Payroll tax and direct selling
Learn about common payroll tax errors in the direct selling industry and how to correctly declare payments made to sales agents and other contractors.
What is direct selling?
Businesses in this industry sell goods and services directly to consumers.
There are no physical shops and contractors are engaged to sell the goods. The contractors are called sales agents, consultants or distributors.
A broad range of products are sold via direct selling, including cosmetics, homewares and nutritional supplements.
Common payroll tax errors
As an employer in the direct selling industry you must meet your payroll tax obligations.
Payroll tax audits show that direct selling businesses often fail to include payments to contractors as liable for payroll tax, and the payments do not meet the criteria for an exemption.
The errors result in the businesses underpaying their payroll tax by a significant amount.
If your business is audited we will verify your evidence with third-party information, including information obtained from other government agencies.
Exemptions for sales agents engaged as contractors
In the direct selling industry contractors are usually engaged as sales agents to sell products directly to consumers.
These sales agents have an Australian Business Number (ABN) and operate under sole trader, partnership, trust or company structures.
Businesses must include all payments to contractors, including sales agents, as taxable wages in their payroll tax returns unless an exemption applies. See Division 7 of Part 3 of the Payroll Tax Act 2007 (PTA).
If your sales agents do not have ABNs they may be your common law employees. You may be liable for payroll tax under section 13(1) of the PTA and none of the exclusions under the contractor laws will apply.
For more details read:
There are seven exemptions available under the relevant contract laws in the PTA. The following three exemptions are most commonly claimed:
Services provided for less than 90 days
If your sales agent provides the same or similar services for 90 days or less in a financial year the payment is exempt from payroll tax. See section 32(2)(b)(iii) of the PTA.
Any amount of time worked in a day constitutes a full day.
If you are claiming an exemption under this category, you should keep copies of the following:
- the contract
- invoices
- working papers
- general ledgers
- timesheets, and
- any other evidence which supports the exemption claim.
For more details about this exemption read:
Replacement Method
If you are unable to keep records of the days worked by your sales agents or other contractors, or if it is difficult to do so, we will accept the use of the Replacement Method.
The Replacement Method formula is used to calculate the estimated remuneration a sales agent or other contractor would receive from an employer for 90 days of service.
If the amount paid by you to the sales agent or contractor is less than or equal to the amount calculated using the formula, the 90-day exemption will apply.
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 on the Australian Government’s Fair Work Ombudsman website.
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.
Click or tap the headings below to view examples of this exemption.
Services are provided to a direct selling business by a sales agent.
The services are provided over 70 days in a financial year.
The sales agent is paid $20,000. The business kept records of the dates and times worked by the sales agent.
These details are reflected in the invoices and timesheets. The business supplied this evidence as part of an investigation and the exemption was approved.
The direct selling business could’ve also used the Replacement Method using the formula:
Y = A x B x C x D
Y = The estimated remuneration for 90 days of service was calculated at $24,827.
A = The hourly rate was calculated at $32.84 using the Australian Government’s Fair Work Ombudsman website.
B = 7 (average number of hours worked per working day).
C = 120 per cent.
D = 90 days.
The amount paid to the sales agent of $20,000 was less than the amount calculated using the formula. Therefore the 90-day exemption applies.
The services are provided by the sales agent for 70 days in a financial year however the direct selling business has kept no records of the dates and times worked by the contractor. This means the business is unable to demonstrate this exemption applies.
The business can apply the Replacement Method to support an exemption claim if records are not available, but the exemption will not apply if the total remuneration paid exceeds the amount calculated using the replacement method.
Services provided by two or more people
This exemption applies if a contractor, such as your sales agent, engages two or more workers to provide the contracted services. See section 32(2)(c) of the PTA.
The services performed by the second person must be:
- directly related to work under the contract, and
- the second worker must perform a significant proportion of the total work required by the contract.
If claiming this exemption you must maintain records to support the claim. The evidence you should keep may include:
- the contract
- invoices
- general ledgers
- workers compensation insurance, and
- any other documentary evidence.
Read Revenue Ruling PTA 023: Contractors engaging others for more details about this exemption.
Click or tap the headings below to view examples of this exemption.
A sales agent is engaged by a direct selling business in a financial year.
The sales agent operates a company and engages a sales lead and a sales assistant in the same financial year.
The sales agent and the sales assistant visit customers and demonstrate products together.
The work performed by the sales assistant is directly relevant to the contract between the direct selling business and the sales agent.
Both the sales lead and the sales assistant perform work that constitutes a substantial proportion of the total work required by the contract.
The direct selling business can supply evidence which demonstrates two people were engaged by the sales agent to perform work under the contract.
The business can claim this exemption.
A sales agent is engaged by a direct selling business in a financial year.
The sales agent operates a company and engages a sales lead and a sales assistant.
The sales assistant performs work not directly related to the requirements of the contract such as bookkeeping and invoicing.
In this instance, even though the contractor engages two employees, only one person is performing the work required under the contract and an exemption will not apply.
Contractor who ordinarily provides services to the public
If your sales agent provides similar services to the public during a particular financial year you may be entitled to this exemption. See section 32(2)(b)(iv) of the PTA.
The sales agent must prove they provide services of that kind to the public. Simply being available to provide them is not sufficient.
When claiming this exemption, you should keep supporting records such as copies of:
- the contract
- advertising material
- declarations, and
- other evidence which substantiates the exemption claim.
We consider a range of factors to determine whether you have satisfied the requirements of this exemption. Read Revenue Ruling PTA 021: Exemption for contractors ordinarily rendering services to the public for more details.
Click or tap the headings below to view examples of this exemption.
A direct selling business engages a sales agent. The sales agent provides services to multiple direct selling businesses.
The direct selling business can demonstrate this by providing evidence such as, copies of advertising material, contracts and declarations.
Claims for an exemption will be verified against third party and other government agency information held by our office.
A direct selling business engages a sales agent who is available to provide services to other principals.
In the same financial year the sales agent primarily provided services to the one direct selling business.
An exemption will not apply.
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.
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 return due for lodgement.
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. 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.
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 questions about this topic call 1300 139 815 or +61 2 7808 6904 for international callers.
You can also email [email protected]