How to pay and manage Australian contractors: A practical guide

If you're paying independent contractors in Australia, you need to handle payment, documentation, and understand ABN verification and GST requirements. The payment part is straightforward once you know the right method. The compliance part—verifying ABN, managing GST, understanding superannuation rules, and keeping proper records—is where most businesses make mistakes.

This guide walks through what you actually need to do. Then we'll show you where Kontrable helps organize the work.

The main things you need to do

1. Verify ABN before paying. Request the contractor's Australian Business Number (ABN) and verify it on ABN Lookup (abr.business.gov.au). If they don't have an ABN, you must withhold 47% tax from payments. Always verify first.

2. Make payments using PayID or Wise. For Australia-to-Australia payments, use PayID—it's free and instant. For international payments to Australian contractors, use Wise for better exchange rates.

3. Collect proper invoices. Require invoices for every payment. If the contractor is GST-registered, their invoice must include 10% GST and their ABN.

4. Keep records for 5 years. The ATO requires you to maintain invoices, payment proof, ABN verification, and contracts for 5 years. This protects you in an audit.

5. Understand superannuation rules. Generally, you don't pay super for true contractors. But if the arrangement looks like employment, super may be required. Use the ATO's Employee/Contractor Decision Tool if unsure.

That's the foundation. Everything else builds on these five things.

Payment methods: What actually works

For Australia-to-Australia payments:

Use PayID through your Australian bank. It's free, near-instant (usually under 60 seconds), and contractors receive AUD directly in their bank account. Most Australian banks support PayID.

To set it up: Ask the contractor for their PayID (email or phone number linked to their bank account). Send the payment through your bank's PayID system. The contractor receives it within seconds.

For international payments to Australian contractors:

Use Wise. You'll get mid-market exchange rates (3-4% better than PayPal or traditional banks) and low fixed fees ($5-10 AUD per transfer). Contractors receive AUD in 1-2 business days.

Why Wise works: If you're paying from USD or another currency, Wise converts at the actual market rate, not the inflated rate PayPal or your bank uses. For regular payments, this saves thousands per year.

To set it up: Create a Wise business account (free). Enter the contractor's Australian bank details (BSB and account number). Send money from your currency. Wise converts to AUD at mid-market rates and deposits it in their Australian bank account.

What about direct bank transfer (EFT)?

Direct bank transfer (Electronic Funds Transfer) is free and reliable through most Australian banks, but slower than PayID (minutes to hours). Use it for regular scheduled payments if speed isn't critical.

What about PayPal?

PayPal is convenient if the contractor already uses it, but it's expensive. PayPal charges 2.6% + $0.30 AUD per transaction, and exchange rates are 3-4% worse than Wise. For regular payments, use Wise.

Understanding ABN (Australian Business Number)

The ABN is the most important requirement when paying Australian contractors. Without a valid ABN, you must withhold 47% tax from payments.

What is an ABN?

An ABN is an 11-digit identifier for Australian businesses and sole traders. Contractors should have an ABN to operate legally.

Why ABN matters:

• With ABN: Pay contractor full amount (no withholding)
• Without ABN: Must withhold 47% tax and remit to ATO
• Verification: Always verify on ABN Lookup before first payment
• Record keeping: Keep ABN details for 5 years

How to verify ABN:

1. Request ABN from contractor
2. Visit ABN Lookup (abr.business.gov.au)
3. Enter the ABN to verify it's active and matches contractor's name
4. Check if they're registered for GST (important for invoicing)
5. Keep screenshot or record of verification

GST (Goods and Services Tax)

Australian contractors must register for GST if their turnover exceeds $75,000 AUD annually. Once registered, they charge 10% GST on invoices.

How GST works:

• Contractor charges 10% GST on invoices (if registered)
• You pay the GST amount to them
• They remit GST to ATO quarterly
• If you're GST-registered, you can claim input tax credits (ITC)
• If you're not registered, it's an additional 10% cost

Example invoice with GST:

• Services: $1,000 AUD
• GST (10%): $100 AUD
• Total: $1,100 AUD

You pay $1,100 AUD to the contractor. If you're GST-registered, you claim $100 AUD back as an input tax credit on your BAS (Business Activity Statement).

Superannuation (Super) for contractors

One of the biggest questions: Do you need to pay superannuation for contractors? Generally, no—but there are exceptions.

When super is NOT required (true contractors):

• Contractor provides a quote or tender for the work
• Contractor is paid for results, not time
• Contractor uses their own tools and equipment
• Contractor controls how the work is done
• Contractor can delegate or subcontract the work
• Contractor works for multiple clients

When super MAY be required:

• Contractor is paid mainly for their labor (not results)
• You provide tools, equipment, or workspace
• You direct how, when, and where work is done
• Contractor works exclusively for you
• Arrangement looks like employment

Current super rate: 11.5% of ordinary time earnings (as of July 2024, increasing to 12% by July 2025).

If unsure about super: Use ATO's Employee/Contractor Decision Tool or consult with an accountant. Getting this wrong can result in back payments and penalties.

