Payroll tax captures not only wages paid to employees but also certain payments made to contractors. In this part 6 of our payroll tax series, we look at what is a contractor and what payments to contractors are caught by the payroll tax regime. In part 7 we will examine the exemptions that apply to contractors.

We explore this particularly in relation to the Victorian regime, but these principles apply across all States and Territories as the payroll tax legislation is uniformed across Australia (except Western Australia, which does not have the contractor provisions).

In identifying whether payments to contractors are subject to payroll tax, taxpayers and their advisors must consider the following four issues:

1.     Is the person an employee or contractor?

This question is important because payments to employees are always caught by the payroll tax regime whereas not all payments to contractors are caught (for example, because an exemption applies). It is important to note that just because a person is labelled as a contractor does not mean that they are not an employee.

Whether a person is an employee or a contractor has been examined in detail by the Courts many times over the years (not just for payroll tax but also for employment obligations, super guarantee etc). As a result, the Courts have developed a multi-factorial test to determine whether a person is an employee or not. Those factors include the following:

a.     Control and direction

If the business operator exercises a high level of control over the person, it will be more likely that there is an employer and employee relationship.

b.     Contract and practical relationship

Does the contract between the parties state that it is an employment or contractor relationship? Even if such contract states that it is a contractor relationship, is the conduct of the parties consistent with that?

An assessment of the terms of the contract along with the facts and circumstances of the relationship between the parties to the contract, pre and post execution of the contract is necessary.

c.     Contracts to achieve a ‘given result’

If the contract in question focuses on producing a result, rather than what must be provided during performance of the contracted task, this points towards an independent contractor relationship.

d.     Independent business

If the person is conducting their own business as distinct from merely participating in the business of the principal, then there is less likely to be an employer and employee relationship.

e.     Power to delegate

If the person has the power to delegate to others to undertake services for which the person was engaged, then there is more likely to be an independent contractor relationship.

f.      Risk

A person who bears the commercial risk and responsibility for their own services infers an independent contractor relationship.

g.     Provision of tools and equipment

If the person provides the assets, tools and equipment, thereby incurring the expenses and other overheads, this indicates that the person is an independent contractor.  

h.     Other factors considered

Other factors include:

• the right to suspend or dismiss the person

• the obligation to work

• working set and regular hours

• the payment of a regular or fixed remuneration

• the deduction of income tax

• providing superannuation benefits, annual leave, sick leave and long service leave

• requiring the person to wear a company uniform

• whether the person engaged to conduct the services is incorporated or not

2.     Is the contract a relevant contract?

A ‘relevant contract’ is a contract under which a person in the course of carrying on a business:

• Is engaged by a business to supply services (including results of work performed) for or in relation to a performance of work;

• Has supplied a business services of persons for or in relation to the performance of work; or

• Is engaged by a business to perform works on goods that are resupplied to the business.

Clearly, this is a very broad definition which covers all services contracts (unless an exception applies). For example, relevant contracts for a company that operates a retail business, would include the engagement of the following services (unless an exception applies) – contract sales staff, contract cleaners, their accountants, their lawyers, a plumber who fixes their faulty pipe, a change management consultant etc. While many services contracts will fall out of the payroll tax net via the exceptions, the starting point is that they are included and taxpayers must show they are excluded under one of the exceptions.

In addition to these “everyday” services contracts, as noted by Justice White in Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127, the meaning of a ‘relevant contract’ is broad enough to encompass any person under a separate contract between the principal business and end user (rather than directly with a contractor) under which the services of the contractors are supplied in relation to the performance of work.

In other words, even where there is no direct contract between the business and the contractor, where a contractor provides services or a performance of work to the business, this may still be captured under the meaning of a ‘relevant contract’.

It does not matter if the contractor is incorporated or not as payments to corporate entities under a relevant contract are caught by payroll tax (unless an exemption applies).

3.   How much of the payment under the relevant contract is subject to payroll tax?

Where the provisions apply, any amounts paid or payable by employer to the contractor under the relevant contract is deemed to be taxable wages (this may include other payments such as superannuation, any share or options provided under the relevant contract). The GST component of a relevant contract is not counted for payroll tax purposes.

For relevant contracts that include payments for goods, materials or equipment as well as services, the State Revenue Office has approved certain deductions for various classes of contracts to reflect a deemed amount for materials and equipment – see Revenue Ruling PTA018. For businesses that engage professions/trades not covered by the ruling, the business may need to apply for a private ruling in relation to calculating a goods/materials/equipment claw out.

4.   Does an exemption apply?

If the contract is a relevant contract, taxpayers and their advisors will then need to analyse if any of the contractor exemptions apply to exclude such payments from being subject to payroll tax. In part 7 of our payroll tax series, we explore the available contractor exemptions.

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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

Phil Broderick
Principal
T +61 3 9611 0163  l M +61 419 512 801   
E: pbroderick@sladen.com.au           

Laura Spencer
Senior Associate
T +61 3 9611 0110
lspencer@sladen.com.au