Contractors engaging others
Version Number: 1
Legislation: Payroll Tax Act 2009
Date Issued: 1 July 2009
Revenue Rulings do not have the force of law.
The Payroll Tax Act 2009 (the “Act”), which commenced on 1 July 2009, rewrote and repealed the Pay-roll Tax Act 1971 and provides fully harmonised legislation with New South Wales, Victoria, Tasmania and Northern Territory.
Parties to a ‘relevant contract’ are taken to be employers and employees (Sections 33 and 34 of the Act) and payments made under a contract are taken to be wages (Section 35 of the Act). Payments taken to be wages are subject to payroll tax under Section 36 of the Act.
While most contracts for the provision of services come within the meaning of ‘relevant contracts’ under Section 32 of the Act, certain types of contracts are specifically excluded from the definition of ‘relevant contract’. One exclusion is a contract in which the contractor hires employees or engages other contractors to perform some or all of the work required under the contract (Section 32(2)(c) of the Act).
The purpose of this Revenue Ruling is to explain how Section 32(2)(c) of the Act would apply to exclude a contract from the definition of ‘relevant contract’.
Section 32(2)(c) of the Act may apply to exclude a contract from the definition of ‘relevant contract’ in any of the following situations:
In addition, all the following conditions must be met for the exemption in Section 32(2)(c) of the Act to apply in each of the above circumstances:
- the contractor must be carrying on a business (includes a trade, profession, or any other activity generally provided for a fee, gain or reward, carried out in systematic and repetitive manner);
- the contractor must have the overall responsibility to fulfil the terms of the contract in the course of the contractor’s business;
- the person(s) performing the work under the contract must be engaged directly by the contractor and not the principal, even though the principal may also benefit from those services;
- the services supplied by the person(s) performing the work must be a necessary part of and are supplied in the course of the contractor’s business; and
- the person(s) must be engaged by the contractor to perform the work which is the object of the contract.
Multiple contracts between the same principal and contractor
Where a principal has numerous contracts with a contractor during a financial year and there is clear evidence that each contract is discrete, the exemption will apply on a contract-by-contract basis.
It is common for contractors to operate in a team or buddy gang system where two or more contractors work together on a job or number of jobs. Often, it is difficult to establish the formal relationship between members of the gang, or whether the gang constitutes a legal entity. Where there is a lack of documentation supporting the status of the gang, a contract is deemed to exist between the principal and each contractor if the principal pays each of the contractors separately. In these circumstances, the exemption does not apply to a buddy gang of contractors.
Contractors sharing the services of the same person(s)
There are circumstances where a contractor may share the services of a person or persons with another contractor to perform work pursuant to the respective contracts between the same principal and the contractors. For the exemption to apply, the sharing of such services must be a commercial arrangement, that is:
- the work performed by the person or persons engaged by both the contractors must be distinct; and
- the remuneration paid to that person or persons must commensurate with the work performed and at a commercial rate.
Where the criteria stated above are not met, but you believe that the exemption should apply, please apply to the Commissioner of State Taxation (the “Commissioner”) for a determination.
A contract will not be exempt under Section 32(2) of the Act if the Commissioner considers the contract or arrangement was entered into with the intention of avoiding payroll tax. If any person engaged by the contractor to perform the work is a former employee of the principal, the Commissioner may also consider the arrangement in light of the anti-avoidance provisions under Section 32(2)(c) of the Act.
The same approach may be taken where a person engaged by the contractor is a spouse or child of the contractor, or a beneficiary of a trust set up by the contractor and is not paid at a commercial rate.
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