Contractors

Payments to contractors are taken to be wages in certain circumstances.

Payroll tax applies to payments to contractors who provide services exclusively or primarily for one principal in a financial year.

The principal who engages the contractor is deemed to be an employer and the entity providing the services is deemed an employee.

Payments made in this situation are deemed wages and are liable for payroll tax, unless the contractor provisions are met.

The payroll tax contractor provisions are in Division 7, Part 3 of the Payroll Tax Act 2007. The 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, different rules apply.

This video helps you understand whether your contractor is an employee whose wages are subject to payroll tax.

Check whether payroll tax applies to your contractor

There are 3 steps to determine whether payroll tax applies to your contractor:

Is the person an employee?
Is the contract a relevant contract?
Do any exclusions apply?

Step 1: Is the person an employee?

If the person is an employee, payments made to them are subject to payroll tax.

Revenue Ruling PTA-038 sets out the factors to help you figure out whether someone is an employee or contractor.

If the person is an employee, you do not need to proceed to the remaining steps. Payments to employees are taxable and should be reported as wages.

If the person is not an employee, continue to Step 2.

Step 2: Is the contract a relevant contract?

A relevant contract is a contract where a person:

supply services
are supplied services
re-supply goods.

In the course of carrying on a business

Most contracts are relevant contracts. Payments under relevant contracts are deemed wages, and are subject to payroll tax unless an exclusion applies. If you have an arrangement between an Australian financial services licence holder and authorised representative, or between a medical centre business and health practitioner, consider the information below before proceeding.

If a contact is not a relevant contract, there is no need to proceed to Step 3.

If a contract is a relevant contract, payments are deemed wages unless an exclusion applies. To consider this, continue to Step 3.

Step 3: Do any exclusions apply?

Certain contracts are excluded from being relevant contracts, so payments under these contracts are not deemed wages subject to payroll tax.

Excluded services

There are exclusions for the following services:

Owner-drivers – contractors engaged to transport goods using their own vehicle, where transport is the primary service.
Insurance agents – contractors engaged to obtain customers for an insurer.
Door-to-door sellers – contractors selling domestic goods door-to-door.

Payroll tax does not apply to payments to contractors providing these services.

Other exclusions

Section 32(2) outlines 6 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 work.
The contract is mainly to provide materials or equipment rather than labour.
The contractor provides their services to a range of clients and the principal does not normally need the services for their ongoing business.
The principal needs the services for less than 180 days in a financial year.
The contractor typically provides the services to the general public.

The contractor provides services to one principal for 90 days or less in a financial year

Payroll tax does not apply to payments to short-term contractors who work for one principal for 90 days or less in a financial year.

You cannot use this exclusion to exclude payments to casual, short-term or part-time employees (payments to employees are taxable – see Step 1).

To work out whether this exclusion applies, add up the total number of days worked during the financial year. Any work on a given day counts as one full day. Days do not have to be consecutive.

If you can’t work out the exact number of days a contractor has worked, you can use our replacement method.

If no exclusion applies, payroll tax applies to all payments to the contractor (including payments in the first 90 days).

The contractor engages others to do work

This exclusion applies where the contractor hires employees or engages other contractors to do some or all the work under the relevant contractor.

Revenue Ruling PTA-023 explains how this exclusion applies, including the number of people contractors need to engage.

The contract is mainly to provide materials or equipment rather than labour

This exclusion applies when the main purpose of the contract is supplying materials or equipment, and providing labour is secondary.

Revenue Ruling PTA-033 explains that it applies when the cost of providing the materials or equipment is more than 50% of the total contract amount.

Example 1

ABC Pty Ltd engages a contractor to supply an air-conditioning unit. The contractor who supplies the unit also installs it, so the installation is secondary to providing the unit. Payroll tax does not apply to payments under this contract.

Example 2

Jones Constructions Pty Ltd enters a contract with Riggs Crane Hire Pty Ltd to supply a crane and a crane operator. This contract is excluded because supplying the crane is the main purpose of the contract.

The contractor provides their services to a range of clients and the principal does not normally need the services for their ongoing business

This exclusion recognises that businesses may need certain services that are not associated with their main business every so often.

Revenue Ruling PTA-022 provides more detail.

Example 3

Slick Refit Pty Ltd provides office refitting services. Under a contract, a bank hires Slick Refit Pty Ltd to refresh its office once every 5 years.

This contract is excluded from being a relevant contract because the bank does not normally need office refitting services for its ongoing business. Payroll tax does not apply to payments under this contract.

The principal needs the services for less than 180 days in a financial year

This exclusion acknowledges that businesses sometimes need ad-hoc services related to their main work, but so infrequently they do not hire employees to do them.

This exclusion depends on the total number of days the service is needed, regardless of who does the work.

Revenue Ruling PTA-020 provides more details, including examples.

The contractor typically provides the services to the general public

If none of the previous exclusions apply, a contract may be excluded when we are satisfied the contractor normally provides these services to the general public.

Revenue Ruling PTA-021v2 provides guidance on when this exclusion applies.

No exclusion applies

If no exclusion applies, the principal is deemed to be the employer, and the contractor is deemed to be the employee.

Amounts paid or payable under the relevant contract are deemed to be taxable wages. This may include superannuation and any shares or options.

Contractor deductions

If a contract involves supplying materials or equipment, you may be able to make certain deductions from the taxable wages you declare.

Revenue Ruling PTA-018 provides more detail, including a list of approved deductions for different types of contractors.

Example 4

A principal engages a computer programmer under a relevant contract. The contractor is paid $100,000 excluding GST in the financial year. The contractor provides some materials and equipment to do the work.

Computer programmers can claim a deduction of 5% (in this case, $5,000).

That means the principal needs to declare total wages of $95,000 ($100,000 – $5,000).

These deductions do not apply to employees.

The contractor cannot buy the materials or equipment from the designated person or a member of the designated person’s group.

Approved deductions are the only way you can account for materials or equipment provided by contractors.

Even if contractors provide invoices showing separate amounts for labour and non-labour items, payroll tax applies to the full amount of the invoices (minus any approved deduction). The principal cannot declare only the labour component as deemed wages.

GST

An employer can exclude GST paid to contractors from taxable wages.

Australian financial services licence holders

We will consider whether arrangements between an Australian financial services licence (AFSL) holder and its authorised representatives are relevant contracts on a case-by-case basis.

The Commissioner will consider all factors, including contracts, services, payments and the nature of the business conducted by the AFSL holder and its authorised representatives.

Medical centres

The Commissioner will consider whether arrangements between a medical centre business and its health practitioners are relevant contracts on a case-by-case basis.

For more detail, refer to Revenue Ruling PTA-041 Relevant contracts - medical centres.

Anti-avoidance provisions

None of these exclusions apply if we determine the contract was designed to avoid paying tax.

They also do not apply if payments are made to a person related to the contractor to avoid tax.

If we make a determination under these anti-avoidance provisions, we will explain our decision in writing to the employer.

The anti-avoidance provisions are set out in s32(2D) and s47 of the Payroll Tax Act 2007.