I’ve been receiving a lot of enquiries regarding the status of contractors in regard to payroll tax and thought it timely to elaborate on the issue. From the many people I’ve spoken to, many businesses don’t realise they might be at risk of having to pay payroll tax on payments to contractors.
The challenging jobs market, rise of the gig economy, the need for workers to earn a little extra, as well as older workers and younger mothers wanting to have some income generating ability have all had an impact on the rise of the ‘contractor’.
A person can fairly easily apply for an ABN and consider themselves a contractor.
Businesses are looking for easy ways to fill short-term gaps or one-off roles in their workforce, so they engage a contractor to circumvent the complex recruitment, retention, or termination process.
Simple and wins all round! In a word, NO.
The differentiation between a contractor and an employee is far from that clear-cut. While the issue is not new, in the 1980s it was under the spotlight in the burgeoning computer industry and now it is on the radar again.
There have been cases put before the Fair Work Commission in regard to delivery services and gig workers to determine if they are in fact independent contractors or employees. The importance being on the distinction and clearly identifying the type of working relationship to make this determination.
This is still an evolving and developing issue with potential implications as part of the Closing Loopholes: Fair Work Act changes for independent contractors definitions and protections – watch this space!
“Payments made to your contractors may be liable for payroll tax.* While contractor wages are not captured for payroll tax under the general wages definition of the Payroll Tax Act, special provisions apply that deem these payments to be wages.”
– Queensland Revenue Office (Introduction to contractors for payroll tax in Queensland, 5th January 2024)
* With the exception of Western Australia these contractor provisions are harmonised in all states and territories.
Clearly Defining Your Contractors
Under the Payroll Tax Act, payroll tax is payable on wages including directors’ fees, superannuation and most other employee benefits such as bonuses and commissions.
What businesses often overlook is that payroll tax is also payable on payments to contractors unless the contractors fall within one of the exemptions.
If you engage contractors, they may or may not meet one of the exemptions under the Payroll Tax Act. But if they don’t then you will have to pay payroll tax on payments to contractors. And it is your obligation to make this distinction between contractor and employee. Don’t just go on the say-so of the contractor.
“A contractor is an entity that agrees to produce a specific result for an agreed price. Payments you make to contractors under a relevant contract are taxable.
You need to establish whether your workers are employees or contractors.
If you have an employer–employee relationship with a contractor, they will be considered an employee; and the contractor provisions will not apply.”
– Queensland Revenue Office
Determining whether a worker is a contractor or employee
Before considering whether payments made to contractors are taxable under the contractor provisions you should determine whether the contractor is actually your employee.
Sometimes the line between a contractor and an employee is blurred. You have to be particularly careful where your contractors are exclusively or almost exclusively engaged by your business.
Unfortunately, there are no definitions for the terms ‘employee’ or ‘contractor’ in the Payroll Tax Act legislation, and therefore takes on the ordinary or common law meaning. The courts have established a number of principles to assist in determining whether a contractor may be considered an employee.
In most cases, it will be clear when an employer-employee relationship exists, however, this can be difficult when the worker is not defined as a common law employee.
Is your contractor actually an employee?
- Control and Direction: Do I have the right to control or direct how, where, when, or who performs the work?
- If you have this right, it indicates an employee relationship. Contractors generally maintain more autonomy.
- Contract Terms: Does the contract use terms like “employer” and “employee”?
- Terms like these suggest an employee relationship. Contractor agreements typically avoid such language.
- Risk: Who bears the risk and cost of rectifying issues that arise during the work?
- If the business bears the risk and costs, it suggests an employee relationship. Contractors usually bear their own risks and costs.
- Leave Entitlements and Super: Are leave entitlements and superannuation payments provided?
- Providing these benefits typically indicates an employee relationship, as contractors manage their own entitlements.
- Delegation: Can the worker delegate or subcontract their tasks?
- If the worker can delegate tasks, it indicates a contractor relationship. Employees usually cannot subcontract their work.
- Business Integration: Is the worker’s role integrated into my business’s daily operations, or is it separate?
- Integration into daily operations suggests an employee relationship. Contractors generally operate independently.
- Running Own Business: Is the worker running their own business or participating in my business?
- Running their own business suggests a contractor relationship. Participation in your business indicates an employee relationship.
- Sourcing Customers: Does the worker source their own customers, such as through tenders?
- Sourcing their own customers indicates a contractor relationship. Employees typically do not source their own work.
- Expenditure and Equipment: Does the worker incur significant expenses or provide their own materials and equipment?
- If the worker incurs expenses and supplies their own equipment, it indicates a contractor relationship. Employees typically use company-provided resources.
- Multiple Customers: Does the worker have multiple customers, or do they work exclusively for my business?
