Becoming A Contractor

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Becoming a contractor (or subcontractor) in Australia

There are generally two reasons why someone will become a contractor.

The first is the voluntary decision to become a contractor. This may be a way to seek extra freedom or independence.

The second can happen where an employer suggests or requests that you become a contractor.

Either way, there are a number of steps which need to be taken, and a number of factors to consider.

  1. Decide on and implement a business structure
  2. Understand your responsibilities
  3. Check your licensing and insurance requirements

We’ll now take a look at each of these areas in more detail.

Decide on a business structure

Once you’ve decided that becoming a contractor is the right decision for you, the next step is decide on the business structure you will use.

Sole Trader

If you are working on your own, the most popular option is to become a sole trader.

As a sole trader you and your business are treated as a single legal entity, and there is no separation when it comes to financial matters.

For:

Setting up as a sole trader is a very straightforward process, and all you need to do is register an ABN (Australian Business Number).

If you wish to trader under a name other than your own name, you will also need to register a trading name. This is an easy and very inexpensive process.

You and your business will share the same TFN (Tax File Number) which means you only submit a single tax return each year.

Ultimately these factors mean that operating as a sole trader is the most inexpensive and easiest way of operating as a contractor. But there is more to consider.

Against:

As a single legal entity, any loss that the business suffers also applies to you personally.

For example if your business suffers a major loss, you will be personally liable for the loss. This means that your personal assets such as your family home could be at risk.

Company

A company structure is generally more associated with businesses that employ multiple staff, but there are still situations where a contractor may choose this option.

The big difference between a sole trader and company structure is that with a company you and your business are both regarded as separate legal entities.

For:

With you and your business being separate legal entities, you are protected from losses that your business may suffer.

As you and your business lodge separate tax returns, you and your accountant may also have some more freedom in the way that profits are paid or retained.

Against:

Setting up a company structure is more expensive initially, and is also more expensive on an ongoing basis.

Despite this increased costs, some contractors still see a company structure as a more attractive option.

Other Structures

There are other structures you can go with, such as a partnership or a trust, but these tend to be less common for a contractor.

If you are unsure you should speak with your accountant.

Implement your business structure

Once you’ve decided on a business structure the next step is to have it implemented.

Sole Trader

For a sole trader this is very simple. The first step is to apply for an ABN, which can be done via the Australian Business Register website at no cost.

To add a trading name you will need to register a business name. This can be done via the ASIC website and costs around $30 for a 1 year registration.

Company

To setup your company structure you can either use your accountant or you can utilise one of the various online providers of company registrations.

Contractor responsibilities

As a contractor there are certain responsibilities that you will not have previous had when you were an employee.

You will now be responsible for meeting your own taxation obligations, which may include having to complete a Business Activity Statement each quarter, along with paying GST and PAYG.

You will also need to manage your own superannuation responsibilities. There are serious penalties in place for contractors who do not comply with the super requirements.

An accountant or bookkeeper will be able to help you with these responsibilities, or you may choose to look after them on your own.

It’s also important to remember that you no longer have access to sick leave or workers compensation, so it will now be your responsibility to ensure you are protected financially if you cannot work for a period of time.

Insurance requirements

As a contractor you will no longer be covered by the business insurance of your employer.

Instead it will be your own responsibility to ensure that your business activities are properly insured.

For most contractors the most important form of cover will be public liability insurance, which will protect you in the event that you cause property damage or personal injury to another person.

In some cases insurance will be optional, but depending on your occupation you may find that it is mandatory.

For example many construction sites around Australia require that contractors and subcontractors have their own public liability insurance.

As a contractor you will not have access to any sick leave or workers compensation, so it is also a very good idea to insure your income.

This can be done via income protection, which is also one of the most important forms of insurance for a contractor.

Licensing requirements

Depending on the type of contracting you are undertaking there may be certain licenses or permits that are required.

For example if you are an electrical contractor you will need a licence in most states of Australia.

Another example is a bookkeeper, where you may be required to be a registered BAS agent depending on the work you are undertaking.

Most licenses required for business are administered by the individual states, so it’s best to refer to your state government’s website for more information.

More information

Your two main contact points for information when becoming a contractor should be your accountant and your insurance broker.

Your accountant will be able to assist you in recommending the most suitable business structure, along with helping you to put the structure in place.

Where your insurance broker comes into the picture is ensuring that you and your family are protected financially if anything goes wrong once you start contracting.

Of course you can do all of these things on your own, provided that you have the time to do it properly and undertake sufficient research.

Switching to being a contractor can be a fantastic way to increase your independence and potentially even your income, but it’s important to get the setup done properly the first time.

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