Payments to contractors are, in certain circumstances, taken to be wages.
The payroll tax contractor provisions are contained in Division 7, Part 3 of the Payroll Tax Act 2007 (the Act). They are intended to tax payments to contractors who predominantly provide labour services and work exclusively or primarily for one principal in a financial year.
Such arrangements are referred to as ‘relevant contracts’. Payments under these contracts are deemed to be wages (excluding GST). The principal who engages the contractor is deemed to be an employer who is liable for payroll tax on those wages.
The contractor provisions apply regardless of whether the contractor provides services via a company, trust, partnership or as a sole trader.
For workers on-hired under an employment agency contract to a client of the employment agency, different payroll tax rules apply.
If you are uncertain about how these provisions apply to your circumstances, please consider applying for a private ruling in accordance with Revenue Ruling GEN-009v3 General information on private rulings.
When do I pay tax for a contractor?
There are three steps to determining whether you have a payroll tax liability for your contractor:
- Establish whether the person is an employee.
- Establish whether the contract is a relevant contract.
- If the contract is a relevant contract, do any exclusions apply?
If the person is an employee, payments made to, or in relation to that person are taxable wages subject to payroll tax. There is no need to consider the remaining steps.
Sometimes, however, it is unclear or ambiguous whether a person is an employee or a contractor. Revenue Ruling PTA-038 sets out a number of significant factors to help you figure out whether someone is an employee or contractor.
If the person is not an employee, you need to consider Step 2.
A relevant contract is a contract under which a person in the course of carrying on a business:
- Supplies services to another person for or in relation to the performance of work. (i.e. a contractor supplying services to a principal).
- Receives services from another person for or in relation to the performance of work. (i.e. a principal receiving services from a contractor).
- Gives out goods to natural persons who perform work and re-supply the goods. (i.e. a principal supplying goods to a contractor who performs work and resupplies the goods to the principal).
This covers most contractual arrangements between two persons each of whom supplies or receives such services in the course of a business. If the contract does not involve any of such arrangements, it is not a relevant contract and payments under the contract are not deemed to be taxable wages under the contractor provisions. Under these circumstances, you do not need to consider step 3 below.
If a contract is a relevant contract, payments under that contract are deemed wages. This means such payments are subject to payroll tax under the contractor provisions unless an exclusion listed in Step 3 applies.
Contracts between an Australian Financial Services Licence holder and its authorised representative
The Commissioner will consider, on a case by case basis, whether arrangements between an Australian Financial Services Licence (AFSL) holder and its authorised representatives are relevant contracts.
The Commissioner will take into account all factors, including the contracts and contractual arrangements, the nature of the business conducted by the AFSL holder, 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 excluded from being relevant contracts, so payments under these contracts are not deemed wages subject to payroll tax.
Contracts involving services supplied by the following people are specifically excluded from being relevant contracts:
- Owner-drivers: Generally, these are contractors engaged solely to transport goods using their own vehicle and provide ancillary services to the transport of those goods (s32(2)(d)(i)). The exclusion does not apply where services additional to those for or ancillary to the conveyance of goods are also provided under the same contract.
- Insurance agents: These contractors provide services solely for or in relation to obtaining customers to be insured by the insurer (s32(2)(d)(ii)). The exclusion does not apply where the insurance agent sells both insurance and other non-insurance products under the same contract.
- Door-to-door sellers: These contractors provide services for or in relation to the door-to-door sale of goods solely for domestic purposes (s32(2)(d)iii)). For guidance on the operation of this exclusion, please refer to Revenue Ruling PTA-007.
Payments made to contractors providing any of these services are not taxable.
Section 32(2) provides six other, more general, exclusions:
- The contractor provides services to one principal 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 principal’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 principal for less than 180 days in a financial year.
- 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 exclusion applies to contracts under which the contractors work for one principal for a total of 90 days or less during a financial year. It operates to exclude payments to short-term contractors from payroll tax.
- This exclusion cannot be used to exclude payments to casual, short-term or part-time employees (payments to employees are taxable – see Step 1).
- In determining whether this exclusion applies, the focus is on the total number of days worked during the financial year. Any work carried out on a given day will count as one full day and the days worked do not have to be consecutive.
- The exclusion does not apply where the contractor is providing the same or similar services to a principal under various contracts, and the total number of days on which the services are provided exceeds 90 days in that financial year.
- 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 if no other exclusion applies.
Generally, you can establish the number of days that a contractor has rendered services based on time sheets, attendance sheets or invoices. In some circumstances, it may not be possible to determine the actual number of days on which services were provided. Where this happens the Commissioner has set out a replacement method to determine whether the exclusion applies.
