Employment agencies and payroll tax
Learn how an employment agent or labour hire agreement is defined for payroll tax purposes and which amounts are taxable.
What is an employment agency contract
An employment agency contract exists if an employment agent obtains a worker to provide services to a client for a fee. Under such a contract, the worker does not become an employee of the client.
A worker can also provide these services individually, or through a corporation or trust.
Employment agency contracts are used:
- in a broad range of industry and business contexts
- for skilled or unskilled work, and
- for short or long-term engagements.
An employment agency contract may be:
- written or oral
- formal or informal, and/or
- expressly made or implied.
The diagram below shows a typical employment agency contract.
Diagram 1: The Client requires workers for its business and enters into a contract with an Employment Agent. The Employment Agent then procures and contracts workers, performing employer functions including payroll functions. The Workers are contracted to work in and for the Client’s business.
How employment agency contracts are treated for payroll tax
When there is an employment agency contract:
- the employment agent is taken to be the employer of the worker who provides services to the employment agent’s client, and
- the worker is deemed to be the employee of the employment agent.
The employment agent as the deemed employer is liable for payroll tax on all amounts paid to the worker.
Employment agency provisions are contained in Division 8 of Part 3 of the Payroll Tax Act 2007 (PTA).
An employment agency arrangement is not a “relevant contract” under section 37 of the PTA. This means that contractor exemptions do not apply.
Employment agents with government clients
Employment agents may on-hire workers to government departments or bodies.
Payments to the on-hired workers are treated differently depending on which level of government is party to the arrangements.
Commonwealth Government
Although the Commonwealth Government is not subject to payroll tax, an employment agent is still liable for payroll tax on wages paid to workers on-hired to the Commonwealth Government.
The exemption in section 40(2) of the PTA does not apply since the Commonwealth Government is not specified as an exempt employer.
State Government
All State Government departments are liable for payroll tax in their respective state.
Employment agents must pay payroll tax on wages paid to workers on-hired to New South Wales government departments under an employment agency contract.
Local Government
Local government (municipal councils) are exempt from payroll tax except for wages related to certain activities outlined in section 60 of the PTA.
Employment agents are exempt from payroll tax on wages to workers on-hired to local government bodies so long as the workers are not engaged in the activities listed in section 60 of the PTA.
What you need to do
You need to correctly declare the wages paid to workers under employment agency contracts in your annual returns and monthly returns. For help in calculating the amounts follow these steps.
Errors may result in a tax default. If you have a tax default we will apply interest to the outstanding amount. Penalty tax may also be imposed. Read the interest and penalty tax page for more details.
Read what happens if you do not pay your payroll tax to understand how we help you meet your obligation to pay on time.
Always maintain relevant records to verify the calculation methods you used to include payments to workers in your monthly returns and annual returns.
Step 1: Work out the taxable wages
When there is an employment agency contract, the employment agent must declare all wages paid to workers. Wages include:
- gross salaries and wages
- fringe benefits
- employer superannuation contributions
- termination payments
- contractor payments
- allowances
- bonuses and commissions
- directors’ fees
- shares and options, and
- apprentice and trainee wages.
Read the taxable wages section for more details about how to calculate each taxable wage.
A client pays $12,000 to an employment agency and the employment agency pays $10,000 to the worker.
The liable employer is the employment agency and the $10,000 is a liable wage.
A client pays $1 million to an employment agency for the services of Andrew Green through Green Pty Ltd.
The agency pays $800,000 to Green Pty Ltd.
The liable wages of the employment agent should include the $800,000 paid by the agency to Green Pty Ltd.
Step 2: Work out the non-taxable payments
The following are not taxable wages and do not need to be declared in monthly or annual returns:
- GST component of a payment.
- Fees the client pays to an employment agency.
- One-off fees paid by a client to a recruitment agency for placing a person with the client where the person becomes an employee of the client. Under this arrangement the client is responsible for any payroll tax liability.
- Where the client of the employment agency signs an Employment Agency Contracts – Declaration by Exempt Client (PDF, 599.29 KB) stating they are an employer paying exempt wages, such as a public hospital or charitable body. Read more about exemptions.
ABC Nurses Pty Ltd (ABCN) is an employment agent that supplies nurses to major public and private hospitals under employment agency contracts.
In the 2023/24 financial year ABCN paid:
- $5,000,000 in wages to nurses who provided services in public hospitals
- $4,000,000 in wages to nurses who provided services in private hospitals (for profit), and
- $1,000,000 in wages to nurses who provided services in non-profit hospitals operated by an association.
