At present, there is a large focus on the contentious issue of ‘contractors’ both in the area of payroll tax and by the ATO, particularly in industries such as building, call centres and cleaning professions.
Many Small-medium businesses take a strong approach to excluding contractors in calculating their payroll tax liability. We include a table of exemptions which do allow a contractor to be excluded. In Australia, although there is no set definition of what constitutes a contractor; the approach of the courts is to look beyond the contractual descriptions to the ‘truth’, being the totality of the relationship.
The distinction between ‘Contractors’ and ‘Employees’ attracts not only attention from the Office of State Revenue (OSR) when assessing a company’s payroll tax liability, but also the ATO and the Fair Work Ombudsman. Notably, these bodies share and cross reference data exposing a greater risk for non-compliant companies.
Payroll Tax
It is important for payroll tax to be calculated correctly and the correct treatment is applied, in particular to contractors. The payroll tax threshold for NSW is $678,000 for the 2012 Financial Year.
The OSR may assess ‘Contractors’ as employees for the purpose of payroll tax. The relative factors the OSR will consider in drawing the distinction between contractors and employees include:
- The right to control the manner of the performance of work of another
- Whether the person is performing services which is an integral part of the company
- Whether the terms of the contract are consistent with the practical relationship between both parties
- Whether the contract focuses on the ultimate result or what must be provided during the performance of the contracted task
- Whether the worker is conducting a business on his or her own or actually participating in the business of the business operator
- The provision of equipment used
- Whether there are set hours of work
- Whether the worker has the power to delegate work or subcontract work to another person.
Useful table of exemptions
The OSR have published nine exemptions from payroll tax for all businesses. Only the portion of the payment which relates to labour is subject to payroll tax, meaning it excludes GST and costs of materials/equipment.
We recommend that it is vital to DOCUMENT upfront the reasons why a contractor meets an exemption and is excluded. If your company is audited, the OSR may go back a number of years and unless there is proper documentation it can be very difficult to argue reasons for exclusion.
1. Services ancillary to the supply or use of goods
A company hires a crane and the crane operator comes with the entire package. If the labour component of the invoice is less than 50% then you can claim this exemption.
2. Services provided by the contractor to the principle for <90 days in a financial year
This is a per contractor test. Even if a contractor works for five minutes in one day, it is considered to be 1 day. If a contractor works for 91 days then the entire 91 days is included. We recommend you ask the contractor to specify on their invoices which days they have worked.
3. Services of a kind ordinarily required by the principle for less than 180 days in a financial year
A farm requires the services of numerous fruit pickers for 130 days in the year, with no requirement for services outside of harvest season. As this service is required for less than 180 days, all payments to contractors will be exempt, regardless of whether an individual contractor may have worked for more than 90 days in the same financial year.
4. Services provided by two or more persons employed by a contractor
This is linked to the ability to delegate. For example, this would not include a plumber working for you who employs his wife to do his book keeping. Both persons need to be able to work in or on your business.
5. Services of a kind not ordinarily required by the principle and ordinarily provided by the contractor to the public generally
Examples may include a window cleaner or a person who specialises in doing shop window displays. If <40% of gross trading income of a contractor comes from your entity then this test is met in all States. We advise that you should get the contractor to sign a declaration to state that <40% of their gross income comes from your entity.
6. Services of a kind provided by the contractor to the public generally in that financial year (subject to the Commissioner’s discretion)
To qualify for an exemption you must submit a written request to the Chief Commissioner of State Revenue.
NSW, VIC, TAS, ACT and QLD: if a contractor works for an average of 10 days or less per month and provides services to at least two other unrelated entities.
Considerations: does the contractor operate independently? Do they have their own business card? Do they have their own tools of trade? Do they have a security pass to the building? Etc
7. Services ancillary to the conveyance of goods by a vehicle provided by the contractor
They must be the Owner Driver, providing the vehicle for the primary purpose to convey the goods.
8. Services solely in relation to the procurement of persons desiring to be insured
Insurance Agents
9. Services solely in relation to the door-to-door sale of domestic goods to be used solely for domestic purposes
The door to door sale must be unsolicited, being for a good not service and the sale must be made at the buyer’s place of residence or employment. E.g. Direct selling agents.
If you need any help in assessing your payroll tax liability or whether your contractors meet one of the exemptions listed above then please contact us
Comment