|Practice Note number||CPN 007|
|Date issued||28 February 2019|
|Issued by||Cullen Smythe Commissioner of State Revenue|
This Commissioner’s Practice Note is relevant to all businesses that have dealings with contractors.
Payments to independent contractors may be liable to payroll tax under the Payroll Tax Act 2007 (the Act). This practice note will assist customers to decide whether payments they make to independent contractors are liable for, or exempt from, payroll tax and whether the amounts should be included in their payroll tax returns. It explains the type of records they should keep about any exempt contracts.
Note: Failure to pay tax could result in interest and penalties.
It is a contract, agreement, arrangement or undertaking under which a contractor provides an employer with the services of a worker.
The individual who performs the work may be the contractor or another worker engaged by the contractor.
The independent contractor is deemed to be an employee.
The person who receives the services is deemed to be an employer.
Payments by the deemed employer that relate to the performance of work by the contractor are liable for payroll tax unless an exemption applies.
Any part of the payments which are for materials, tools or equipment are not liable for payroll tax.
Exemptions apply in the following circumstances:
If an employer believes a particular contract is exempt, records must be kept to show that the exemption applies.
Businesses may engage independent contractors who provide their own services, or the services of other workers, in the course of performing work or achieving a result. Payments made to independent contractors may be taxable if the contract or arrangement is a “relevant contract” for payroll tax purposes. This is because the definition of “wages” under the Act includes amounts paid or payable to a contractor for the performance of work under a relevant contract unless an exemption (called an “exclusion”) applies.
This means that you may have to pay payroll tax on payments made to a worker engaged as a contractor even if:
Payments for services provided by an independent contractor are taxable unless at least one of the following exclusions (that is, exemptions) apply:
More information about the application of each of these exemptions is provided below.
If a payment under a relevant contract includes a non-labour component, such as payments for goods or materials, payroll tax only applies to the component that is attributable to work. The non-labour component should be deducted. You should also deduct the GST component of any payment to a contractor.
An independent contractor is a person who is conducting their own business.
The types of business structures used by contractors include:
An independent contractor will generally:
Liability for payroll tax on payments to independent contractors is dealt with in Sections 31 to 36 of the Act.
Even if your contract with a worker defines them as an 'independent contractor', the worker may still be regarded as a common law employee depending on other terms of the contract.
Read the public ruling on determining whether a worker is an employee (PTA038) for more information about the difference between an employee and an independent contractor.
The Australian Taxation Office (ATO) has an employee/contractor decision tool you can use to help you decide if a particular worker is your employee or a contractor for payroll tax purposes. It is available at www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/. This is important in determining your payroll tax liability because the exemptions in the contractor provisions do not apply to employees.
If you engage a worker under a contract of employment, your payroll tax liability is determined under section 13 of the Payroll Tax Act 2007 (“General concept of wages”). The exemptions under the contractor provisions do not apply.
If a worker is engaged under an employment agency contract, the employment agent’s liability is determined under Division 8 of Part 3 of the Act. The contractor provisions do not apply.
If your worker is not engaged as an employee and the employment agency provisions do not apply, you must consider the facts and circumstances applying to each contractor to decide whether the contractor provisions apply.
If none of the contractor exemptions apply, payroll tax is payable on the labour component of the amount paid or payable to the contractor, after excluding GST.
A contract is exempt if it is primarily for the supply of goods, and the services provided by the contractor are ancillary to the supply of goods
This exemption will apply if the main purpose of the contract is the supply or use of goods. This usually means the amount you pay for goods, or for the use of goods, is more than 50% of the aggregate payments under the contract. The value attributed to the contractor’s services and to the goods or their use must be reasonable market rates.
“Goods” has a broad meaning and includes any tangible article, whether portable or fixed to something, and whether intended for personal, domestic or commercial consumption or use. It includes commodities, material, merchandise, and equipment.
If the value attributed to the goods or to their use is less than 50% of the contract value but you believe the main object of the contract is the supply or use of goods, you should seek a private ruling from the Chief Commissioner before claiming the exemption.
You should maintain a copy of the contract, invoice, purchase order or quote, disclosing the value of goods and/or equipment you purchased under the contract as well as the total value of the contract.
If your records do not disclose the value of the goods, you should maintain other evidence of the value of the goods at the time of the transaction, such as a price list from the supplier of the goods.
Note: Read the public ruling on contractor services ancillary to the supply of goods (PTA033) for more information.
