The information in this video is correct at the time of publication. Legislation and other details may change without notice.

Intro

Welcome everyone to today's video payroll tax contractor provisions and employment agents.

For those of you who are new to payroll tax or if you just like a refresher this video will assist you with the payroll tax treatment of payments to contractors and payments made under employment agent arrangements.

Western Australia’s contractor provisions differ from those covered in this video. For more information on the treatment of contractors for payroll tax purposes in Western Australia please go to customer education at wa.gov.au.

Payroll tax videos

This video is part two of our three-part series on payroll tax.

We recommend you also view the other videos for further information on payroll tax, they are video 1: understanding the basics (allowances, fringe benefits tax, exemptions and rebates) and video 3: groupings.

The harmonised videos are the result of efforts from each of the respective revenue offices.

While the content of this video is harmonised, there may be differences between the states and territories so where applicable the differences will be highlighted.

The information provided in this video is of a general nature if you have any specific queries please contact the applicable revenue office or seek independent professional advice.

You can find other helpful information resources and links to revenue offices at payrolltax.gov.au.

In this video we will first go through the differences of an employee versus a contractor and how to determine the correct amount to declare. Once the difference has been established we will look further into contractor provisions to understand the various contractor exemptions including which parts of the legislation are harmonised across the Australian states and territories. Lastly we will look at employment agent arrangements

During this video you will see different revenue rulings in the bottom left corner of certain slides. Revenue rulings provide guidance on how various revenue officers have interpreted the legislation and how they administer their relevant acts.

Employee or Contractor

Revenue ruling PTA38 provides information to assist you to determine if a worker is an employee or a contractor. Please note this revenue ruling is applicable for all states and territories except for Western Australia, which we will address shortly.

The contracted provisions can only be considered in a situation where a worker is a legitimate genuine contractor. This section will help you make that decision.

When making this decision you must look at the overall relationship between the worker and the business. There are situations where a worker is called a contractor but actually has all of the characteristics of an employee. In these cases, the worker is considered to be an employee for payroll tax purposes and all payments made to them are taxable.

An employee has an employment relationship with the employer which is called a contract of service. There is a mutual obligation on behalf of the employer and the employee. On the other hand, a legitimate contractor is engaged to provide specific services to a principal, this is a contract for service and the contractor would be running their own independent business.

It is important to remember that a contractor can be deemed an employee even if they provide their services via a company trust partnership or sole proprietorship.

So how do you determine if someone is an employee or a contractor? As previously mentioned, the following is applicable in all states and territories except for Western Australia.

You need to determine if the worker is an employee or a genuine independent contractor where exemptions may apply to determine this you will need to look at the totality of the relationship between the business and the worker. No one single factor is more or less important than another.

Let's have a look at some of the factors used to make a determination:

control and direction

How much control does the business have over the service that is provided? This could include who what when and how the job is performed the business doesn't need to monitor everything.

However you need to identify if the business is able to influence a certain level of control commercial risk who has the licences and insurances. Does the business take on the risk or the worker entitlements? Does their business provide sick leave or annual leave? Who is paying superannuation to the worker?

tools material and equipment

Generally contractors should supply their own tools and equipment

power to delegate

Does the worker have the ability to delegate their tasks to another?

integration

Is the worker integrated into the business or is their work totally separate?

The term employee is not defined in the act, we get the definition from common law, which takes into account the factors we have just gone through. Familiarise yourself with revenue ruling PTA38 which will help guide you when making your employee or contractor determination.

Is the worker an employee?

Following the flow chart shown on the screen an employing business should ask the following questions about each of their workers

Is the worker an employee?

If yes, any payments are payroll taxable and the contractor provisions do not apply.

If no, does the contract include labour?

Payroll tax is a tax on labour so if there's no labour component to a contract there is no payroll tax due.

If the worker is not an employee and the contract includes the supply of labour, the next question to ask is - does an exemption apply?

If an exemption applies the payments are not taxable. We will cover exemptions later in this video.

If the answer is no, payments to the contractor are taxable using the formula on the next screen.

For contractor payments where no exemption applies, taxable wages is the total amount paid for the service labour less any GST and less any approved deductions.

The approved deductions represent any non-labour components of a contract such as tools materials or equipment provided by a contractor. These standardized deductions were set by the revenue offices after consultation with employers and industry and cover various classes of contracts. Revenue ruling PTA18 provides a list of these approved deductions.

