Employees and Contractors
Many Australian businesses engage workers as contractors or subcontractors instead of common law employees.
The contractor provisions in the Payroll Tax Act 2011 were introduced to capture arrangements where workers, though engaged as contractors or subcontractors, carry out their duties and operate in ways similar to that of employees.
The contractor provisions make the payments under such contracts (‘relevant contracts’) subject to payroll tax unless the contract is exempt.
It is necessary to understand what constitutes a ‘relevant contract’, an ‘employee’ and a ‘contractor’ under the contractor provisions at Division 3.7 of the Payroll Tax Act 2011.
In practice, the totality of the relationship and the facts of each case must be considered before determining whether a worker is an employee or an independent contractor. For certain contracts, a deduction or an exemption may apply for payroll tax purposes (see below).
Determining whether a worker is an employee is detailed further in Revenue Circular PTA038.
The examples used below are for illustrative purposes only to demonstrate a particular factor relevant to the determination of whether a worker is an employee or an independent contractor, based on a limited set of facts.
Is the contract a relevant contract?
The relevant contract provisions are quite broad; they apply to the majority of contracts for the provision of services. However there are a number of exemptions that exclude certain contractors from the relevant contract provisions.
Relevant contracts include those contracts where a person or company:
- supplies services relating to work;
- is supplied with services relating to work; or
- gives out goods to individuals for the resupply of those goods to the hiring business, or another member of a group containing the hiring business.
Payments by the hiring business for the services of the contractor are deemed to be wages. This includes any fringe benefits or superannuation contributions. However, the GST component of a contract is not liable.
Payments made under a relevant contract will be subject to payroll tax whether or not the person supplying the services or labour does so as an individual or through a company, trust or partnership.
Are you paying an employee or a contractor?
The term ‘employee’ is not defined in the Payroll Tax Act 2011 but an employee can only be an individual (natural person).
A principal/independent contractor relationship is different to an employer/employee relationship. Payments to a contractor under a relevant contract are liable for payroll tax, but may be subject to a deduction or exemption under certain circumstances.
For more information, please refer to Revenue Circular PTA038.
To determine if a worker is in an employer/employee relationship or a principal/independent contractor relationship the following factors should be considered. The terms of the contract provide evidence of the nature of the relationship between the parties, but all facts and circumstances of the relationship between the parties must be considered.
This list is not exhaustive and a wide range of factors will be considered in determining whether a relevant contract is subject to payroll tax.
Indicates an employee
Indicates a contractor
Control and direction
The employer/business operator has the right and/or authority to control/direct the worker in terms of how, where and when the work in question is to be performed.
The worker has freedom to accept or refuse work and the manner and time in which he or she will complete the tasks and achieve the agreed result.
Contracts to achieve ‘given result’
The contract is for the labour or the pay of the worker.
The purpose of the contract is to achieve a given end result.
Independent business operation
The worker isn’t conducting his or her own business, as distinct from participating in the business of the employer.
The worker is engaged by an employer in the ordinary course of operating the worker’s own independent business, providing services to the general public.
Power to delegate
The worker doesn’t have the power to delegate work or sub-contract to another person to complete the services for which he or she was engaged.
The worker has the power to delegate or sub contract work to other entities.
Delegation power firmly indicates the worker is an independent contractor rather than an employee.
The worker does not bear the commercial risk and responsibility for any poor workmanship, time delays or injury sustained in the performance of the work; these risks and responsibilities are borne by the employer.
The worker does bear the commercial risk for poor workmanship, time delays and injury sustained in the performance of his or her own work.
Tools and equipment
The worker doesn’t provide his or her own tools and equipment. Even if the worker does, it is possible that any resulting expenses will be reimbursed or an allowance paid by the employer.
The worker provides assets, tools, equipment and materials at his or her own expense. The worker also incurs other expenses.
Are your contracts eligible for a deduction?
If a contract has both labour and non-labour components (for example, materials or equipment), and the non-labour component is supplied by the contractor, a flat deduction rate may apply to adjust the taxable amount for payroll tax purposes, depending on the trade of the contractor.
Please refer to Revenue Circular PTA018 for a list of contractor types and the corresponding deduction rates.
If a profession, trade or particular type of contract is not listed in this Circular, an employer may apply to the Commissioner for ACT Revenue (the Commissioner) for a determination. Please refer to Revenue Circular PTA019 for further information.
A deduction does not apply for other costs incurred by the contractor that are unrelated to performing the labour component under the contract. Costs associated with running the contractor’s business in its own right are also non-deductible. Examples could include motor vehicle, mobile phone and home office expenses.
Are your contracts exempt from payroll tax?
A contract may not be liable for payroll tax if it fits any of the following criteria:
Supply of labour is ancillary to the supply or use of goods owned by a contractor.
In other words, the contract’s basic purpose is to supply goods. Labour or services are only incidental to this.
Contracting someone to supply and install an air conditioning system, or a contractor using a backhoe provided by the contractor as part of the contract.
Payroll Tax Act 2011, section 32 (2) (a)
The services under the contract are not normally required, and are provided by a contractor who ordinarily provides such services to the general public.
This exemption recognises many contracts are for services required on an intermittent basis, and provided by a contractor who also provides them to the general public.
A small retailer engages a shop fitter to refit the interior of the shop.
The retailer does not regularly require this service and the shop fitter provides services to retailers generally, not just this small retailer.
If, however, the retailer operated a large chain of stores and the shop fitter’s services were required for a sequence of contracts over much of the year, the exemption would not apply.
The contractor conveys goods in a vehicle provided by the contractor (an owner-driver).
A contract for goods being delivered, transported or provided is not liable if the owner-driver is not a common law employee; provides his or her own vehicle; and the primary purpose of the contract is to convey goods.
The vehicle cannot be owned or leased by the principal.
The delivery of flowers in a van owned by the driver.
The contract is allowed to include services ancillary to the conveyance of goods, such as loading and unloading products from the van.
Payroll Tax Act 2011, section 32 (2) (c)
The services are provided by a contractor as part of a genuine independent business, and the contractor ordinarily provides such services to the general public.
This exemption can apply even if the services are normally required in a financial year.
However, to qualify for the exemption, you must apply to the Commissioner for a determination that the contract is exempt.
Upon application, the Commissioner will review aspects of the contractor’s business and exercise discretion accordingly.
Please refer to the Revenue Circulars for further information.
A carpenter carrying on a genuine, independent business provides services to two builders in a financial year.
Under the carpenter’s contract with the first builder, the carpenter works for an average of 10 days or less per month (not counting months when no services were provided).
The first builder may apply to the Commissioner for an exemption.
When exemptions will not apply
No exemptions will apply to a contract if the contract includes the performance of any additional services or work that are not covered by the criteria above. In other words the contract must exclusively contain exempt services.
Additionally, no exemption will apply if it is determined a contract was established with an intention to either directly or indirectly avoid or evade the payment of payroll tax by anyone.