Understanding your payroll tax obligations

Most states and territories have agreed to a harmonised approach when it comes to payments made to contractors and whether they are “wages” for the purposes of payroll tax. 

Western Australia is one state that is not harmonised with other jurisdictions, however payments to contractors may still be liable for payroll tax in certain circumstances where the relationship is akin to that of employee/employer. Similarly, the ACT recognises some of the below exemptions, but not all.

The general rule under the harmonised legislation is that all payments made to contractors will be taxable in circumstances where the contractor is providing essentially 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.

Yes. The term ‘contractors’ is broadly defined and may apply to contractors conducting business as a company.

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.

Yes. There are six exemptions. Only one exemption needs to be satisfied 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 dictate how the exceptions will be applied in that jurisdiction. Generally, these Revenue Rulings provide for the following exemptions:

Exemption 1 – The contractor provides services to the business on no more than 90 days in a financial year.

For 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:

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, for example,  who also provides the plant in addition to labour, 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 multiple contractors are engaged for less than 180 days to provide the same service then they are all exempted. 
• If the multiple contractors are engaged for 180 days or more than all the contractors providing the same service are not exempted. 
• Example: , a builder engages painters for a total of 160 days in a financial year, payments made to those painters 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.

The Commissioner has approved certain deductions to reflect a deemed amount for material or equipment. These include:

The amount of wages paid or payable to a contractor is reduced by the relevant portion of the amount of GST.

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.