Tax and compliance requirements

What you need from Australian contractors

Before paying any contractor, collect:

• ABN: Australian Business Number (verify on ABN Lookup)
• Invoices: Proper tax invoices for all work completed
• GST status: Whether they're registered for GST (shown on ABN Lookup)
• Bank details: BSB and account number for transfers
• TFN declaration (if required): Only if you determine super is payable

Records you must keep

The ATO requires you to keep records for 5 years. Maintain:

• All contractor invoices
• ABN verification records
• Proof of payment (bank statements, Wise receipts, PayID confirmations)
• Contracts or statements of work
• GST documentation (if claiming ITCs)
• Superannuation payment records (if applicable)

Contractor vs employee classification

One mistake businesses make is misclassifying employees as contractors. The ATO uses several factors to determine the relationship:

Control: Does the contractor decide how, when, and where they work, or do you?

Ability to delegate: Can they delegate the work to someone else, or must they do it personally?

Financial risk: Do they bear financial risk on the engagement, or are costs covered?

Tools and equipment: Do they use their own equipment, or do you provide everything?

Multiple clients: Can they work for other clients, or are they exclusive to you?

If the ATO determines a "contractor" is actually an employee, you owe back superannuation, PAYG withholding, and penalties.

Use the ATO's Employee/Contractor Decision Tool to assess the relationship. Document it carefully with a written contract that explicitly states independent contractor status.

Common mistakes and how to avoid them

Mistake 1: Paying without verifying ABN. Problem: You pay a contractor without verifying their ABN. Later, ATO audits and determines the ABN was invalid or inactive. You're liable for the 47% withholding tax you should have deducted.

Solution: Always verify ABN on ABN Lookup before the first payment. Keep screenshot of verification. This takes 2 minutes and protects you completely.

Mistake 2: Not claiming GST input tax credits. Problem: You're GST-registered but don't claim input tax credits on contractor invoices. You're paying 10% more than necessary.

Solution: Ensure contractors provide proper tax invoices with GST breakdown and their ABN. Keep all invoices organized. Claim ITCs on your BAS.

Mistake 3: Misclassifying employees as contractors. Problem: You treat someone as a contractor but they work exclusively for you, use your equipment, and follow your directions. ATO audits and determines they're actually an employee. You owe back super, PAYG withholding, and penalties.

Solution: Use ATO's Employee/Contractor Decision Tool. Ensure contractors control their work methods, use their own tools, and can work for other clients. Document the relationship properly.

Mistake 4: Using PayPal for currency conversion. Problem: You're a US business paying Australian contractors via PayPal. PayPal's exchange rate is 3-4% worse than mid-market. For a $5,000 USD payment, you lose $150-200 USD to bad exchange rates.

Solution: Use Wise for international payments. You get mid-market rates and save 3-4% on every transfer.

Frequently asked questions

Q: Do I need to deduct tax from Australian contractor payments? A: No, if the contractor has a valid ABN. They're responsible for their own income tax through quarterly PAYG installments or annual tax returns. Exception: If contractor doesn't have an ABN, you must withhold 47% tax.

Q: What if the contractor doesn't have an ABN? A: You must withhold 47% tax from payments and remit it to ATO. This is a significant compliance burden. Always request ABN before engaging contractors. If they're legitimate, they should have one.

Q: Can I use PayID if I'm an international business? A: No, PayID requires an Australian bank account. Use Wise for international payments to Australian contractors—it's the most cost-effective option with mid-market exchange rates.

Q: How do I know if someone is a contractor or employee in Australia? A: Use ATO's Employee/Contractor Decision Tool. Key factors: control (who decides how work is done), ability to delegate, financial risk, tools and equipment ownership, and whether they work for multiple clients. Contractors should control their work methods and be able to work for others.

Q: Do I need a written contract with Australian contractors? A: Not legally required, but highly recommended. A written contract clarifies scope, deliverables, payment terms, and helps demonstrate the contractor relationship for ATO purposes. It protects both you and the contractor.

Q: What's a tax invoice in Australia? A: A tax invoice must include: contractor's name and ABN, your name, date, description of services, GST amount (if registered), and total amount. If contractor is GST-registered and invoice is $1,000+ AUD, it must be a tax invoice for you to claim input tax credits.

Q: Do I need to register as a payee in Australia? A: No. You're paying independent contractors for services. You don't need to register as a payee or with the ATO unless you have employees. The contractor handles their own tax compliance.

Getting started

If you're paying Australian contractors, here's the process:

1. Request contractor's ABN and verify on ABN Lookup
2. Check if they're GST-registered (shown on ABN Lookup)
3. Assess super requirements using ATO's Employee/Contractor Decision Tool
4. Set up payment method: PayID for Australia, Wise for international
5. Require proper tax invoices with GST breakdown (if applicable)
6. Keep all records for 5 years
7. Create written contractor agreement

Kontrable helps with steps 1, 4, 5, 6, and 7 by organizing contractor information, tracking payments, managing invoices, and storing contracts. You stay in control of your payment method and use PayID or Wise directly.

If you're managing a few contractors, a spreadsheet works. If you're managing dozens or coordinating across a team, Kontrable saves time and keeps contractor data organized.

Ready to get organized?

[Start a free trial of Kontrable] – Get invoice workflows, payment tracking, and contract storage. Try it free.