build your super or already planning for retirement, keeping up with these changes can help you make informed decisions. Here’s what’s on the horizon.

1. Possible tax changes for large superannuation balances

    The government is looking at increasing taxes on large super balances. The proposal would add an extra 15% tax on the earnings of super balances over $3 million, starting from 1 July 2025. This has been a hot topic, with debates about whether the tax system for super is fair.

    The proposal made it through the House of Representatives in 2023 but ran into problems in the Senate in late 2024. To pass, the government needs support from minor parties and independent senators, but many are pushing back against key parts of the plan, such as taxing unrealised gains (profits on investments that haven’t been sold) and not adjusting the $3 million threshold over time.

    With a federal election coming up, it’s unclear if this tax change will go ahead. If it doesn’t pass soon, it may be delayed or scrapped altogether. The Senate will revisit the issue in February 2025, so we’ll have to wait and see what happens next.

    2. Increase in employer superannuation guarantee contributions

      A key change in 2025 is the rise in the super guarantee (SG), which is the portion of your wage that your employer must contribute to your super fund. From 1 July 2025, the SG rate will increase from 11.5% to 12%. While this might seem like a small increase, it can make a significant difference over time, helping your retirement savings grow. If you’re an employee, this means more money going into your super, but it’s also worth checking if it affects your overall salary package.

      3. Potential increase to transfer balance cap

        Although contribution caps increased in July 2024 due to inflation adjustments, they are not expected to rise again in July 2025.

        However, the transfer balance cap (TBC) – which limits how much super can be moved into a retirement pension – will increase from $1.9 million to $2 million on 1 July 2025.

        This change mainly affects people who haven’t yet started drawing a retirement income from their super. If you already receive a pension from your super, you might still benefit from a partial increase, depending on your individual circumstances.

        4. Impact on total superannuation balance 

          As the TBC rises on 1 July 2025, the total super balance (TSB) limit will increase as well. This limit affects how much you can contribute to your super using after-tax dollars, known as non-concessional contributions (NCCs).

          The expected increase in TSB thresholds will determine how much extra you can contribute, including whether you can use the bring-forward rule, which allows you to make larger contributions over a shorter period. The table below shows a breakdown of the expected limits for 2025.

          As can be seen, if your TSB is below $1.76 million, you can contribute up to $360,000 over three years. However, as your TSB increases beyond this amount, the limit on how much you can contribute gradually reduces. Once your TSB reaches $2 million or more, you will no longer be able to make additional NCCs. 

          These changes may create opportunities for some individuals to grow their super, but it’s important to understand how the new limits apply to your personal situation.

          5. New rules for older legacy pensions

            In December 2024, the government introduced new rules to give people more flexibility in managing older “legacy pensions.”

            For years, some retirees with lifetime, life expectancy, and market-linked pensions in self-managed super funds (SMSFs) have faced strict rules that made it difficult to change or adjust these pensions. These products can no longer be started in SMSFs, and many people have been stuck in outdated pensions that no longer suit their needs.

            Previously, the only way to change these pensions was to convert them into similar products, which came with limits on how reserves could be allocated that did not count towards the member’s contribution caps.

            But with the new rules now in place, people with legacy pensions have five years to review their options and make changes if needed. Since these decisions can be complex, it’s a good idea to speak with a financial adviser, especially one who specialises in SMSFs, before making any changes.

            6. Improved super fund performance and transparency

              Large APRA-regulated super funds are under pressure to deliver better performance and be more transparent with their members. In 2025, expect to see:

              Comparing super funds has become easier, helping you make more informed decisions about where to keep your retirement savings.

              7. Technology and digital innovation and super

                Technology is playing a bigger role in superannuation, and 2025 will likely see more innovation. Super funds are investing in better online tools, mobile apps, and artificial intelligence to help members track their savings and make smarter investment choices. If you haven’t already, it’s worth exploring your super fund’s digital tools to take control of your retirement planning.

                Final thoughts

                Superannuation is a long-term investment, and small changes can have a big impact over time. With the start of a new year, take the time to review your super, stay informed about potential changes, and consider speaking to a financial adviser if needed. With the right strategies, you can make sure your super is working hard for your future retirement. 

                Christmas and tax

                With the festive season just around the corner (or already under way), many business owners will be gearing up for year-end celebrations with both employees and clients.

                Knowing the rules around FBT, GST credits and what is or isn’t tax deductible can help avoid unwelcome surprises on the tax front.

                Holiday celebrations generally take the form of Christmas parties and/or gift giving.

                Parties

                Where a party is held on business premises during a working day, is attended by current employees only and comes in at less than $300 a head (GST-inclusive), FBT does not apply, the cost of the function is not tax deductible and GST credits cannot be claimed.

                Where the function is held off business premises, say at a restaurant, or is also attended by the employees’ partners, FBT applies where the GST-inclusive cost per head is $300 or more, but not where the cost is below the $300 threshold, as it would be regarded as a minor or infrequent benefit. Where FBT applies, it applies to the entire cost of the event, not just to the excess over $300, while the cost of holding the function is tax deductible and GST credits can be claimed.

                Where clients also attend, FBT will not apply to the cost applicable to them (not being employees), but those costs will not be tax deductible and GST credits will not be available.

                Gifts

                First, you need to work out whether the gift itself is in the nature of entertainment – for example, movie or theatre tickets, admission to sporting events, holiday travel or accommodation vouchers.

                Where the recipient of an entertainment gift is an employee, and the GST-inclusive cost is below $300, the minor or infrequent exemption may apply so that FBT is not payable, in which case the cost will not be tax deductible and GST credits are not claimable. For larger entertainment gifts to employees, however, FBT applies, the cost is deductible and GST credits can be claimed.

                Where the gift is not in the nature of entertainment and it falls below $300, the FBT minor or infrequent exemption may apply – for example, Christmas hampers, bottles of alcohol, pen sets, gift vouchers. But because the entertainment rules do not apply, the cost of the gift is tax deductible and GST credits are claimable.

                Where a gift is made to a client, the $300 FBT minor benefit exemption falls by the wayside, as long as it is not an entertainment gift and the gift was made in the reasonable expectation of creating goodwill and boosting future sales. Such gifts are uncapped (within reason) and are tax deductible to the business. GST credits are also claimable.

                Best approach for employees

                Provided it’s not a regular thing, taking employees out for Christmas lunch or dinner escapes FBT, as long as the cost per head stays below the $300 threshold. While the cost of the function will still be non-deductible, that has much less of a cash-flow impact on the business than the grossed-up FBT amounts.

                Combined with a non-extravagant off-site Christmas party, making a non-entertainment gift costing up to $299 is a very tax-effective way of showing your appreciation. Gift cards are always well-received and even where they can be used to make a wide variety of purchases (including theatre tickets and the like), they will not be regarded as an entertainment gift, which means the cost is tax deductible and GST credits can be claimed.

                Best approach for clients

                While FBT is off the table for business clients, making a non-entertainment gift (tax deductible; no dollar limit) is actually much more tax-effective than wining and dining a key client (non-deductible entertainment). If you put some thought into what gift to buy a client and in some cases deliver it yourself, you may make much more of an impact than joining them in one of many restaurant meals in their already crowded Christmas calendar. 

                If you need help on the tax treatment of holiday celebrations and gifting, please give us a call.