A contract is exempt if the services are not ordinarily required in your business and the contractor performs similar services for the public generally
This exemption applies when an employer engages an independent contractor to provide services that are not ordinarily required in the employer’s business during a financial year, and the contractor conducts a business of providing similar services to the public generally. Services are “not ordinarily required” if, during a financial year, that type of services are not usually required at all.
You will need to demonstrate that you do not normally engage employees or contractors to perform the particular type of services. In many cases, this may be self-evident, but you still need to keep sufficient information about the work performed by the contractor to demonstrate that the type of services actually performed under the contract are not normally required by your business during a financial year.
You should also keep a record of the evidence that your contractor conducts a business of providing the same or similar services to other businesses. Such evidence may include:
If we are not satisfied that the contract is exempt, we may check information we are able to access from other Government agencies. For example, we are able to access information about contractors held by the ATO, showing the income declared by the contractor for income tax purposes. If your contractor’s annual income is substantially higher than the remuneration your business pays to the contractor during the relevant financial year, that shows your contractor provides services to the public generally.
Note: Read the public ruling on contractor services not ordinarily required (PTA022) for more information.
A contract is exempt if you ordinarily require the type of services for less than 180 days in a financial year
This exemption applies if you engage a contractor that provides services of a type that is usually required by your business for less than 180 days in a financial year. However, if your business regularly or usually uses this type of service for at least 180 days each year, the exemption does not apply.
You should maintain records describing the type of services supplied by the contractor. You need to be able to demonstrate that your business usually requires the same or similar services for less than 180 days in most financial years.
If you wish to claim this exemption, you will need to demonstrate that the services provided by the contractor are normally required by your business for less than 180 days each financial year, and the services were required because of special circumstances.
If you believe a particular contract qualifies for this exemption, you should ensure that you keep a record of the type of services received under the contract, and demonstrate that your business does not usually require the same or similar services. This could be recorded in the contract itself, on the invoice provided by the contractor, or in your payment records.
Note: Read the following public rulings for more information:
A contract is exempt if the contractor works for you for 90 days or less during the financial year
If a contractor is engaged by your business under multiple contracts, and the work is performed by the same person, the contracts are exempt only if the total number of days worked all of the contracts does not exceed 90 days during the same financial year.
If you engage multiple contractors to undertake similar tasks, but the same individual performs the work under those contracts, the exemption will only apply if the total number of days worked by that individual does not exceed 90 days.
Each day on which your contractor provides services counts as 1 day e.g. working for 1 hour on a particular day counts as 1 day for the purposes of this exemption.
If you claim this exemption you must keep records which show that your contractor worked for your business for 90 days or less during a financial year.
Such evidence may include:
If you are unable to determine the number of days your contractor worked from information on the invoice or contract, you may use a “replacement” method using the industry pay rates to determine the estimated remuneration you would expect to pay for 90 working days of the type of service provided by your contractor, having regard to the contractor’s qualifications or expertise. You can use relevant award pay rates published on the Fair Work Australia website. You compare this amount to the payments you made to the contractor to determine whether the contract is exempt. The replacement method is explained in Revenue Ruling PTA 035 v2.
Note: Read the following public rulings for more information:
A contract is exempt if your contractor ordinarily provides similar services to the public during the relevant financial year.
You need to show us that during the relevant financial year your contractor ordinarily provided similar services to the public generally. Your contractor must be offering similar services to other principals in the course of conducting a genuine independent business. The characteristics which indicate that your contractor conducts an independent business are listed in Revenue Ruling PTA021.
As outlined in Revenue Ruling PTA021, we will accept that your contractor ordinarily provides services to the public generally if:
Engages Independent plumbing contractor. Performs work for other businesses that are part of the same group
You should keep information identifying the days on which your contractor performed work for you, and evidence showing your contractor offers similar services to other customers or businesses. Such evidence may include:
We use data provided by the Australian Taxation Office to check claims for this exemption. The taxable income declared by the contractor should be significantly more than the total amount paid to the contractor by the employer.
Note: Read the public ruling on contractors ordinarily rendering services to the public (PTA021)for more information.
An exemption applies if your contractor conducts an independent business and engages 2 or more persons to provide your business with services under the contract.
The work performed by each of at least 2 individuals who perform the work must be directly related to the work required under the contract and must constitute a significant proportion of the total amount of work required by the contract. The exemption does not apply if the contribution of one of the individuals is de minimis, that is, if it is an insignificant proportion of the total work performed under the contract or contracts during the financial year (see for example, Novus Capital Ltd v Chief Commissioner of State Revenue  NSWCATAD 72 at paras 285 & 286).
