Do I Need An ABN For A Contractor Overseas? Your Bookkeeper Is About To Withhold 47 Per Cent

No, and in most cases they are not allowed one. Someone working in Manila who is not carrying on an enterprise in Australia is not entitled to an Australian Business Number. Almost nobody acts on it, because the default when an invoice arrives without an ABN is to withhold. Outstaffer sells an Employer of Record service, so take that as disclosed.

The Australian Bureau of Statistics released September's labour force figures on 15 October: employment down 39,300, unemployment up to 4.7 per cent. Payroll growth has stalled. The work has not, and some now arrives on an invoice.

The ATO already wrote the answer on a form nobody opens

The rule most bookkeepers half remember is real. Where a supplier does not quote an ABN, you withhold the top rate of tax and send it to the ATO. The exceptions are the interesting part, and the ATO lists them on its Statement by a supplier not quoting an ABN form. One reason a supplier can give, in the ATO's words, is that "they are not entitled to an ABN because they are not carrying on an enterprise in Australia".

That is your contractor in Manila. Exactly and literally. They sign a short statement, you file it with the invoice, and you withhold nothing.

What if they already have an ABN?

Then quote it and move on. Some do: an agency selling into Australia, or a developer who lived here and never cancelled. An ABN is evidence of entitlement, not of residency.

What withholding 47 per cent from an overseas contractor actually costs

The ATO prints no percentage. It prints "top rate of tax". Its resident rates table puts the top marginal rate at 45 cents in the dollar above $190,000, and the Medicare levy adds 2 per cent. That is where the 47 comes from.

Run it. A bookkeeper in Cebu invoices $2,400 a month. Withhold 47 per cent and $1,272 reaches the person doing the work. Over a year that is $13,536 remitted against a liability nobody created, on an invoice of $28,800. No tax is saved. You have lent the Commonwealth half of someone's pay and called it the rule.

They resign in week six.

Outstaffer's published Employer of Record pricing starts at $250 a month per employee, covering the employment relationship, statutory contributions and payroll in the right currency. The expensive option was never the compliant one.

It was the accident.

Can the supplier claim it back?

In theory, by lodging an Australian return. Most will not, because a tax agent here costs more than the sum in dispute. The money is gone, and the relationship with it.

The ABN is the easy half of what you need to check

Here is the honest counter. The exemption turns on the supplier's own claim, not your judgement of their affairs, and the statement takes two minutes. It is the easiest compliance question you will answer this quarter, and the least important.

An ABN tells you nothing about classification. The harder question is whether this is a contractor arrangement at all, because someone who works your hours, uses your systems and cannot send a substitute is not a supplier the ATO or Fair Work would recognise.

Does a company on the invoice change it?

Not on the ABN point. A Philippine corporation not carrying on an enterprise here sits where a Philippine individual does. It can change the classification analysis, worth reading beside what a Philippines hire costs once statutory items are counted.

Related reading

• Your Contract Says Contractor. The ATO Looks At Two Other Things.
• A Second Client Does Not Make Your Contractor A Contractor

What I would do before the next contractor invoice lands

Pull twelve months of payments to anyone outside Australia and check for tax withheld against a missing ABN. If there is any, you have an overpayment and a statement to collect. This is general information rather than tax advice, so run your facts past your accountant.

Then ask the second question. If this person is not really a supplier, sign up and price the employed version before someone with statutory powers asks for you.

What I cannot work out is why software defaults to withholding on a foreign address. Do I need an ABN for a contractor overseas, or does the ledger just assume so? If yours gets it right, tell me which one.