Payments to contractors are, in certain circumstances, taken to be wages. Division 7, Part 3 of the Payroll Tax Act 2007 (the Act) contains the contractor provisions, which are intended to tax payments to contractors who provide predominantly labour services and who work exclusively or primarily for one designated person in a financial year.
The provisions initially capture all contracts for the performance of work. These are referred to as relevant contracts. Some contracts are specifically excluded from the definition of relevant contracts and, as such, the payments under those contracts are not taxable.
If a contract is a relevant contract, payments under the contract are deemed to be wages (excluding GST). The designated person who engages the contractor is deemed to be an employer and is liable to pay payroll tax on those deemed wages.
The term "contractors" is generic and includes sub-contractors, consultants and outworkers. The provisions apply regardless of whether the contractor provides services via a company, trust, partnership or as a sole trader. The nature of the contracting entity does not affect the application of the contractor provisions.
The Act contains separate provisions relating to workers that are on-hired under an employment agency contract to a client of the employment agency.
When do you pay?
In summary, there are three steps to determining a payroll liability in respect of your contractor:
Step 1: Is the person an employee?
Although you may consider a worker to be a contractor, they may actually be your common law employee.
The Act does not define the term employee. In most instances it is not difficult to determine if a person is an employee or a contractor.
Generally, only natural persons can be considered employees. If the person engaged conducts their business via a company or a trust, they cannot be considered an employee. Payments to them may, however, still be taxable under the contractor provisions.
If it is unclear whether the person is an employee or a contractor, a number of significant factors (established by the courts) should be considered.
If uncertainty exists as to the status of a person, a ruling should be obtained from the SRO. In cases where it has been determined a person is a contractor and not an employee, it is necessary to consider the contractor provisions in the Act.
If the person is an employee, the payments made to, or in relation to, that person are subject to payroll tax. If the person is not an employee, it is necessary to consider Step 2.
Step 2: Is the contract a relevant contract?
If the contract involves being supplied with services, supplying services or giving out goods for their re-supply, it is a relevant contract and it is necessary to consider Step 3. If the contract does not involve any of these, it is not a relevant contract and payments under the contract are not subject to payroll tax.
Step 3: Do any exclusions apply?
Payments under a relevant contract are not taxable if:
- Any one of six exclusions provided in the Act apply, or
- The services provided under the contract are of a type specifically excluded by the Act
The Act (s32) provides that payroll tax is imposed on payments made for services provided under a relevant contract. A relevant contract is one where a person in the course of their business:
- Supplies services to another person for or in relation to the performance of work,
- Receives services from another person for or in relation to the performance of work, or
- Gives out goods to natural persons for work to be performed by those persons in respect of those goods and for re-supply of the goods to the first mentioned person, or where that person is a member of a group, to another member of that group
In practical terms, a relevant contract exists where the contractor provides some labour services in fulfilling the requirements of the contract. If a contract is not a relevant contract, payments will not be subject to payroll tax.
Contracts between an Australian Financial Services Licence (AFSL) holder and its authorised representative
The Commissioner will consider the arrangements between an AFSL holder and its authorised representatives on a case by case basis to determine whether or not those arrangements are relevant contracts under section 32 of the Act.
The Commissioner will take into account all factors, including the contracts and the contractual arrangements, the nature of the business conducted by the AFSL, the nature of the business conducted by its authorised representatives, the provision of services, and the remuneration and payments between the AFSL holder and its authorised representatives.
Certain contracts are not relevant contracts for payroll tax purposes. Specifically, s32(2)(d) of the Payroll Tax Act 2007 excludes contracts where services are supplied by:
- Insurance agents, and
- Door-to-door sellers
Payments made to contractors who provide any of these types of services are not taxable, even if no other exclusions apply.
Note: for these contracts to be excluded for payroll tax purposes, the services must be provided by a contractor and not an employee.
Generally, these are contractors engaged primarily to transport goods where the contractor provides and drives the vehicle used for the transport of those goods (s32(2)(d)(i)).
Generally, these are contractors who only sell insurance. Specifically, the provision excludes contracts under which services are supplied solely to the insurer for, or in relation to, obtaining customers to be insured by the insurer (s32(2)(d)(ii)).
The exclusion does not apply to commissions from the sale of other non-insurance products.
Door-to-door sales contracts are excluded if various criteria are met, including the requirement that the goods sold are essentially domestic goods and the sale is made at the purchaser’s residence (s32(2)(d)iii)).
Section 32(2) also provides six other, more general, exclusions. As such, relevant contracts do not include contracts whereby:
- The contractor provides services to the one designated person for 90 days or less in a financial year,
- The contractor engages others to do all or part of the work pursuant to the contract subject to certain conditions being met,
- The provision of labour is ancillary or secondary to the supply of materials or equipment by the contractor,
- The services provided under the contract are of a type not ordinarily required in the designated person’s ongoing business and the contractor usually provides those services to a range of clients,
- The services are of a type ordinarily required by the designated person for less than 180 days in a financial year, or
- The Commissioner is satisfied the contractor ordinarily renders services of the type under the contract to the public generally in a financial year
The contractor provides services to the one designated person for 90 days or less in the financial year
This is the first exclusion which should be considered when determining if payments to contractors are subject to payroll tax.
Payments made to contractors who work for one designated person for 90 days or less in total during a financial year are not included for payroll tax purposes. This operates to exclude payments to short-term contractors.
