As follow on from part 6 of our payroll tax series, where we identified when payments to contractors will be caught by the payroll tax system, in this article we consider the various exemptions that can apply to such payments to contactors. Importantly, if any of these exemptions apply, such payments to contractors will not be subject to payroll tax.
The application of these exemptions can result in significant payroll tax savings. It is therefore important for employers to consider each exemption for each contractor that they engage.
The contractor exemptions or exclusions that are available include:
1. Services are provided for 90 days or less in a financial year
This exclusion applies where the contractor provides services under a relevant contract to a business for 90 days or less in a financial year.
For example, a builder who contracts an electrical contractor for 82 days in a financial year will not have to pay payroll tax on the payments to that contractor. In contrast, if that builder contracts a plumbing contractor for 93 days in a financial year, all of those payments will be caught by the payroll tax system.
2. Contractor engages others to do all or part of the work under the relevant contract
This exclusion applies where the contractor hires employees or engages other contractors to perform some or all the work under the relevant contract. In order for this exemption to apply the contactor must be carrying on its own business and engaging those persons in the course of that business.
The Victorian Commissioner’s view of the application of this exemption is set out in Revenue Ruling PTA023. This includes how the exemption can apply to different business entitles. For example, a company will require 2 persons to be engaged whereas a sole trader can include one additional person plus the sole trader. A partnership can include two or more partners, a partner with one or more persons or two persons none of which are partners.
The Commissioner takes the view that the contractor must have the overall responsibility of fulfilling the terms of the contract, directly engage persons performing the work under the relevant contract and the services supplied by the persons performing the work must be a necessary part of the contractor’s business.
3. Provision of labour is ancillary or secondary to the supply or materials or equipment under the relevant contract
This exclusion applies where the contractor is engaged primarily for the supply of material or equipment rather than the supply of labour by the contractor.
As a “working guide” the supply of labour can be considered ancillary to the supply equipment or material when the cost of providing the materials or equipment exceeds 50 per cent of the total contract amount.
In Downer EDI Engineering Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSCA 126 payments to a contractor engaged to deliver and install Foxtel set top boxes to homes were found to be exempt from payroll tax. The NSW Supreme Court of Appeal found that the installation services supplied were ancillary to the supply of goods under the relevant contract which therefore fell within the third contractor exclusion and that it was not necessary for legal title of the goods to pass for there to be a supply of goods.
4. The services provided under the relevant contract are of a type not ordinarily required by the business
This exclusion applies where the contractor is engaged to provide services that are not ordinarily required or associated to the designated person’s main area of business.
For example, a company that conducts a hotel business contracts a management consultant to review their business structure on a 7-month contract. This is not a service ordinarily required by the hotel business and payments under this contract are excluded from payroll tax.
5. Services are of a type ordinarily required by the business for less than 180 days in a financial year
This exclusion applies where the contractor is engaged under a relevant contract to supply services to the designated person (or principal) and the services are typically required by the principal for less than 180 days in a financial year (ie it must be an ad-hoc service that is required infrequently).
For example, a mining company requires an annual environmental audit that it must submit to the government. This audit typically takes 4 months from start to finish. The company does not otherwise require an environmental auditor. An annual 4-month contact of an auditor to conduct this audit would be excluded from the payroll tax system under this exemption.
6. Contractor ordinarily provides services to the public
This exclusion applies where the contractor ordinarily provides services under the relevant contract to the public generally in that financial year.
The Commissioner will take a number of factors in ascertaining if this exists, including and not limited to the contractor’s advertising, clients, plant and equipment, contractual work won, charges and general risk borne.
In Nationwide Towing & Transport Pty Ltd v Commissioner of State Revenue (No 2) [2018] VSC 609, the Victorian Supreme Court held that the taxpayer in this case, who was contracted by RACV Roadside Services Pty Ltd to provide emergency roadside services, had engaged subcontractors who provided to the public additional services (outside of those covered by the RACV contract). The Court rejected the Commissioner’s view that the subcontractors must carry on a “genuine independent business”, but rather the correct question at law was whether the subcontractors had indeed provided services to the public generally. Given that the subcontractors did provide services to the public generally, even if they weren’t carrying on an independent business, this exclusion applied and the payments to the subcontractors weren’t caught by payroll tax.
The Victorian Commissioner has issued draft Revenue Ruling PTA-021v2, in which he accepted this decision and lists further factors the Commissioner will consider in assessing if the requirements to qualify for this contractor exclusion is met.
If you have any questions about how payroll tax should apply in your circumstance, please contact our specialist team at:
Denise Tan
Senior Associate
T +61 3 9611 0160 | M +61 438 714 965
E: dtan@sladen.com.au
Laura Spencer
Senior Associate
T +61 3 9611 0110 | M 0436 436 718
lspencer@sladen.com.au
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E: pbroderick@sladen.com.au
