When operating a business and engaging contractors, it is crucial to navigate the complexities of payroll tax obligations to ensure compliance with legal requirements. 

Determining Payroll Tax Liability

Payments made to contractors might be subject to payroll tax unless specific exemptions apply. It’s crucial to ascertain if any of these exemptions are applicable before proceeding further. 

1. Contractor Classification: Determine whether the contractor should be categorised as an employee, irrespective of possessing an ABN or self-identifying as a contractor. 
2. Employment Agency Contracts: If your contract resembles an arrangement with an employment agency, exemptions may not be applicable.

The term ‘employee’ is not defined in the Payroll Tax Act 2007  and therefore the ordinary or common law meaning applies. Revenue Ruling PTA 038, aims to assist employers, principals, and their representatives in determining whether a worker qualifies as a common law employee.  

This ruling delineates crucial factors for making such determinations:

• Control and Direction: Assessing the ability to exert control by the business operator over the worker. 
• Contracts for a Given Result: Distinguishing between contracts focused on specific outcomes and those based on labour. 
• Independent Business: Evaluating whether the worker operates independently or as part of the business. 
• Power to Delegate: Examining the worker’s capacity to assign tasks to others. 
• Risk, Tools & Equipment: Analyzing who bears commercial risk and provides essential tools and equipment. 
• Other Factors: Considering additional indicators such as rights to suspend/dismissal, working obligations/hours, payment structure, benefits, and uniform requirements. 

The Revenue Ruling was issued in 2011. Since then, there have been 2 landmark judgements issued by the High Court of Australia (Jamsek and Personnel Contracting). Accordingly, where the business organization and the worker have a comprehensive written contract,  the relationship will be characterized as one of employment or independent contractor by reference to the rights and obligations of the parties under that contract. The courts will look at conduct and other factors in circumstances such as where the contract is challenged on the basis that it is a sham or where the contract has been varied.  

Sub-Contractor Declarations

When engaging sub-contractors, it’s imperative to obtain a signed declaration from them, even if payments are exempt under contractor exemptions. This declaration confirms that the sub-contractor has fulfilled their payroll tax obligations. Failure to do so may make you liable for any unpaid payroll tax. Even with a sub-contractor’s declaration, remember that payroll tax liability still applies unless contractor exemptions are met. 

Contractor Exemptions

Here are the main exemptions to consider:

1. Services Ancillary to Goods Supply: when the primary contract purpose is goods or equipment supply, and the supply of services is ancillary. 
2. Services Not Regularly Required: where the services are not normally needed for your business, and the contractor derives less than 40% of income from your business. 
3. Services Required Temporarily: when the services are needed for less than 180 days in a financial year. 
4. Short-term Services:  where the contractor provides identical or similar services for 90 days or less in a financial year. 
5. Commissioner-approved Services: Contractors providing similar services to the public may be exempt upon approval by the Commissioner. 
6. Services by Multiple Individuals: if two or more workers perform contracted services. 
7. Owner-Driver Services: when services are incidental to transportation and delivery of goods in a vehicle provided by the contractor. 

Please note that there are further conditions to be satisfied for an exemption to apply.  

Expert Assistance

Waterhouse Lawyers can assist you in navigating all payroll tax obligations for contractors considerations and, if necessary, prepare an objection to any assessments or decisions made by tax authorities. Contact us today!