- This cannot be used to exclude payments to casual, short-term or part-time employees,
- Any work carried out on a given day will count as one full day,
- The days worked do not have to be consecutive. They can be worked intermittently throughout the financial year. It is the total number of days worked during the financial year that must be considered in determining if this exclusion applies,
- Once the 90-day limit is exceeded, all payments made to the contractor during the financial year are taxable, including payments made for the first 90 days (subject to none of the other five exclusions applying), and
- The exclusion will not apply where the contractor is providing the same or similar services to a designated person under various contracts where the number of days on which the services are provided in total is greater than 90 days in that financial year
Generally, the number of days a contractor has rendered services can be ascertained by reference to time sheets, attendance sheets or invoices. In some circumstances, however, it may not be possible to determine the actual number of days on which services are provided.
Accordingly, where such difficulties exist, the Commissioner has set out a replacement method to determine whether this exclusion applies. Under the replacement method, a formula is used to calculate the estimated remuneration a contractor would receive from a designated person for 90 days of service. If the actual amount earned by the contractor is less than, or equal to, the amount calculated using the formula, the 90-day exclusion will be accepted as being applicable to that contract.
For further information, refer to the Commissioner’s ruling on the replacement formula.
The contractor engages others to do all or part of the work pursuant to the contract (subject to certain conditions being met)
Payments made to contractors who hire employees or engage other contractors to perform some or all of the work required under the contract are not included for payroll tax purposes.
For this exclusion to apply, the number of people required to be engaged varies according to the nature of the entity through which the services are provided. A Commissioner’s ruling explains this in more detail.
Where the conditions outlined in the ruling are not met, but the designated person believes that the exclusion should apply, an application should be made to the SRO for a private ruling.
The provision of labour is ancillary or secondary to the supply of materials or equipment by the contractor
Payments made under contracts where the provision of labour is ancillary or secondary to the supply of equipment or materials by the contractor (in other words, the provision of materials or equipment is the main object of the contract) are excluded for payroll tax purposes.
- A company has an air-conditioning unit installed. The contractor who supplied the unit also installed it. In this instance, the installation work is ancillary to the provision of the air-conditioning equipment and payments under the contract are not taxable.
- Jones Constructions Pty Ltd enters into a contract with Riggs Crane-Hire Pty Ltd to supply the use of a crane and Riggs Crane-Hire Pty Ltd also supplies the crane operator. This contract is excluded because the supply of the crane is the main purpose of the contract. The supply of the operator is ancillary to the supply of the crane.
The Commissioner has ruled that the provision of labour under a contract will be considered to be ancillary to the provision of materials or equipment where the cost to the designated person of the provision of the materials or equipment exceeds 50 per cent of the total contract amount.
The services provided are of a type not ordinarily required in the course of the designated person’s ongoing business and those services are provided by a contractor who normally renders such services to the general public
This provision excludes payments for services of a type not ordinarily required in the designated person’s business, where the contractor usually provides those same services to the public generally.
This recognises the fact that businesses may require certain services that are not associated with their mainstream business.
A bank hires painters and decorators to paint and decorate its office once every five years. Those painters and decorators also render their services to the public generally. The contract is excluded for payroll tax purposes because the bank does not ordinarily require the services of painters and decorators.
A Commissioner’s ruling provides further detail on this.
The services are of a kind or type ordinarily required by the designated person for less than 180 days in a financial year
This provision excludes payments made under contracts for a type of service which the designated person requires for less than 180 days in a financial year.
This takes into account the fact that businesses require ad-hoc services allied to the mainstream work of the business, but so infrequently that employees are not engaged to perform those services.
A Commissioner’s ruling provides more detail on, and some examples of, this exclusion.
The Commissioner is satisfied the services are rendered by a contractor who ordinarily renders services of that type to the public generally in that financial year
This provision excludes contracts for services that do not meet any of the other five exclusions and the Commissioner is satisfied that the services are rendered by a contractor who ordinarily renders such services to the public generally in that financial year.
In applying this exclusion, the Commissioner needs to be satisfied that the contractor provides the services in the course of conducting a genuine independent business, which stands in the market place and actually renders like services to a range of clients in that financial year.
A Commissioner’s ruling provides more detail on, and some examples of, this exclusion.
Amounts payable under relevant contracts
Generally, the full amount paid to a contractor is taxable (excluding GST). However, it is recognised that many of the contracts subject to payroll tax may involve some element of materials or equipment being supplied by the contractor, although not enough for the labour ancillary exclusion to apply.
Accordingly, the Commissioner has approved certain deductions for various classes of contracts to reflect a deemed amount for materials and equipment. A Commissioner’s ruling provides more detail on contractor deductions.
A contract computer programmer is engaged by a designated person and is paid $100,000 (excluding GST) in the financial year. The programmer provides some materials and equipment in performing the work under the contract.
A deduction of 5 per cent has been approved for computer programmers. Assuming the payments to that contractor are subject to payroll tax, the amount to be declared is $95,000 (that is, $100,000 less the 5 per cent approved deduction ($5000)).
There are three important points regarding these deductions:
- They are only available in respect of contractors who provide some materials or equipment to fulfil their duties, and do not apply to employees,
- The materials or equipment provided by the contractor must not have been purchased from the designated person or a member of the designated person group, and
- Approved deductions are the only allowable method to take account of materials or equipment provided by contractors
Where contractors provide invoices showing separate amounts for the labour and non-labour items, it is the full amount of the invoices which is subject to payroll tax, less any approved deduction. You cannot declare the invoiced labour component only.
GST included as wages
An employer can exclude the GST component of payments made to contractors which are taken to be taxable wages under the Act.
The Act (s47) contains an anti-avoidance provision, which relates to agreements under which payments by an employer for the services of a natural person are paid to another person (i.e. trust, company or partnership) related to that natural person, and the effect of such agreement is to avoid or reduce payroll tax.
The Commissioner may disregard such an agreement and determine any party to be the employer and any payment under the agreement to be wages.
A determination under this provision must be in writing and served on the employer setting out all the facts upon which the Commissioner relies and the reasons for making the determination.