|Ruling number||PTA 035|
|Date issued||30 March 2009|
|Issued by||Tony Newbury|
Chief Commissioner of State Revenue
|Effective from||1 July 2007|
|Effective to||28 May 2012|
|Status||Replaced by PTA 035v2|
The contractor provisions are in Division 7 of Part 3 of the Act. These provisions provide for certain contractors (whether incorporated or not) to be deemed employees (under what are defined as ‘relevant contracts’) and for payments to those contractors to be treated as wages for the purposes of the Act. Most contracts for the provision of services are ‘relevant contracts’.
However, there are six possible exemptions that may exclude payments under such contracts from the definition of wages. One of the exemptions is a contract for the provision of services by a person providing the same or similar services to a principal under the contract for no more than 90 days in a financial year (section 32(2)(b)(iii) of the Act).
In addition to explaining the operation of the exemption under section 32(2)(b)(iii) of the Act (90-day exemption), the purpose of this Ruling is to set out a replacement method (the Replacement Method) approved by the Chief Commissioner of State Revenue (the Chief Commissioner) in determining the application of the 90-day exemption where a principal encounters difficulty in determining the actual number of days on which a contractor has rendered services in a financial year.
If a relevant contract involves the provision of services by a person providing the same or similar services to a principal under the contract for no more than 90 days in a financial year, it is an exempt contract under section 32(2)(b)(iii) of the Act. For the purposes of this exemption:
Once the 90-day limit is exceeded, the total payments made to that contractor during the financial year, including payments made for the work performed in the first 90 days, is subject to payroll tax.
Where a principal encounters difficulty in determining the actual number of days on which services are rendered, the Replacement Method may be used. The Replacement Method does not require the calculation of the number of days for which services are provided.
Under the Replacement Method, a formula is used to calculate the estimated remuneration a contractor would receive from an employer for 90 days of service. If the actual amount earned by the contractor is less than or equal to the amount calculated using the formula, the 90-day exemption will be accepted as being applicable to that contract.
The formula is Y = A x B x C x D where:
Y= The estimated remuneration for 90 days of service
A= The highest hourly rate for the classification in that industry according to the respective pay scale summary that is available on the Workplace Authority website (workplaceauthority.gov.au)
B = Average number of hours worked per working day
C = 120 per cent (this accounts for an additional 20 per cent for the types of payment not typically received by contractors such as sick pay, holiday pay, overtime)
D = 90 days
It should be noted that in comparing the actual remuneration received by a contractor with the estimated remuneration derived using the formula (i.e. Y), the actual amount may be reduced by any allowable deduction determined by the Chief Commissioner (please refer to Revenue Ruling PTA 018 for the relevant deductions).
By allowing for the allowable deduction, the wages ordinarily payable to an employee for 90 days of work in that industry are comparable with the labour-only component of the actual amounts paid to the contractor in question.
The actual labour-only component after subtracting 20 per cent (deduction allowable for wall and ceiling plasterers according to Revenue Ruling PTA 018) is calculated as follows:
$15,000 minus $3,000 (being 20 per cent of $15,000) = $12,000
According to the Workplace Authority website, the pay scale summaries that best match the work undertaken by ceiling plasterers are the Award and the Australian Workers’ Union Construction and Maintenance Award 2002. The highest hourly rate for a full-time employee under each award is $18.82.
As a result, the estimated remuneration for 90 days of service provided by the ceiling plasterer under the contract is calculated to be:
$18.82 x 6 x 120% x 90 days = $12,195
In this instance, the labour-only component ($12,000) paid to the ceiling plasterer is less than the estimated remuneration ($12,195) calculated using the formula. Therefore, the 90-day exemption applies to exempt that payment from payroll tax.
In applying the Replacement Method, employers must identify the pay scale summary that best matches the type of work undertaken by the contractor. The pay scale summary to be used is the summary applicable at the commencement of the contract and if the same contract continues into the following financial year, the pay scale summary to be used in that financial year must have been in force at the commencement of that financial year (unless it no longer exists). Records must be kept regarding the pay scale summary used for each contractor for a period of five years.
Where no comparable pay scale summary exists, employers who can provide a satisfactory alternative rate may seek a private ruling from the Office of State Revenue (OSR).
Please note that rulings do not have the force of law. Each decision made by the OSR is made on the merits of each individual case having regard to any relevant ruling.