ABCN obtains declarations (PDF, 599.29 KB) from their public and non-profit hospital clients which confirms they are exempt employers. As such, ABCN is entitled to claim an exemption on the amounts it paid to nurses who provided services in those public and non-profit hospitals.
However, since the private (for profit) hospitals are not exempt employers, ABCN is liable for payroll tax on the $4,000,000 it paid in wages to nurses working in the private hospitals.
ABCN must also continue to declare liable wages paid to workers and employees:
- who are providing services to ABCN such as administration roles
- where workers have been supplied to clients who are not exempt from payroll tax, and
- if a declaration for exempt clients is not obtained.
Step 3: Clarify chain of on-hire arrangements
A chain of on-hire arrangement is where 2 or more employment agents stand between the worker and the client.
In most cases, the employment agent closest to the ultimate client (Agent 2 in the diagram below) will be regarded by Revenue NSW as the employment agent who is liable for payroll tax.
If Agent 2 pays the relevant payroll tax then Agent 1 must obtain a declaration from Agent 2 using the Employment Agency Contracts – Chain of On-hire Declaration (PDF, 98.67 KB).
This declaration must be kept by Agent 1 for five years. Agent 1 must ensure that this declaration can be readily produced upon request by Revenue NSW.
If Agent 2 is below the payroll tax threshold and does not pay payroll tax, then Agent 1 would be liable.
The diagram below shows a typical example of a chain of on-hire.
Diagram 2: A linear representation of a chain of on-hire arrangement when there are 2 employment agents acting between the client and worker(s).
A client business is seeking labour and pays $120,000 to Agent 2, which pays $110,000 to Agent 1 which pays $100,000 to the worker.
Agent 2’s wages are over the payroll tax threshold.
Only Agent 2 is liable and the liable wages are the $110,000 paid to Agent 1.
Common errors with employment agency contracts
Payroll tax audits often uncover errors caused by misunderstandings of how the employment agency provisions apply. These include:
- Businesses failing to realise that the employment agency provisions apply to their situation.
- Employment agents not including payments to workers obtained through another business or company.
- Misconceptions that employment agency contracts:
- only apply to traditional “employment agents” or “labour hire firms” (as they are commonly understood)
- cannot be results-based contracts
- cannot be a fixed-price contract
- only apply if the worker undertakes “core business activity” during normal trading hours, or
- require the relationship between worker and client business be an employee-employer relationship.
Errors by industry
Certain industries frequently engage workers through employment agency contracts. Businesses in these industries often make errors when calculating their taxable wages. For more details, visit the following industry pages:
ABC Poultry Pty Ltd (ABC Poultry) operates a poultry processing facility and engages Chicken Deboners Pty Ltd (Chicken Deboners) to provide a team of workers to carry out chicken deboning and filleting during periods of high demand.
The agreement between ABC Poultry and Chicken Deboners has the following features:
- The work is carried out in ABC Poultry facilities, following its general instruction and procedures.
- Chicken Deboners supplies a supervisor and team of workers that operate in different shifts to ABC Poultry’s employees but carry out similar tasks.
- Chicken Deboners workers bring their own knives and personal safety equipment but otherwise use benches and facilities of ABC Poultry.
- ABC Poultry will make payment to Chicken Deboners based on a dollar amount per kilogram of processed cuts of meat.
- ABC Poultry engages Chicken Deboners on a regular and continuing basis.
Chicken Deboners workers are a mix of employees and workers sourced through other subcontractor companies.
Chicken Deboners did not register for payroll tax because the wages it paid to its employees was below the payroll tax threshold.
It was also of the view that payments made to subcontractors were not subject to payroll tax because:
- as companies running their own businesses, the subcontractors were responsible for payroll tax on their own workers
- the contract was not primarily for supplying labour to ABC Poultry, but rather to produce a result (specified quantities of processed meat paid per kilogram)
- they were not a traditional “employment agent” as it is commonly understood, and
- it failed to consider whether the employment agency provisions applied.
A payroll tax audit of Chicken Deboners found it to be classified as an employment agent because:
- Chicken Deboners expended care and effort in procuring the services of the workers for ABC Poultry, and
- the workers were working in and for the conduct of ABC Poultry’s business and undertaking work in the same or similar way as ABC Poultry’s employees.
The fact that workers supplied by Chicken Deboners had their own shift supervisor and were paid by the volume of meat they processed did not preclude the finding that the contract was an employment agency contract.
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
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.
You will be given a notice outlining the details.
Read section 42 and section 47 of the PTA for more details.
