Many Australian businesses hire contractors or subcontractors rather than permanent employees.
The Payroll Tax Act 2011 applies payroll tax to contractors who are deemed to have an employer/employee relationship with the business, rather than a principal/independent contractor relationship.
The legislation also introduces contractor provisions to define ‘relevant contracts’ (see below) and to highlight work arrangements in which contractors and subcontractors work for the business in a similar way to employees.
According to these provisions, the payments that fall under relevant contracts are subject to payroll tax unless the contract is exempt. For certain contracts, deductions may also apply for payroll tax purposes. See below for more on exemptions and deductions.
Employees vs contractors
To firstly determine whether a worker is an employee or an independent contractor, you’ll need to look at each relationship and the surrounding circumstances on a case-by-case basis.
A number of factors determine whether you are in an employer/employee relationship or a principal/independent contractor relationship. The terms of the contract provide some information on the nature of the relationship, but you also need to consider other facts and circumstances surrounding the relationship.
The below examples serve only to illustrate some of the factors for determining whether a worker is an employee or an independent contractor. The list is not exhaustive; other considerations may come into play in establishing whether a relevant contract is subject to payroll tax.
Factor to consider
Indicates an employee
Indicates a contractor
Control and direction
The employer or business operator has the right, authority or both to control and direct how, when and where the worker performs the work in question.
The worker has the freedom to accept or refuse work and the manner and time in which he or she will complete the tasks and achieve the agreed-upon result.
Contracts to achieve a given result
The contract is for the labour or the pay of the worker.
The purpose of the contract is to achieve a given result.
Independent business operation
The worker isn’t conducting his or her own business, distinct from participating in the employer’s business.
An employer engages the worker in the ordinary course of operating the worker’s own independent business. The worker’s own business provides services to the general public.
Power to delegate
The worker doesn’t have the power to delegate work or subcontract to another person to complete the services for which he or she was engaged.
The worker has the power to delegate or subcontract work to other people. The power to delegate firmly indicates that 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; the employer bears these risks and responsibilities.
The worker bears the commercial risk for poor workmanship, time delays and injury sustained in the performance of his or her work.
Tools and equipment
The worker doesn’t provide his or her own tools and equipment. Even if the worker does, the employer may reimburse or pay an allowance for any resulting expenses.
The worker provides assets, tools, equipment and materials at his or her own expense and may incur other expenses.
For more information, see the Determining Whether a Worker is an Employee circular (PTA038).
If workers are independent contractors rather than employees, the relevant contract provisions may still apply. These rules are quite broad; they apply to most contracts that concern providing a service.
Relevant contracts include those for which a person or company:
- supplies services by performing work
- receives services through the performance of work
- provides goods to individuals to resupply those goods to the business that hires the contractor.
In simple terms, a relevant contract exists when a contractor provides services to fulfil a given contract. When you pay for a contractor’s services, those payments – including any fringe benefits and superannuation contributions – count as wages (excluding GST) and are subject to payroll tax. If a contract is not a relevant contract, your payments will not be subject to payroll tax.
If a relevant contract has both labour and non-labour components (for example, materials or equipment) and the contractor supplies the non-labour elements, a flat deduction rate may apply to adjust the taxable amount of payroll tax, depending on the contractor’s trade.
Please refer to the Contractor Reductions circular (PTA018) for a list of contractor types and the corresponding deduction rates. If the circular does not list a specific profession, trade or type of contract, employers may apply to the Commissioner for ACT Revenue for a determination. The Contractors – Labour and Non‐Labour Components circular (PTA019) contains more information.
Deductions do not apply for costs the contractors incur if the costs don’t relate to performing the labour portion of the contract. Expenses that contractors incur in running their own businesses, such as motor vehicle, mobile phone and home office expenses, are also non-deductible.
You may not have to pay payroll tax on a relevant contract if it fits any of the following criteria:
The supply of labour is secondary to the supply or use of goods that the contractor owns. In other words, the contract’s primary purpose is to supply goods; labour or services are only incidental to this.
Contracting someone to supply and install an air conditioning system, or hiring a contractor who uses his or her own backhoe 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 that many contracts are for services necessary only on an intermittent basis and are provided by a contractor who also provides them to the general public.
A small retailer engages a shopfitter to refit the interior of his or her shop. The retailer does not regularly require this service, and the shopfitter provides services to retailers generally – not just this small retailer. If, however, the retailer operated a large chain of stores and required the shopfitter’s services for a sequence of contracts over much of the year, the exemption would not apply.
The contractor transports and delivers goods in his or her own vehicle.
A contract for delivering, transporting or providing goods is not subject to payroll tax if:
The principal cannot own or lease the vehicle, or make contributions towards the driver’s vehicle expenses.
The delivery of flowers in a van the driver owns. The contract can include services secondary to conveying goods, such as loading and unloading products from the van.
The exemption generally applies to owners of motorcycles, cars, vans and trucks. Bicycle couriers will be considered employees in most circumstances and subject to payroll tax.
The contractor provides services as part of a genuine independent business and ordinarily provides those services to the general public. This exemption can apply even if you normally require the services within a financial year. However, to qualify for the exemption, you must apply to the Commissioner for ACT Revenue for a determination that the contract is exempt. The commissioner will review aspects of the contractor’s business and exercise discretion accordingly.
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 he or she provides no services). The first builder may apply to the commissioner for an exemption.
When exemptions don’t apply
No exemptions apply to a contract if it includes performing any additional services or work that the criteria above do not cover. In other words, the contract must exclusively contain exempt services.
Also, no exemption applies if it is determined a contract was established with the intention to directly or indirectly avoid paying payroll tax.