The requirements to qualify for this exemption depend on whether the contractor is a natural person, a partnership of natural persons or a company.
Both the full time employee and the casual workers perform the installation work
The contract between AFSL1 and AR1 is exempt
The contract between ACL and CR Is exempt under this provision because CR has engaged 2 persons to provide services to ACL. However, the contract would not be exempt under this provision if only 1 person is sub-authorised.
You should maintain any documents that show at least 2 workers performed the work under the contract. The relevant documents may include:
We have access to ATO and State Insurance Regulatory Authority records, and we may check whether their information is consistent with your claim that the contract is exempt.
Note: Read the public ruling on contractors engaging others (PTA023) for more information.
A contract is exempt if it is solely for or ancillary to the conveyance of goods by means of a vehicle provided by the person
“Goods” has a wide meaning and includes tangible items, articles, commodities, material, and merchandise, including the return transportation of packaging and spoiled goods.
Read more at: http://www.businessdictionary.com/definition/goods.html
Services are ancillary to the transport of goods if they are part of the work required to be performed to undertake the conveyance, including tasks undertaken prior to loading and after unloading the goods. Such services include driving the vehicle to pick up the goods and return the vehicle or to drive to the next conveyance job; loading and unloading the vehicle; repairs to the vehicle during the conveyance; and conducting a stocktake either before or after conveying the goods.
The contractor must provide the vehicle used to transport the goods, but the vehicle may be hired, leased or borrowed, as long as it has not been hired, leased or borrowed from the person or business for whom the goods are transported. The employer or business must not make a contribution, directly or indirectly, to the capital or running expenses of the vehicle.
The contract is exempt
The contract is not exempt because the contract is for the provision of TV services and is not solely for or ancillary to the conveyance of goods.
You should keep a copy of the contract, invoices, agreement or consignment notes provided by the contractor when your goods are picked up or delivered to the destination.
You should also record the registration details of the vehicle used by the contractor.
Note: Read the public ruling on the payroll tax exemption for payments to owner-drivers (PTA006) for more information.
A payment under a relevant contract is taxable to the extent that the payment is for labour. Where the payment includes a component for labour and also a non-labour component, such as materials, tools, equipment, or a vehicle, you may deduct the amount attributed to the non-labour component.
If your contract separately identifies the labour and non-labour components of payments, the amount paid for labour is taxable, provided the components reflect reasonable market rates.
If a contract does not distinguish between the amounts payable for labour and non-labour components, you may deduct a proportion of the total payments as specified for particular types of contracts outlined in public ruling PTA 018 (Contractor deductions). If your contractor provides services which are predominantly of a type specified in the ruling, or if you provide a similar type of service, you may apply the percentage deduction specified for that type of contractor without seeking the Chief Commissioner’s approval. For example, the deduction permitted for electricians may be applied to contractors installing electronic equipment or performing services where electrical work forms a substantial component of the work.
If a non-labour component is specified in your contract but it is higher than the rate specified in PTA 018 for the particular industry, you must seek the Chief Commissioner’s approval of the higher rate before using it.
The deduction specified in PTA 018 for wall and floor tilers is 25%. If you are able to prove that a higher deduction is warranted because the tiler is providing expensive tiles under the contract, you should apply for the Chief Commissioner’s approval of the higher deduction. Evidence such as invoices of the actual non-labour costs actually incurred by the tiler must be provided.
If your contractor provides services that are not the same or similar to an industry specified in PTA 018, or if you have calculated a non-labour component which is higher than is specified in the ruling, you should apply for a determination by the Chief Commissioner (see PTA019).
You may be asked to provide evidence of the actual or estimated costs incurred by your contractor to justify the deduction you wish to claim. Acceptable evidence includes invoices for the particular materials provided by your contractor.
If your contractors provide their own tools and/or equipment, you can claim a proportion of the costs of such equipment using depreciation rates accepted by the Australian Taxation Office.
Another acceptable method is to use the award or market rate of remuneration paid to employees with similar qualifications or skill levels performing similar work to your contractor. Award rates can be obtained on the website of Fair Work Australia.
Note: Read the public ruling on Contractor deductions (PTA018) and Contractor labour and non-labour components (PTA019) for more information.
If your contract satisfies the requirements for an exemption, but we believe the contract results in a reduction or avoidance of payroll tax, we may disregard the contract and treat the payments for the services of the contractor as liable under the anti-avoidance provision.
Commissioner of State Revenue