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Are your contractor payments exempt from payroll tax?

Are your contractor payments exempt from payroll tax?

Recently there has been a rise in the number of random NSW Payroll Tax audits, especially in the Building & Construction Industry. The key target is payroll tax on Contractor Payments where the worker is hired as an independent contractor, but works and operates exactly like an employee.

Payroll Tax is applied to a business’s NSW “wages” that exceed the Payroll Tax threshold (currently $750,000). The current payroll tax rate is 5.45%. “Wages” are any remuneration paid or payable by an employer to an employee for services provided. Payments made to certain Contractors may also be deemed wages, unless the contract is exempt. The Contractor provisions apply even if the contractor is a company/trust or a “personal service business” passing the 80/20 test.

There are seven main exemptions which may apply.

Exemption 1:

Applies to contracts under which the basic purpose is to supply goods, and the labour or services provided under the contract is only incidental to this.

Where the amount relating to the provision of materials/equipment under a contract is more than 50% of the total contract amount, the provision of labour under the same contract is considered ancillary. There must be evidence to substantiate that the provision of materials/equipment is the principal object of the contract.

Link: Revenue Ruling PTA 033

For example, payroll tax is not payable when you contract someone to supply or install an air conditioning system.

Furthermore, where the 50% criterion is not satisfied, the principal may be entitled to a deduction depending on the profession of the contractor (Link: Revenue Ruling PTA 018).

Exemption 2:

Applies to contracts for services you do not normally require and the contractor provides these services to the public generally.

From time to time, businesses may require services that are not associated with their mainstream business activities. As these services are required so infrequently, it would be more practical for businesses to engage contractors instead of permanent staff to perform these services when the need arises. Contracts to provide these services by contractors who ordinarily renders such services to the general public are excluded. Consequently, payments made under such contracts would not be subject to payroll tax.

For the exemption to apply, the following criteria must be satisfied:

  • The services provided by the contractor must not ordinarily be required by the principal (e.g. services provided by painters and decorators engaged by a bank to paint and decorate its office), and
  • The contractor must ordinarily provide the services in question to the public generally. To satisfy this criterion, the contractor would need to have derived less than 40 per cent of gross trading income from the principal during the relevant financial year.

Link: Revenue Ruling PTA 022

Exemption 3:

Applies to contracts for services normally required by a business for less than 180 days in a financial year.

From time to time, businesses may require certain ad-hoc services to operate effectively but do not require these services for the whole year. Further, seasonal businesses may require certain essential services to operate effectively but do not require these services for the whole year.

The 180-day exemption focuses on the number of days on which a particular type of service is ordinarily required by the principal in a financial year. Where a particular service is provided by both employees and contractors, the number of days on which such a service is provided to the principal by both the contractors and employees must be taken into account. Services required for part of a day will count as a full day.

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 ordinarily required during the financial year that is relevant. In essence, where a type of service is required by an employer for less than 180 days in a financial year, payments to all contractors providing that service are exempt even though an individual contractor may have worked for more than 90 days in the same financial year.

The difference between the 180-day exemption and the 90-day exemption is that while the 90-day exemption requires the determination of the number of days an individual contractor provides services to a principal, the 180-day exemption requires a determination of the total number of days a particular type of service is required by the principal (regardless of whether the service has been provided by contractors and/or employees).

Link: Revenue Ruling PTA 020

Exemption 4:

Applies to contracts under which a contractor provides services up to 90 days in a financial year.

If a contract involves the provision of same or similar services under the contract for no more than 90 days in a financial year, it is an exempt contract. For the purposes of this exemption:

  • the carrying out of any work on a given day will count as a full day, and
  • the days worked 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.

Where a principal encounters difficulty in determining the actual number of days on which services are rendered, the Replacement Method may be used. The Replacement Method does not require the calculation of the number of days for which services are provided (more details, including an example, can be found on this in the attached link).

Link: Revenue Ruling PTA 035 v2

Exemption 5:

Applies to contracts that do not meet the above criteria, but the Chief Commissioner is satisfied the contractor provides services of that kind to the public generally within a financial year.

In exercising his discretion, the Chief Commissioner needs to be satisfied that the contractor provides:

  • the services in the course of conducting a genuine independent business, and
  • ordinarily renders those services to the general public.

The mere fact that a contractor works on a succession of jobs for different principals does not mean that these criteria are satisfied. It is necessary to consider the steps undertaken by the contractor to create an independent business (i.e. to obtain work from clients other than the principal in question).

To seek an exemption, a principal is required to apply to the Chief Commissioner for a determination.

In making his determination, the Chief Commissioner will review the contractor’s business and consider factors including (but not limited to):

  • the use of a business name by the contractor
  • the extent and nature of advertising undertaken by the contractor
  • the range of clients serviced by the contractor
  • the extent and nature of plant and equipment provided by the contractor in execution of the services
  • the engagement of staff or sub-contractors by the contractor;
  • the use of business premises by the contractor
  • the method of operation of the business (such as tendering for jobs)
  • the potential for entrepreneurial risk
  • the nature of contracts entered into (e.g. formal long term or informal rolled over contracts)
  • the history of the formation of the contractor’s business
  • how the contractor won the contract
  • whether work is performed on separate contracts concurrently
  • the nature of the contractor’s business and the type of services provided
  • whether the contractor bears the cost and responsibility for faulty materials or workmanship
  • whether the contractor quotes competitively for jobs on an all inclusive basis (all labour and materials), and
  • whether the contractor merely charges for services on an hourly rate and adds on the cost of materials.

None of the above factors are conclusive on their own, nor is the above list an exhaustive list of factors.

However, the Chief Commissioner will accept that a contractor ordinarily renders services to the public generally where, in the financial year in which services were provided under the contract in question, the contractor provided services of that type to:

  1. two or more principals (not being members of a group) during the financial year, and
  2. the principal claiming the exemption for an average of 10 days or less per month (excluding the months in which no services were provided).

If a contractor who has supplied services under a contract to a principal in a particular financial year, meets the above two criteria, the exemption applies. Under these circumstances, there is no need for the principal to obtain a determination from the Chief Commissioner (more details, including an example, can be found on this in the attached link).

Link: Revenue Ruling PTA 021

Exemption 6:

Applies to contracts under which the contractor engages additional labour (two or more people) to fulfil the terms of the contract.

This exemption depends on the type of contracting entity:

  • Company: 2 or more persons performing the work under the contract
  • Partnership: Partner plus one non-partner performing the work under the contract
  • Sole trader: Sole trader plus one other performing the work under the contract

In addition, all the following conditions must be met for the exemption 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
  • The person(s) must be engaged by the contractor to perform the work which is the object of the contract (e.g. not administrative services to the tradesman)

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.

‘Buddy Gang’

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 be commensurate with the work performed and at a commercial rate.

Anti-avoidance provisions

A contract will not be exempt if the Chief 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 Chief Commissioner may also consider the arrangement in light of the anti-avoidance provisions.

Link: Revenue Ruling PTA 023

Exemption 7:

Applies to contracts for the conveyance of goods in a vehicle, which must be provided by, and owned or leased by the contractor.

Payments made for services performed by a contractor who provides his or her own vehicle, being a motorcycle, car or truck, will be exempt if:

  • the vehicle provided by the contractor is not owned or leased by the employer
  • the employer makes no contribution, whether directly or indirectly, to the capital or running expenses of the vehicle and
  • the main purpose of the contractor’s work is the conveyance (i.e. transportation and delivery) of goods. Any other services provided must be in every respect ancillary or secondary to that main purpose. That is, those services must be supplemental or subservient to the main purpose.

Link: Revenue Ruling PTA 006

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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