Payroll tax on management fees.
With payroll tax quite a significant impost for many businesses, astute operators have done their homework over the years. They have called in the experts where necessary and structured their business to effectively manage and minimise their obligations under the law. However, there is still one area where I am constantly seeing issues arise and that’s in the area of payroll tax on management fees.
Directors’ v Management Fees: Payroll Tax Obligations
Most businesses realise that payroll tax is payable on directors’ fees. However, very few are aware that the contractor provisions of the Payroll Tax Act may also apply to management fees payable between companies.
‘Between companies’ here being the key issue.
I was recently asked for payroll tax advice where the Qld Office of State Revenue (OSR) was about to assess payroll tax on some very substantial management fees paid by one company to the other.
Both companies had a common director. It was convenient for the director’s family company to receive income as management fees from the business company rather than director’s fees. They were well aware that ‘director’s fees’ would most certainly have been taxed under the Payroll Tax Act.
The OSR had advised my client that the management fees paid from one company to the other, fell within the contractor provisions under the Payroll Tax Act. Based on this ruling, the OSR advised that they intended to assess payroll tax on the management fees.
As the company’s payroll tax lawyer, my brief was to demonstrate to the OSR that the management fees were entitled to an exemption under the contractor provisions.
Contractor Payments, Payroll Tax Exemptions
So what exactly are these exemptions for contractor payments?
Under the contractor provisions all payments to contractors are subject to payroll tax unless the payments come within one of the exemptions in section 13B of the Payroll Tax Act (Qld). If you operate with contractor payments in your business, it could be worthwhile refreshing your understanding of these exemptions in regard to payroll tax.
In my client’s specific case, even though the management company was a single director company I was able to convince the OSR that the management services provided to the business were actually supplied by at least two people. The two people being the director himself and his wife.
There is an exemption under the Payroll Tax Act where payments to a company are exempt from payroll tax where the services provided by the contractor are provided by two or more people.
However, don’t rush into claiming this exemption just yet. According to OSR Public Ruling PTA023.2 the persons engaged must be engaged by the contractor to perform the work which is the object of the contract.
The OSR gives a good example, which should make the distinction clear:-
A plumber is engaged to carry out plumbing work as a contractor. His wife provides the business with administrative services such as bookkeeping and banking. A very typical scenario for many Australian small businesses.
The object of the contract is plumbing work. The administration work is not considered the object of the contract. That is, the exemption is not met because only the plumber provided services the object of the contract and not his wife.
Fortunately, in this case my firm was able to show that the director’s wife was actively involved in the business. She also performed work with her husband which was the object of the contract.
The OSR accepted my submissions and withdrew their claim for payroll tax.
Read some of our other case studies which may be of interest to you.
Defining Your Management Contracts
These cases highlight the importance of looking closely at your management fee payments, directors’ fees and contractor payments in regard to payroll tax.
Personally, I was surprised that the OSR were looking at assessing payroll tax on payments made under a management contract. Fortunately for my clients the outcome was favourable.
However, unless we could have shown that the payments were exempt under the contractor provisions it would have resulted in a very different outcome. There would have been a substantial payroll tax assessment to pay.
If you are interested in clarifying your business’ position in regard to payroll tax on management fees, directors’ fees or contractor exemptions, please don’t hesitate to call Peter Tobin 0438 001 809 for a confidential discussion. Alternatively, email Peter Tobin directly with your queries.