- Having multiple customers suggests a contractor relationship. Exclusivity usually indicates an employee relationship.
- ATO Rules: Does the Australian Taxation Office classify the worker as an employee or a contractor?
- If the ATO classifies the worker as an employee, they are also considered an employee for payroll tax purposes.
Introduction to Contractors for Payroll Tax in Queensland (Queensland Revenue Office)
Contractor Provisions Under the Payroll Tax Act
Like other parts of the Payroll Tax Act the contractor provisions can be difficult to understand without knowing more about the law. You might think that if you engage someone as a contractor you will not have to pay payroll tax on those payments. But that is not always true.
The Contractor provisions are concerned with arrangements under which people who would ordinarily be treated as employees set themselves up as contractors. It treats certain persons who set themselves up as contractors as though they were employees of the person with whom they contract.
Contractor Provisions are included in the Payroll Tax legislation.
One of the reasons why it is difficult to understand the Contractor provisions is that although the word “contractor” is used in the Division heading, the Payroll Tax Act doesn’t define “contractor”, but rather, employs the concept of a “relevant contract”.
Whilst most arrangements between a business and its contractors come within the definition of a “relevant contract” there are a number of exemptions.
You don’t need to try and work out these complicated Contractor provisions alone. Peter Tobin delivers prompt advice backed by years of experience, servicing clients all across Australia, and is able to assist regardless of which state or territory your business operates in.
At Tobin Partners we have experience in advising businesses on whether the Contractor provisions apply and what exemptions might be available.
Exemptions from Contractor Provisions
Detailed below are common exceptions that may apply to contractor payments. This is not an exhaustive list, for a full explanation of the exemptions please refer to your state or territories revenue office and relevant rulings.
- 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. Revenue Ruling – Contractors 180-day exemption (SRO Victoria)
Queensland gives a similar example for a diving school operator on the Great Barrier Reef. Public Ruling – Contractors — 180-day exemption (QRO)
- 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.
- Public Ruling – Contractors engaging others (QRO)
- Contractors labour is secondary to the main contract :
- Payments made under a contract where the main purpose is to supply goods and the service is incidental. For example, where the contractor’s services are required for the operation of the supplied equipment, and are therefore secondary to the main 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 and 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 for payroll tax but also penalty tax and interest.
A number of industries, notably the construction industry and the film/TV production sector routinely engage contractors instead of hiring employees.
For case studies and examples, I refer you to our case study articles.
To find out more information where contractor payments may be exempt from payroll tax refer to the Queensland Revenue Office’s available resources. They also have a video explaining the specific types of exemptions, and examples of when they may apply, and the deductions that may be available.
- Queensland Revenue Office: Payroll tax
- QRO: Contractor provisions interactive help tool
- QRO Public Rulings
Making the Judgement Call
The businesses that are particularly at risk are those which employ contractors who work by themselves, supply substantially their own labour and are paid on an hourly rate basis.
However, the first issue that the Payroll Tax Office will look at is whether these ‘contractors’ are genuine contractors.
Even though they might have their own ABN, be registered for GST, have their own insurances and operate their own vehicle, the Payroll Tax Office will require you to demonstrate that they are not employees.
And don’t forget it’s not up to the Payroll Tax Office to prove anything. Once the Payroll Tax Office forms a view that your contractors might not be genuine contractors, the onus of proof to show they are genuine contractors, is on your shoulders. The onus of proof is always on the taxpayer.
There have been a number of recent cases where workers engaged as contractors have been held by the Courts to be employees.
The effect of having to pay payroll tax on payments to contractors can be devastating. The Payroll Tax Office can go back five (5) years and also claim penalties and interest.
Fortunately, Peter Tobin has plenty of experience in helping you work out whether any exemptions apply to your contractors or whether they might be regarded as employees. For more information, I refer you to some of our case studies on this issue.
To discuss the role of contractors in your business in regard to payroll tax, please contact us at Tobin Partners Lawyers by email or call Peter Tobin 0438 001 809 directly for a confidential discussion.
Disclaimer: This article contains general information only. It should not be relied upon as legal advice. Formal legal advice should be sought on particular matters canvassed.
Related blog articles:
- Payroll tax and medical practices: payments to doctors and contractors https://www.tobinpartners.com.au/payroll-tax-and-medical-practices-payments-to-doctors-and-contractors/
- Navigating Payroll Tax for Medical Practices: The Impact of Independent Contractor Arrangements https://www.tobinpartners.com.au/doctors-as-independent-contractors-medical-and-other-professional-practices-and-payroll-tax/
- Employment Agency Provisions: Independent Contractors or Employees? https://www.tobinpartners.com.au/independent-contractor-or-employee-security-and-cleaning-companies-impacted-by-employment-agency-provisions/