If an employer believes they are entitled to a higher deduction than those set in PTA18 they, or their relevant representative, must apply in writing to the relevant state or territory for a determination. Revenue ruling PTA19 sets out the process for doing this.

If you are an employer in Western Australia there are differences you need to be aware of as Western Australia is not harmonised in regards to contractors. Please refer to WA's revenue website.

Contractor exemptions

Let's now look at contractor exemptions.

There are a number of contractor payments that are exempt from payroll tax. If any one of these exemptions applies to your business circumstances you can claim a payroll tax exemption for those contractor payments.

There are three specific exemptions and six general exemptions. It is important to remember that you only need to satisfy one type of exemption for the contract to be exempt from payroll tax.

Three specific exemptions

The three specific exemptions are

• owner drivers
• door-to-door sales agents and
• insurance sales agents

Owner drivers

The owner driver exemption is a very specific exemption where the main purpose of the contract is for the transportation and delivery conveyance of goods. The contractor must use their own vehicle or lease the vehicle used. The employer must not own or lease the vehicle or make contributions whether directly or indirectly to the capital or running expenses of the vehicle. Please note this exclusion is not applicable to push bike couriers. Please refer to revenue ruling PTA6 for further information on the owner driver exemption

The following two exemptions do not apply in the Northern Territory, New South Wales or Western Australia.

Door-to-door sales

The door-to-door sales agents applies to contractors who are not employees who sell domestic goods and the sale of the goods takes place at the purchaser's home. Please refer to revenue ruling PTA7 for more information on the door-to-door sales exemption.

Insurance sales agents

The insurance sales agent's exemption applies to insurance companies that hire contractors to sell insurance on a commission basis. Commission paid to these contractors are exempt from payroll tax. Remember they must be genuine independent contractors and not employees.

Six general exemptions

There are also six general exemptions. These are:

• 90 day
• 180 day
• contractors engaging others
• services and salary to supply of goods
• services not ordinarily required
• and contractors who ordinarily perform
• services to the public

180 day exemption

The first general exemption is 90 days. If a contractor provides services that are the same or similar to services provided by the principal for no more than 90 days in a financial year, the payments are exempt specifically where the contractor provisions apply.

The principal is deemed to be the employer the worker is deemed to be the employee and the payments made to the worker are deemed to be wages unless one of the exemptions apply

Please remember that the carrying out of any work on a given day constitutes a day's work and the day's work do not have to be consecutive, it is the total number of days worked during the financial year that is relevant.

Once the 90 day limit is exceeded the total payments made to that contractor during the financial year including payments made for the work performed in the first 90 days is subject to payroll tax, unless another exemption applies.

For example, new homes proprietary limited engaged a plasterer to complete work on an apartment block. The days were not consecutive as it depended on when the apartments were ready. The plasterer worked for a total of 70 days. Therefore, payments under this contract are exempt from payroll tax

Please refer to revenue ruling PTA35 for more information on this exemption.

180 day exemption

The next exemption we will now look at is the 180-day exemption.

It is important to point out that it is not an extension of the 90-day rule we just covered, the 180-day exemption focuses on where a type of service is required by the principal for less than 180 days a financial year. The service may be supplied by contractors and or employees.

If that service is required for less than 180 days in a financial year, payments to all contractors providing that service are exempt.

You need to consider one that the service may have been provided by multiple contractors but also needs to include days the service was provided by employees and the days for which the type of service is required do not have to be consecutive. It is the total number of days for which a particular type of service is provided during the financial year that is relevant.

We have found the most common application for this exemption is with seasonal workers. For example, a winery engages a number of great pickers at the commencement of the vintage, the pickers were utilised for a total of 110 days. The winery has no requirements for pickers at any other time of the year and has no permanent pickers employed.

As the business only needs the pickers for less than 180 days any payments to these contractors are exempt for payroll tax.

Please refer to revenue ruling PTA20 for more information

Contractors engaging others

The next exemption is when the contractor engages others where a contractor engages others to complete work that is part of the contract. Those payments are exempt.

To satisfy the requirements of this exemption the additional labour must be hired by the contractor not the principal itself.

For example, Peter is a plumber. He enters into a contract with a client's business to carry out plumbing work. He performs the plumbing work which is the object of his contract. Peter's spouse Jill also attends some work flights with Peter. Jill attends to assist with providing quotes and other admin bookkeeping duties.