Where this happens the Commissioner has set out a replacement method to determine whether the exclusion applies.
Under the replacement method, you use a formula to calculate the estimated remuneration that a contractor would receive from one principal 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 contract can be excluded.
For more 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)
This exclusion applies to contracts under which contractors hire employees, or engage other contractors, to perform some or all of the work.
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.
This exclusion applies to contracts under which the supply of materials or equipment is the main object of the contract and the provision of labour is secondary.
The Commissioner has ruled (PTA-033) that the provision of labour under a contract will be considered ancillary to the provision of materials or equipment where the cost of providing the materials or equipment exceeds 50% of the total contract amount, as evidenced on the contractor’s invoice.
ABC Pty Ltd engages a contractor to supply an air-conditioning unit. As the contractor who supplies the unit also installs it, the installation is ancillary to providing the unit. This contract is excluded from being a relevant contract and the payments under this contract are not taxable.
Jones Constructions Pty Ltd enters into a contract with Riggs Crane-Hire Pty Ltd to supply a crane and a crane operator. This contract is excluded because the supply of the crane is the main purpose of the contract, and the supply of the operator is ancillary to that purpose.
The Commissioner has ruled (PTA-033) 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% of the total contract amount.
The services provided are of a type not ordinarily required in the course of the principal’s ongoing business and those services are provided by a contractor who normally renders such services to the general public
This exclusion applies to contracts under which the provision of services is not ordinarily required in the principal’s business and the contractor usually provides the same services to the public generally. This recognises the fact that businesses may require certain services that are not associated with their main business.
A Commissioner’s ruling (PTA-022) provides further detail on this.
Slick Refit Pty Ltd provides office fit out and refitting services. Under a contract, a bank hires Slick Refit Pty Ltd to refresh and refit its office once every five years. This contract is excluded from being a relevant contract because the bank does not ordinarily require office refitting services. The payments under this contract are not deemed wages that form part of the bank’s payroll tax liability.
The services are of a kind or type ordinarily required by the principal for less than 180 days in a financial year
This exclusion applies to contracts under which the services provided are of a kind required by the principal for less than 180 days in a financial year. This takes into account the fact that businesses require ad-hoc services allied to the main work of the business, but so infrequently that employees are not engaged to perform those services.
This exclusion involves determining the total number of days on which a particular type of service is required by the principal, irrespective of whether the services have been provided by a contractor.
A Commissioner’s ruling (PTA-022) provides more details, and 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
Where none of the previous exclusions apply, a contract for services may be excluded where 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.
A Commissioner's ruling, PTA-021v2, provides guidance on when this exclusion applies.
Amounts deemed to be taxable wages under relevant contracts
Where no exclusion applies to the relevant contract, the principal under the contract is deemed to be the employer, and the contractor is deemed to be the employee. The amounts paid or payable under the relevant contract is deemed to be taxable wages. This may include payment such as superannuation and any share or option provided under the contract.
Generally, the full amount paid to a contractor under a relevant contract is deemed to be taxable wages (excluding GST). It is, however, recognised that many contracts subject to payroll tax may involve the contractor supplying some element of materials or equipment to perform work under the contract, which is 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 (PTA-018) provides more detail on contractor deductions.
A contract computer programmer is engaged by a principal under a contract for services and is paid $100,000 (excluding GST) in the financial year. The programmer provides some materials and equipment in performing work under the contract.
A deduction of 5% has been approved for computer programmers. Assuming that the payments to that contractor are deemed to be taxable wages subject to payroll tax, the amount to be declared is $95,000.
Approved deduction (5% of $100,000) = $5000
Amount to be declared ($100,000 - $5000) = $95,000
There are three important points regarding these deductions:
- They are only available in respect of contractors providing some materials or equipment to fulfill their duties under a relevant contract, and do not apply to employees (payments to employees are taxable – see Step 1).
- The materials or equipment provided by the contractor must not have been bought from the designated person or a member of the designated person’s group.
- 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 labour and non-labour items, it is the full amount of the invoices which is subject to payroll tax, less any approved deduction. The principal cannot declare the labour component only as deemed wages.
GST excluded as wages
An employer can exclude the GST component of payments made to contractors from the amount of taxable wages under the contractor provisions.
None of the exclusions in s32(2) set out above will apply if the Commissioner determines that the contract under which the services are supplied was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax by any person (s32(2D).
The Act (s47) also contains a further anti-avoidance provision relating 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.