Subcontractor vs Employee — ATO Rules for Tradies

You reckon he's a subbie because he has an ABN and sends you invoices. The ATO reckons he's an employee because you tell him where to be, when to start, and what tools to use. Guess whose opinion matters more. Getting this wrong can cost you years of back-paid super, leave entitlements, payroll tax, and penalties that can reach hundreds of thousands of dollars.

The ATO test — what they actually look at

The ATO determines worker status based on the totality of the contract. No single factor is decisive — they weigh all of them together. Here are the big ones:

Control

Does the business direct how, where, and when the work is done? An employee is told "be on site at 7am, do it this way, use these materials." A genuine subcontractor is given a result to achieve and decides how to get there. If you are directing the method, not just the outcome, that points to employment.

Delegation

Can the worker genuinely send someone else to do the job? An employee must perform the work personally. A genuine contractor can delegate or subcontract — and the right to do so must be real, not just a clause in a contract that would never actually be exercised.

Risk

Who bears the commercial risk? If the work is defective, does the worker have to fix it at their own cost? Can they make a profit or loss on the job? An employee has no financial risk — they get paid their rate regardless. A genuine contractor quotes a price, bears the risk of cost overruns, and is liable for defects.

Tools and equipment

A genuine contractor provides their own significant tools and equipment. If your business provides all the gear and the worker just turns up with a lunchbox, that looks like employment.

The superannuation trap

Even if someone is a genuine contractor for income tax purposes, you may still owe them super. The superannuation guarantee applies if the contract is "wholly or principally for the worker's labour" — meaning they do the work personally, don't provide significant plant or equipment, and are essentially filling a role in your business. An ABN does not exempt you from this.

Fair Work uses a different test

Here is where it gets messy: the ATO, Fair Work, and your state's payroll tax and WorkCover authorities all use slightly different tests. A worker can be classified as a contractor by the ATO but an employee by Fair Work. Fair Work looks at the "real substance, practical reality, and true nature" of the relationship — not just what the contract says. If the day-to-day reality looks like employment, Fair Work will treat it as employment, regardless of the contract.

Sham contracting — the penalties

Sham contracting is when you deliberately (or recklessly) disguise what is really an employment relationship as an independent contractor arrangement to avoid paying entitlements. The penalties under the Fair Work Act are severe:

• Up to $93,900 per contravention for an individual.
• Up to $469,500 per contravention for a body corporate.
• Plus back-payment of all entitlements — super, leave, notice period, redundancy — potentially going back years.
• Plus payroll tax and WorkCover liabilities in your state.

TPAR — your annual reporting obligation

If you are in building and construction, you must lodge a Taxable Payments Annual Report (TPAR) each year by 28 August. This reports all payments you made to contractors for building and construction services during the financial year. The ATO uses TPAR data to cross-reference what contractors are reporting as income — so your subbie's tax return and your TPAR had better match.

How to structure it properly

• Written contract — spell out the scope, the result to be delivered, payment terms, and the right to delegate. Make sure the contract reflects reality.
• Quote the job, not the hour — genuine contractors quote a price for a result. Hourly rates with no fixed scope look like employment.
• Let them control the method — specify what you need done, not how to do it.
• Own tools and equipment — a genuine contractor provides their own significant tools.
• Multiple clients — if they work exclusively for you, it starts looking like employment. A genuine contractor serves multiple businesses.
• Document your reasoning — write down why you classified the worker as a contractor. If it is ever challenged, having a documented, considered position helps establish "reasonable belief."