Payroll tax is often in your blind spot. The business is growing. You hire more staff and contractors. And suddenly payroll tax is an issue – a huge issue – an issue we didn’t see coming.
Do I Have To Pay Payroll Tax?
To work out whether you need to pay payroll tax imagine two baskets. You put all individual workers into the first basket. And then you place everybody working for you through a partnership, trust or company into the second basket. Whoever is left in these two baskets at the end of this exercise, will be subject to payroll tax, ie their remuneration will be.
Start with the first basket filled with individual workers. Look at the totality of relationship for each of these individuals. That is the key phrase – totality of relationship. It means that you don’t just consider one factor, but all six together. You look at the entire relationship.
A worker is your contractor if they are:
1 – Able to delegate – they arrive in a team
2 – Paid for a result, not time – they fix problems at their own cost
3 – Provide their own tools to complete the work
4 – Bear the commercial risk – they can make a loss
5 – Have control over their work – when and how
6 – Independent of you – you don’t tell them what to do
If considering these six factors somebody looks like a contractor, move them to the second basket. Otherwise leave them in the first basket. Everybody left in the first basket is subject to payroll tax.
You start with assuming that every contractor – be it an individual that came from the first basket or a company, trust or partnership – is a contractor. And you only take them out of the second basket if an exemption applies.
In NSW there are seven exemptions – six general ones that apply across Australia and one specific one.
# 1 Services ancillary to the provision of goods or use of goods
The labour provided under the contract is ancillary to the supply or use of goods.
# 2 Services not ordinarily required and supplied to general public
The business does not ordinarily require these services. And the service provider actually supplies the same type of services to the general public in that financial year.
Think of a plumber who comes to the site once-off to repair a broken pipe, but has plenty of other customers elsewhere.
# 3 Services ordinarily required for less than 180 days
The business does not ordinarily require these services and only uses these services for 179 days a year or less.
So this is about the service itself. Not the worker. Think of a ski-resort that only needs road clearing for 90 days a year.
# 4 Services provided for 90 days or less in a financial year
The worker works for less than 90 days in a financial year. After 90 days, the entire contract becomes relevant from day one (1) unless one of the other provisions apply.
This is now about the worker, not the service itself.
# 5 Services generally supplied by the contractor to the public
The Chief Commissioner can exclude the contract from payroll tax when satisfied based on evidence provided that the contractor provides services of that type to the general public during the financial year. The contractor must have actually provided services to the public – simply being available to provide them is not enough.
# 6 Services performed by two or more people
The contractor engages others to provide the services or the service requires two or more people to provide. This exemption can be denied if determined that it was entered into with the intention of avoiding payroll tax.
So these are the six general provisions that apply across Australia (apart from WA) thanks to harmonisation. And then there is one specific exemption that only applies to NSW.
# 7 Services provided by an owner-driver
The contract is solely for the conveyance of goods in a vehicle provided by the contractor. The contractor must own or lease the vehicle and must not be an employee.
If an individual or entity meets one of these exemptions, they move out of the second basket and their remuneration is not subject to payroll tax.
If you are involved with more than one entity, you also need to consider the grouping provisions. These grouping conditions automatically apply if certain conditions are met. So this is not a choice as it is for GST or income tax, but a legislative anti-avoidance provision to prevent ‘splitting’. Incorrect grouping is the most expensive mistake to make.
If the grouping provisions apply, all members of that group are treated as one single entity for payroll tax purposes, so only one threshold applies with joint and several liability between group members for any payroll tax payable.
Five provisions define a group. Entities are related if they are one of the following:
1 – Corporations related under the Corporations Act 2001
2 – Employers who share employees – think of a car dealership where one company runs sales and the other repair and maintenance, but both companies share the reception staff.
3 – Businesses commonly controlled by the same person or persons – control starts at 50%.
4 – Corporations that directly, indirectly or in aggregate are controlled by the same person or set of associated persons through a combination of personal and corporate share ownership.
5 – Groups that have common members and as a result are subsumed into a larger group of three or more members.
If any entities meet one of these criteria, you need to pool all their workers and do the exercise again.
Disclaimer: Tax Talks does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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Last Updated on 13 November 2019