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Payroll Tax Act Service contracts

In recent years, all states and territories, with the exception of Western Australia, have harmonised their payroll tax legislation. The information below examines the way payments to contractors are treated for payroll tax purposes.

How the payments to contractors are treated for payroll tax purposes

Are payments made to contractors liable for payroll tax?
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The general rule under the harmonised legislation is that all payments made to contractors will be taxable in circumstances where the contractor is essentially providing labour services. Payments to contractors may also be taxable in other circumstances. The ‘employer’ who receives the goods or services is responsible for making the payment.

If the contractor operates through a Pty Ltd company are they affected as well?
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Yes. The term ‘contractors’ is broadly defined and may apply to contractors conducting business as a company.

What kind of contracts are included?
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Any payments made to a contractor for the performance of work may be liable for payroll tax. The contract does not need to be in writing and is defined to include any agreement, arrangement or undertaking. The contract may be formal or informal, express or implied.

Are there any exemptions
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Yes. There are six exemptions. Only one exemption needs to be satisfied in order to render the contract exempt. The onus is on the employer who receives the goods and services to be able to prove one of the exemptions exist. Each state and territory has released Revenue Rulings based on the harmonised legislation, which dictates how the exceptions will be applied in that jurisdiction. Generally, these Revenue Rulings provide:

Exemption 1 – The contractor provides services to the business on no more than 90 days in a financial year. For the purpose of this exemption, the carrying out of any work by a contractor for the business on a given calendar day will count as one full day. The days worked do not need to be consecutive. Where it is not possible to determine the actual number of days work, a formula, known as the Replacement Method, may be used to calculate the estimated remuneration a contractor would receive 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 90-day exemption will be accepted as being applicable to that contractor. 

Exemption 2 – The contractor engages a sufficient number of other workers to do all or part of the work pursuant to the contract. The number of workers required to be engaged by the contractor varies depending on the nature of the entity through which the services are provided:

Type of contracting entity Persons performing the work under the contract
Partnership of natural persons
  • Partner(s) and one or more other persons
  • Two or more persons, none of whom is a partner

This exemption will not apply if the work under the contract is performed only by partners.

Sole trader
  • Sole trader and one or more other persons
  • Two or more persons not being the sole trader.

In addition, for this exemption to apply the contractor must be carrying on a business, have the overall responsibility to fulfil the terms of the contract and the contractor must directly engage the person performing the work. 

Exemption 3 – The provision of labour is ancillary or secondary to the supply of materials or equipment by the contractor. For this exemption to apply the cost of materials or equipment must be 50 per cent of the total contract amount. A plant operator who also provides the plant would normally satisfy this exemption. There must be evidence to substantiate that the provision of materials or equipment is the principal object of the contract. 

Exemption 4 – The services provided under the contract are of a type not ordinarily required by the principal’s business and the contractor usually provides those services to a range of clients. The principal business will need to demonstrate that the services in question are not ordinarily required as a part of their business and that the contractor has received less than 40% of their gross trading income from the principal during the financial year. 

Exemption 5 – The services are of a type ordinarily required by the principal for less than 180 days in a financial year. Even though an individual contractor may have worked for more than 90 days (exemption A listed above), this exemption may still apply as it is only concerned with the total number of calendar days on which a particular type of service (e.g. carpentry, painting) is required by the principal business. 

If, for instance, a builder engages painters for a total of 160 days in a financial year, payments made to those payments are exempt.

Exemption 6 – The Commissioner is satisfied that the contractor ordinarily renders services of the type under the contract to the public generally in a financial year.

Application to the Commissioner
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Where payments are not exempt under these tests, a principal business may still apply to the Commissioner for an exemption. The Commissioner will normally take into account issues such as use of a business name and advertising, responsibility for the cost of faulty workmanship, the existence of separate business premises, how the contractor won the contract and any other factors that are relevant to the relationship between principal and contractor.

How much of the contract amount will you have to declare?
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The Commissioner has approved certain deductions to reflect a deemed amount for material or equipment. These include:

Type of Contractor Deduction from gross payments to Contractor
Bricklayers 30%
Building supervisors (who provide their own vehicle and inspect more than six sites per week) 25%
Cabinet makers / kitchen fitters 30%
Carpenters 25%
Carpet layers 25%
Draftspersons 5%
Electricians 25%
Fencing contractors 25%
Painters (who provide their own paint) 30%
Painters (who don’t provide their own paint) 15%
Plasterers 20%
Plumbers 25%
Roof tilers 25%
Wall and ceiling plasterers 20%
Wall and floor tilers 25%
Treatment of GST
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The amount of wages paid or payable to a contractor is reduced by the relevant portion of the amount of GST.

Which state / territory revenue office do I have to pay payroll tax to?
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Payroll tax is to be paid in the jurisdiction where the worker resides. For the purposes of payroll tax it is irrelevant where the work is actually performed.

To find out more, contact HIA's Workplace Services team

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