The spotlight’s on the building industry - Inland Revenue’s new factsheet

The spotlight’s on the building industry - Inland Revenue’s new factsheet

Recent times have seen business booming for those at the hammer end of construction and building in Canterbury, in large part due to the earthquakes that hit the region. Christchurch’s boundaries are expanding, and particularly western suburbs are seeing extensive development. Now construction workers in the building industry need to be looking at the tax and ACC implications of all that work (and income).

Inland Revenue have released a factsheet (IR 1026 “Working in the building industry”) outlining the three types of construction workers: employees, labour-only contractors and independent contractors, with a summary of the tax rules that apply to each. Knowing your employment status is important as it not only affects the way your income is taxed, as addressed in the factsheet, but also your ACC payment obligations.

Summary

 Inland Revenue’s new factsheet is a good starting point for things to consider as a construction worker in the building industry. However, as you can read further below, there is more to be aware of than just your employment status. We recommend that you:

  • Set aside a portion of your income during the year for a potential tax bill if you think you might earn more than $70,000.
  • Consider registering for GST, even if your expected income will be under $60,000.
  • Consider the benefits of having pre-agreed loss of earnings cover using ACC’s CoverPlus Extra (if eligible) but budget accordingly.
  • Take advantage of ACC’s interest free instalment option for levies over $500 to help with cash-flow.
  • Consider whether you need Public Liability Insurance.

Want or need to know more? Then read on.

 Employment status

 Employee

The key to determining your employment status is establishing who has “control”. If someone else determines your hours, provides your tools and equipment, controls how and when your work is done, it is likely you are an employee. Your employer is responsible for deducting PAYE from your wages or salary based on the tax code you provide them. Provided your only source of income is from your wages or salary, and PAYE has been deducted correctly, you will probably not have any further tax or ACC obligations.

Independent Contractor

In the building industry, if you are a contractor (i.e. you have control over when, where and how you work), you may be either an independent contractor or a labour-only contractor. An independent contractor has control over the work and provides the materials for the job. If this is your situation no tax is deducted from payments you receive. You will need to complete an income tax return at the end of the tax year declaring all your earnings, claiming business expenses against your business income. However, it is important to ensure you set aside money during the year for tax so that you aren’t caught short. You are also required to pay levies directly to ACC which is discussed in more detail below.

 Labour-Only Contractor

If you are a labour-only contractor (and your Principal provides materials), you will receive “schedular payments” (subject to exceptions below). Your Principal withholds 20% from your schedular income and pays that tax on your behalf, much like paying PAYE. This tax will be credited against your tax bill when you file your end of year tax return. Unlike PAYE however, this will not be the end of the matter for you as you still have to file an annual tax return which could result in further tax to pay and you are also required to pay ACC levies directly.

 You also need to remember here that under this category you are self-employed (not an employee), and you may have other obligations like Public Liability Insurance. You also will be entitled to claim expenses against your income.

Special rules apply if you are a non-resident contractor. Shellock Consulting can assist you if you need more information.

 Schedular payments: Exceptions

 The exceptions to schedular payments:

  • Payments for services provided by a company are not schedular payments as a company pays provisional tax (certain exceptions apply).
  • You may qualify for a Certificate of Exemption (COE) if you’re in business if you have a clean record for filing your tax returns and paying tax on time.

 Certificate of Exemption

A COE applies specifically for tax on schedular payments (it cannot apply to exempt an employee’s salary or wages from PAYE). It may be issued for up to five years based on your tax filing and payment history. If you are granted a COE, no tax will be deducted from your schedular payments but you will need to settle up your tax in your end of year tax return.

 Traps to look out for

 The arbitrary 20%

If you’re receiving schedular payments, the 20% deduction by your Principal seems to be quite an arbitrary figure imposed that isn’t likely to accurately cover your tax liability. If you earn around $70,000 per year, 20% deducted by your Principal will just cover your tax liability. If you earn less, you will end up paying too much tax. This will be refunded eventually, however waiting until well after the end of year for your tax return to be processed before securing your refund does not make good business sense. Alternatively, if you earn more, you could face a tax bill when you file your tax return.

 Goods and Services Tax

As a contractor you must register if your gross earnings will be more than $60,000 in any 12 months period. However, you can register if this sum is less, and you probably should if your work costs include using your ute or truck to travel to different jobs, or you have significant other costs that have GST included. If you are GST registered, it’s worth noting that the withholding tax is not taken off the GST portion of the invoice.

 What about ACC?

Employment status also needs to be established for Accident Compensation purposes. For employees, ACC levies are covered within PAYE deductions. Not so for contractors who will need to make payments to ACC directly. ACC offers self-employed people two options: ACC CoverPlus and ACC CoverPlus Extra.

 If you are self-employed, you will automatically receive ACC CoverPlus, which pays up to 80% of your earnings based on the taxable income declared in your most recent income tax return. A few problems with this:

  • It could be 18-24 months before a business’s first tax return is filed so an accident could result in minimal loss of earnings compensation as you will not yet have established an income pattern (or alternatively a difficult and time consuming exercise proving what your income was).
  • After your tax return is filed, ACC will send a bill for the previous year as well as a provisional levy for the current year which can add to a significant sum, especially in a higher risk industry like construction where levies are more expensive already.

 We don’t like this double tax whammy in the second year of business. It just hurts the pocket at the time when the income tax bills starting coming up, and often at a time when contractors are thinking of taking on a second pair of hands.

 ACC offer self-employed and non-PAYE shareholder employees CoverPlus Extra where you agree with ACC on a fixed level of cover (like a private insurance policy). If you make a claim for an accident you will receive that agreed amount with no need to prove your earnings. A few points to note:

  • Under CoverPlus Extra you are covered from the moment your application is received by ACC.
  • You will be sent the premium invoice when your application has been processed, so you will be paying for your cover earlier than the other option.
  • You are not entitled to CoverPlus Extra if you are an employee of your own company (a shareholder-employee) unless you do not earn salary or wages.
  • If you have a combination of wages for some works and self-employed for others, the calculation of your ACC will be all over the place. 

This third point is a big problem. Why? Because paying yourself a salary or wage is the easiest way to mitigate your income tax bill – it effectively enables you to pay your income tax as PAYE as and when you can afford to pay yourself. It is these frustrating complications that make being self-employed difficult to muster.

On the positive, to make payments more manageable, ACC allow for levies over $500 (GST exclusive) to be paid in instalments of up to 10 months, interest free if paid in 4-6 months, and low interest (currently 5.47%) on the unpaid amount for the longer periods. This undoubtedly makes keeping on top of levies easier while helping level out cash-flow troughs.

If you are uncertain of whether you are an employee or a contractor, or need advice either as an employee, contractor or Principal, please contact us at enquiries@shellockconsulting.co.nz.

 Disclaimer

The comments in this paper are the personal opinion of the writer and are of a general nature only. The Inland Revenue factsheet can be found at http://www.ird.govt.nz/forms-guides/number/forms-1000-1099/ir1026-guide-working-building.html

Posted: Tuesday 25 August 2015