Exemptions from Contractor provisions
Some of the States deal with contractor payments quite differently in regard to payroll tax. For example, in Queensland, New South Wales, Victoria and South Australia the starting point is that all payments to contractors are subject to payroll tax. To obtain relief from payroll tax you must show that the contractor payments fall into one or more of the exemptions.
However, the regime in Western Australia is far easier. You simply distinguish between employees and contractors on common law principles and if you can show that the payments are to genuine contractors then no payroll tax is payable.
Because the Payroll Tax Act on contractor payments are so similar in most jurisdictions, I will take the Queensland Payroll Tax Act 1971 as an example for these case studies.
Whilst there are a number of exemptions for payments to contractors I will focus on the main exemptions which are:
- 90 days or less: Payments to short term contractors who work no longer than 90 days during a financial year for the principal. Any part-time work on a particular day is counted as one full day. After the 90 days have been exceeded then all payments are subject to payroll tax including the first 90 days.
- 180 days or less: Where the principal requires particular services for no longer than 180 days. This exemption often applies to seasonal businesses where the services supplied to the principal are not required for more than 180 days during a financial year. The Victorian State Revenue Office gives an example of a ski school operator which engages ski instructors each year during the snow season for less than 180 days. https://www.sro.vic.gov.au/sites/default/files/PTA-020.pdf
Queensland gives a similar example for a diving school operator on the Great Barrier Reef. https://www.treasury.qld.gov.au/resource/pta020/
- Contractors ordinarily rendering services to the public: The payments must be made to genuine contractors and it is sometimes difficult to distinguish between a genuine contractor and an employee. Unfortunately, there is no definition of either “contractor” or “employee” in the legislation.
- Contractors engaging others to perform work: Payments to contractors where the work is performed by two or more people but the work which is the object of the contract must be performed by two or more people. This exemption won’t apply, for example, where even though two or more people might be employed by the contractor but only one person does the work which is the object of the contract.
- Door to Door Sales: Payments must be made for services for the door-to-door sale of goods but solely for home use. The Commissioner’s view is that to be exempt the sale cannot be made to a body corporate and the salesperson must have an agency agreement in place for the sale of the goods. The sale must also take place at the customer’s home or workplace but not at the vendor’s business premises.
This is an area where a lot of businesses get caught out regularly where they have made payments to contractors which are later held by the Office of State Revenue to be subject to payroll tax. And often for very large amounts. The consequences can be disastrous for small businesses where they are assessed not just the payroll tax but also penalty tax and interest.
Case Study One – Property Developer
Client referred to us by his lawyer.
A number of payments were investigated by the Office of State Revenue with the intention of their being made subject to payroll tax.
We were briefed by the client to demonstrate to the OSR that all such payments came within one of the exemptions of the contractor provisions of the Payroll Tax Act.
Some of these payments included payments to single director companies with no employees.
We were able to convince the OSR that the payments came within the exemption for Contractors ordinarily rendering services to the public.
Tens of thousands of dollars saved by the taxpayer in avoiding an adverse assessment.
Case Study Two– Registered family day care service
Client came to us on referral from her accountant.
Our client was a registered family day care service responsible for approving, supporting, training and advising educators who must meet government minimum requirements. These educators were registered with the Qld Department of Education, Training and Employment (DETE).
The OSR sought to assess payroll tax against our clients on the payments made to these educators.
However, we were able to demonstrate to the OSR that the educators operated their own individual businesses from their own homes and were able to set their own fees without asking for our client’s approval.
Even though the OSR had already issued hefty assessments against our client before our involvement the OSR agreed to withdraw the assessments based on our submissions.
Case Study Three – Carpet Retailer
Client referred to us by his lawyer.
Our client had already been assessed a substantial amount of payroll tax based on payments made to carpet installers.
We were asked to represent the client and convince the OSR to reverse the assessments to nil.
We successfully demonstrated to the Office of State Revenue that all the installers operated their own businesses completely independent from our client and they were genuine contractors. The assessments were withdrawn.
A saving of many thousands of dollars to the client.
Case Study Four – Door-to-door Sales
Client referred to us by his accountant.
Our client was a large distributor of kitchen products sold door-to-door. They were investigated by the Office of State Revenue which indicated they intended issuing assessments for payroll tax plus interest and penalties.
The client asked for my advice and I told them that I didn’t believe the OSR were entitled to claim payroll tax on the payments to the door-to-door salespeople. The client asked me to represent them during the investigation.
We were able to produce to the OSR the written agency agreement which showed that the salespeople were independent contractors and payments to them were entitled to be exempt under the Payroll Tax Act.
Savings of many thousands of dollars to the client.
Case Study Five – Management Fees treated as contractor payments
Client came to us on referral from his accountant.
Substantial management fees were made to an associated company over a number of years. The OSR sought to treat those payments as being caught under the contractor provisions of the Payroll Tax Act. Payments of this kind could have unintended but far reaching effects on businesses. It is not unusual to include a management fee between related entities.
The client asked me to make submissions to the OSR that the payments should not attract payroll tax. In this case, the services were rendered by a single director but assisted by his wife. In the circumstances, we could rely on the exemption where two or more people perform the services on behalf of the contractor.
Fortunately, we were able to convince the OSR not to assess payroll tax on the management fees.
A saving to the client of over $20,000 per annum over the previous 5 years plus future years.