Payroll tax is a State/Territory-based tax that levies tax on ‘employers’ for wages paid to ‘employees’.
While traditional employer-employee relationships do indeed fall within the bounds of payroll tax law, in certain circumstances payments made by a business to contractors are deemed to be employer-employee relationships for payroll tax purposes.
Under Section 33 of the Payroll Tax Act 2011 (ACT) a person is taken to be an employer if, under a relevant contract, the person is someone:
a) who supplies services to someone else, or
b) to whom the services of people are supplied in relation to the performance of work, or
c) who gives out goods to other people.
Note: where both (a) and (b) apply to a relevant contract, paragraph (b) prevails; that is, the recipient of the services is deemed to be the employer — the supplier of the services is not deemed to be the employer for payroll tax purposes.
The definition of a relevant contract in this context is clearly broad. Any payments made to a contractor under such an arrangement may give rise to a liability for payroll tax on the part of the business making the payment. This can apply regardless of whether the contractor supplies services as a sole trader, a partnership, a company or a trust.
Where a principal makes a payment to a contractor, the total amount paid (excluding GST) must be taken into account:
a) when determining whether or not the employer needs to register for payroll tax, and
b) when calculating any amount of payroll tax payable.
A limited number of exclusions are available. These exclusions vary between the States and Territories. Never assume that an exclusion applies without checking the relevant legislation in which you and your contractors operate.
Do not assume, for instance, that because a contractor invoices your business in the name of a company, and has other clients, that the contractor is an employer in its own right for payroll tax purposes.
The consequences of understating a liability for payroll tax can be costly, including unpaid tax, penalties and interest. State and Territory Revenue Authorities can conduct investigations and audits that can be time-consuming and can require additional outlays on professional services that may or may not be covered by an audit insurance policy.
If you need expert advice on this or any other aspect of payroll tax law throughout Australia, either because you are uncertain of your obligations or have become the subject of an investigation by a State or Territory Revenue Authority, contact Nexia Canberra who can review your practices, provide you with advice and represent you in dealings with State and Territory Revenue Authorities.