As the work that Jill performs does not relate directly to the work required by the contract, the business in this case cannot exempt the payments to Peter under this exemption category.

In another example, Samantha is an electrician she enters a contract with a client's business to install electrical items in a room and restore the walls to their original state. To perform the work required under the contract she engages a plasterer and a painter directly. The work performed by the plasterer and painter is considered part of the object of the contract and the contract with Samantha is exempt from payroll tax.

Please refer to revenue ruling PTA23 for more information on this exemption.

Services ancillary to supply of goods

The next exemption is when services are ancillary to the supply of goods.

When the purpose of the contract is for the provision of materials and or equipment and labour is only a small component, the contract may be exempt from payroll tax.

For example, a business needs the services of a crane. A condition of the contract is that a crane operator is provided but the principal purpose of the contract is the crane despite the operator being provided.

Any amount paid under the contract, including any amount paid to the operator, are exempt from payroll tax.

Alternatively, where the criteria is not satisfied for this exemption an employer may be entitled to a deduction depending on the profession of the contractor. Revenue ruling PTA18 outlines the percentage of the total payment that may be exempt, for example 30% deduction for brick layers, 25% deduction for carpet layers and 5% deduction for engineers.

Refer to revenue ruling PTA33 for more information in regards to this exemption and revenue ruling PTA18 for a list of all contractor deductions.

Services not ordinarily required

Our next exemption relates to services not ordinarily required.

Contractor payments made for services not associated with a principal's mainstream activities and are of an ad hoc nature are exempt.

For example, a bank engages a plumber to do plumbing work and this plumber provides these services to the public in general. In this scenario payment to the plumber contractor would be exempt. On the other hand, if XYZ limited provided a contractor to a bank to work as a teller this is a service normally required by the bank and therefore this exemption would not apply in that instance.

Please refer to revenue ruling PTA22 for more information on this exemption.

Because the contractor legislation is very broad there are cases where none of the previous exemptions apply but the genuine contractor is providing services to other businesses. The intent of the legislation is not to capture these.

Services are performed by a contractor who ordinarily performs services of that kind to the general public

Our last exemption is when services are performed by a contractor who ordinarily performs services of that kind to the general public.

In this situation the contractor should not be relying on one principal business as its sole source of income.

To assist businesses with the application of this exemption where the two criteria are met in a financial year the exemption can be applied. These criteria are

• if the contractor provides services to two or more principals which are not members of a group throughout the year and
• the contractor worked an average of 10 days or less per month for the principal excluding the months in which no services were provided

Revenue ruling PTA21 - Further factors that should be considered if the two criteria mentioned are not satisfied. Refer to the relevant revenue office for the revenue ruling.

If you feel an exemption under this category could still apply you need to apply to the Commissioner for a determination.

Employment Agents

Let's now look at employment agents.

An employment agency contract is defined in payroll tax legislation as a contract under which a person, being the employment agent, procures the services of another person, being the service provider, for a client of the employment agent.

If the business procures the service of a service provider for a client the arrangement is regarded as an employment agency contract. The business that procures the service is deemed the employer and the service provider is deemed the employee.

The payments made to the service provider are deemed wages for payroll tax purposes. It is important to note that employment agents reporting taxable wages for payroll tax are not entitled to any contractor exemptions or non-labour deductions we have spoken about previously in this presentation.

Please note that PTA27 is not adopted in Queensland.

Employment agents - Chain of on-hire

it is possible to have more than one employment agent creating a chain of on hire, where each employment agent in the chain may be liable to payroll tax for amounts paid or payable under the arrangement.

To prevent double taxation our revenue offices, deem the agency closest to the client to be the liable party.

In this example, business X, the client, engages employment agent 2. As employment agent 2 does not have the service providers with the relevant skills they engage employment agent 1 to procure service providers with the relevant skills.

Therefore, any wages paid by agent 2 is liable for tax. The dashed line indicates the second employment agency contract where agent 2 procured the service provider through agent 1 for their client business X.

End

That brings us to the end of today's video.

If you would like to know more the harmonised payroll tax website payrolltax.gov.au provides plenty of useful information on harmonised payroll tax matters.

Should you have any queries as a result of the information presented in today's video, please contact the relevant revenue office via the websites currently displayed on your screen.