Payroll tax and the security industry
An overview of common business practices in the security industry that may create payroll tax problems in NSW. Learn how to correctly declare payments to workers under employment agency contracts and payroll tax grouping.
Employers in this industry provide security services to clients.
To provide these services employers use their own employees and subcontractors, or a combination of the two.
Common payroll tax errors
As an employer in the security industry you must meet your payroll tax obligations.
Payroll tax audits on security businesses often uncover errors with:
- employment agency contracts, and
- payroll tax grouping.
The errors result in the businesses underpaying their payroll tax by a significant amount.
If we conduct an audit on your business we will verify your evidence with third-party information, including information obtained from other government agencies.
Employment agency contracts
Businesses in the security industry are usually engaged to provide services to other businesses under a contract for service.
These contracts may be employment agency contracts under section 37 of the Payroll Tax Act 2007 (PTA). This section applies to:
- labour hire businesses, and
- businesses that supply services to other businesses under a contract for service.
Payroll tax audits show that security businesses often:
- fail to recognise that their security contracts are employment agency contracts, and
- incorrectly apply contractor exemptions to payments made to workers under employment agency contracts.
Businesses are not entitled to claim contractor exemptions under an employment agency contract because there is no provision for contractor exemptions under section 37 of the PTA.
These errors may result in underpaid payroll tax because payments relating to subcontractors are not correctly declared as taxable wages.
When does an employment agency contract occur?
Contracts are generally between a security business and its clients and/or workers.
The test that determines if a contract is an employment agency contract is whether the worker performs services ‘in and for’ the conduct of the client’s business.
Some of the factors you must consider in determining whether the worker is performing services ‘in and for’ the conduct of the client’s business include:
- continuity and regularity of services
- where the worker performs the services
- control and direction of the worker by the client
- use of the client’s facilities by the worker, and
- uniforms worn by the worker.
If the worker is helping your client conduct its business in the same way, or much the same way, as an employee, the worker is regarded as part of your client's workforce. The arrangement is an employment agency contract.
To help you decide if your business has employment agency contracts read the:
Example: Where security guards work ‘in and for the conduct of the client’s business’
In the example below the arrangement is an employment agency contract because the guards are working ‘in and for the conduct of the client’s business'. Security guards work regularly and under control of the client’s business, like an employee.
A fact-sensitive analysis must be performed on a case-by-case basis. Not all the factors listed below need to be present for there to be an employment agency contract.
Grouping errors
There are several ways businesses can be grouped under Division 2 of Part 5 of the PTA.
Grouped businesses are entitled to claim only one payroll tax threshold for the group.
Failing to recognise that businesses are grouped usually results in significant underpayment of tax due to multiple payroll tax thresholds being claimed by members of a group.
Payroll tax audits often find security businesses fail to declare that they are part of a group by way of common control or use of common employees.
Common control
Businesses may be grouped through common control under section 72 of the PTA.
This occurs when a person(s) has a controlling interest in two or more businesses.
Use of common employees
Businesses may also be grouped through the use of common employees under section 71 of the PTA.
This occurs when one or more employees of a business perform duties in another business.
To learn more about common control, the use of common employees and payroll tax thresholds read the:
Illegal phoenix activity
Some businesses in the security industry engage in phoenix activity to intentionally avoid paying their payroll tax.
Revenue NSW encourages businesses who are doing the right thing to report phoenix operators and those promoting illegal phoenix behaviour.
We are also part of the Phoenix Taskforce, working with other government agencies to combat illegal phoenix activity.
Read the illegal phoenix activity page for more details.
Anti-avoidance provisions
The payroll tax anti-avoidance provisions apply where an arrangement reduces or avoids liability for payroll tax.
There does not need to be proof the arrangement was intentional. What matters is the effect the arrangement has on the payroll tax liability.
We examine the facts and circumstances of your business to work out whether to apply the provisions.
The Chief Commissioner may disregard the agreement, transaction or arrangements and determine that any:
- party to the arrangement is taken to be an employer, and/or
- payment in respect of the arrangement will be deemed taxable wages.
A security business may be assessed for payroll tax under the employment agency anti-avoidance provisions where:
- the main objective of the security business was to obtain the personal services of a security guard
- there were high levels of integration and dependency between the security business and the security guards, such as:
- wearing the security business’s uniform
- utilising their equipment, and
- the provision of services under the security business’s control
- the licenced security guard provides a labour only service and does not carry on an independent business, demonstrating many of the characteristics of an employer-employee relationship, and
- there is no payroll tax paid on the payments made to the security guards by any security business in the arrangement.
If we apply the anti-avoidance provisions in Division 8 of the PTA we will provide you with a written notice along with reasons for our decision.
Where there is a chain of on-hire we may choose to assess any security business in the arrangement.
Read section 42 and section 47 of the PTA for more details.
What you need to do
You should conduct an internal review of your business to determine the correct payroll tax treatment of payments made to all workers.
Registered businesses
If you have identified an underpayment, or not declared liable amounts in your monthly payroll tax return for the current financial year, include these additional amounts in your next monthly return and/or annual reconciliation.
Unregistered businesses
If your taxable wages exceed the monthly payroll tax threshold in the current financial year, or the last four financial years, you must register for payroll tax.
Register for payroll tax now
Voluntary disclosure
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. The full interest rate will still apply.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your returns, including previous financial years.
Contact the payroll tax team
If you have more questions about this topic call 1300 139 815 or +61 2 7808 6904 for international callers.
You can also email [email protected]