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Do you pay payroll Tax for your contractors?

When an employer needs to pay payroll tax for contractors and the exemptions available under Queensland law.

Alongside determinations with respect to WorkCover, superannuation, and tax, parties engaging contractors need to consider whether the contractor is considered an “employee” for the purposes of payroll tax (a state-based tax).

In Queensland, unless an exemption applies, it is likely that payroll tax will apply to most contractors you engage. Arrangements with contractors involving services are almost always considered relevant contracts for payroll tax purposes.

Who is obligated to pay payroll tax?

If an employer (or group of employers) pays $1.3 million or more in Australian taxable wages per financial year you are required to pay payroll tax. The definition of taxable wages in most circumstances extends to those payments made to contractors.

Who is required to register for payroll tax?

You must register for payroll tax with the Queensland Office of State Revenue (OSR) within seven days after the end of the month in which you pay more than $25,000 a week in Australian taxable wages. Employers must register even if you believe you will pay less than $1.3 million in Australian taxable wages in a year. Once you are registered OSR will inform you of your reporting requirements, and the appropriate method for making payment.

What payments are considered taxable wages?

Any payments made to an employee, and to most contractors, are considered taxable wages unless an exemption applies.

Which payments made to contractors are liable for payroll tax?

Contractors are deemed to be “employees” for payroll tax purposes where a “service” contract exists between the person supplying the services (the contractor) and the end-user (the employer). The liability for payroll tax rests with the “employer” who receives the goods or services. The contract does not have to be in writing and includes an agreement, arrangement or undertaking. It can be formal or informal; express or implied.

If the contractor operates through a Pty Ltd company are they affected as well?

Yes. The term “contractor” is broad and applies to all contractors whether they use a company or not, and includes consultants, outworkers and subcontractors unless they satisfy one of the exemptions in the Payroll Tax Act.

Are there any exemptions?

Apprentices and Trainees (who are employees) appropriately registered are exempt for payroll tax reporting purposes. With respect to contractors, there are nine exemptions of which six are relevant (only one exemption needs to be satisfied to render the contract exempt).

  1. Services provided: Contracts under which a person provides services for 90 days or less in total in any one financial year. For this exemption, any work performed on a calendar day will count as a full day towards the 90-day total and separate engagements of an individual will also be totalled (e.g., if a person is engaged as a labourer for one job and a cement mixer for another job).
  2. Services required: Contracts for services ordinarily required for less than 180 days in the financial year by the hiring business. If, for instance, a builder engages landscape gardeners for a total of 160 days in a financial year, payments made to those gardeners are exempt.
  3. Services performed by two or more people: The contractors must have other people apart from themselves (e.g., their own employees or subcontractors) providing the services.
  4. Services ancillary to the supply of goods: If the main purpose of the contract is to supply goods and the labour or services provided by the contractor are only incidental to this e.g., where the cost of the building materials exceeds 50% of the contract amount.
  5. Services not ordinarily required by your business: A contract may be exempt where the business does not normally need the services and the contractor provides the same type of service for the general public and derives less than 40% of gross trading income from your business in that financial year.
  6. The services are granted an exemption: If a contractor working for the business provides similar services to the general public, then you can apply for an exemption, even if the arrangement does not already fit within the Services Provided and Services Required exemptions outline above.

Record keeping is critical. When claiming any of these exemptions you should ensure that you keep all necessary documentation supporting an exemption in case you are audited in the future.

To find out more, contact HIA's Contracts and Compliance team

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