Employment agencies

Employment agencies may have to pay payroll tax on the wages they pay service providers, depending on the arrangement and the client.

Service providers and employment agencies work with clients under different types of arrangements.

These typically involve a contract which may be formal or informal, and may be express or implied.

Under such a contract, an employment agency arranges for a service provider to perform work for the agency’s client.

The types of contract arrangements are:

• employment agency contracts
• placement arrangements.

The type of arrangement determines who is liable for payroll tax on the wages paid to the service provider.

Employment agency contracts

Typically, an employment agency contract involves:

• a service provider contracting with the employment agency
• an employment agency contracting with the client.

In this case:

• the employment agency is deemed to be the employer
• the service provider is deemed to be their employee, regardless of whether they are a company, partnership or individual
• payments to the service provider are wages
• the employment agency must pay payroll tax on wages paid to the service provider.

Placement arrangements

A placement arrangement involves the service provider contracting directly with the client.

In this case, the client is deemed to be the employer, and is liable for payroll tax.

What are wages

Wages include:

• payments to the service provider
• the value of any benefit that would be a fringe benefit if the service provider was an employee
• payments that would be a superannuation contribution if the service provider was an employee
• some allowances and reimbursements, with some exceptions.

What are not wages

Some payments made by employment agencies are not considered wages and are not subject to payroll tax. These include:

• accommodation and motor-vehicle allowances up to a certain amount
• living-away-from-home allowances, treated as a fringe benefit
• reimbursements of business expenses, provided they meet specific criteria
• employment agency fees
• WorkCover insurance
• the GST portion of any payments.

See the full list of wages exempt from payroll tax.

Exempt organisations

Employment agency contracts are not eligible for the contractor exclusions.

However, wages paid under an employment agency contract to a service provider may be exempt from payroll tax if:

• the wages would be exempt if the client had paid the service provider as an employee
• the client has given the employment agency this declaration.

The wages you pay may be exempt from payroll tax if you are one of these organisations.

Declarations

To claim this exemption, the employment agency must receive this declaration from their client before the end of the financial year.

The declaration must provide:

• the client’s name and contact details
• the employment agency’s name
• the date of the employment agency contract.

Once the client has filled in all the information, select ‘submit’ and download a copy.

The client does not need to lodge the signed declaration with us, but must provide it to the employment agency.

The employment agency must keep it for 5 years and share it with us if we request it.

Complete the declaration

Incomplete or incorrect declarations

If the client gives the employment agency an incomplete or incorrect declaration, the employment agency is still liable for any payroll tax.

If you want to confirm your client’s declaration is correct, obtain your client’s written consent to allow us to give you information about their payroll tax status then contact us.

Multiple declarations

The employment agency needs a separate declaration for each employment agency contract they enter into.

But if this is impractical, you only need to get one declaration from each of your exempt clients each financial year if all service providers do similar work for that client.

Government departments

Commonwealth

If you hire workers to a Commonwealth department or agency, you will pay payroll tax.

Generally, for constitutional reasons, states cannot legislate to tax the Commonwealth. However, under employment agency contracts, payroll tax is paid by employment agencies not Commonwealth government departments and agencies.

State

If you hire workers to a state government department or agency, you will generally pay payroll tax.

State government departments and agencies are not exempt from payroll tax, besides certain organisations like healthcare service providers and schools.

Local

If you hire workers to local government, you will generally not pay payroll tax.

Wages paid by a municipality are exempt from payroll tax, except for specified business activities such as the supply of water or electricity.

Chain of on-hire

Sometimes, a chain of on-hire may arise. For example, one employment agency on-hires labour to another employment agency, which then further on-hires that labour to their client.

In this case, only the employment agency that on-hires the service provider to the client is liable for payroll tax.

Before an agency further up the chain can exclude exempt wages from the wages they report to us for payroll tax, it must obtain this declaration from the agency liable for payroll tax.

Nursing agencies

Sometimes, an employment agency might pay a nurse’s wages even though the nurse is an employee of the client.

In this case, the client is still liable for payroll tax.

Anti-avoidance

If we find an employment agency contract is set up to reduce or avoid payroll tax, we may:

• disregard the contract
• impose payroll tax on the party we deem the employer.