Difference between contractors and employees for payroll tax

[Narrator]

Hi, in this video I’m going to go through the basics of contractors for payroll tax purposes.

Having looked at that introductory payroll tax information, let’s now look at payroll tax contractor-specific provisions.

Yes, payments you make to your contractors can be liable for payroll tax. With the exception of Western Australia, these contractor provisions are harmonised in all states and territories.

While contractor wages are not captured for payroll tax under the general wages definition of the Payroll Tax Act, special provisions apply that deem these payments to be wages.

The first step is to consider whether or not the contractor is actually your employee. This is traditionally known as a ‘master–servant’ relationship.

The term ’employee’; however, is not defined in the Payroll Tax Act. Therefore, it takes on its ordinary or common law meaning.

The courts have established a number of principles that assist in determining whether a worker is a common law employee.

In most cases, it will be clear whether an employer–employee relationship exists. However, there can be situations where identifying the exact nature of the relationship can be difficult.

If a worker is not defined as a common law employee, it does not necessarily mean payments to them are not subject to payroll tax.

The definition of wages, under the Payroll Tax Act, also captures some payments to contractors under the contractor provisions.

Once these payments are captured under the contractor provisions, they are taxable unless you can claim an exemption under one of nine contractor exemptions.

We will be looking at these exemptions later on.

When you consider if the worker is an employee or an independent contractor supplying a service, you must consider the totality of the relationship, not just one factor in isolation.

There are many factors that should be considered to help you determine if the worker is in fact an employee and some of these examples are on the screen.

Firstly, control and direction—if the business operator has the right to control or direct how, where, when or who is to perform the work, it indicates that the worker is an employee and not an independent contractor.

In some businesses, the hiring business does not actually exercise much control or direction over a worker, but they have right or authority to exercise this control.

To give you an example of that, a project management firm engages a worker as a site supervisor.

The site supervisor is responsible for overseeing all things that happen onsite.

Let’s say the site supervisor is a highly skilled and experienced tradesperson. The general manager of the project management firm may not have the technical skills and experience to be able to tell the site supervisor how to actually go about performing the work.

However, the project management firm may be able to control or direct the site supervisor in relation to the general nature of the work to be undertaken, as well as incidental or collateral matters such as the hours of their attendance at the work site, the records they must maintain and the format of any progress reports.

Some other factors to consider when determining whether an employee–employer relationship exists include the formation and terms of the contract. If the contract uses words such as ’employer’ and ’employee’, it is an indication that they are not contractors.

Risk is another factor to consider. Does the hiring business take on the risks or is it the requirement of the contractors usually bear their own risk and rectify any issues as they arise without incurring additional costs to the hiring business?

Payments of leave entitlements and super are indicators that an employee–employer relationship may exist.

Can the worker delegate or subcontract their work or engage others to undertake the services for which the worker was engaged?

Business integration—this element looks at if the work performed by the worker is integrated into daily work of the hiring business or is it completely separate from the daily work of the hiring business?

If it’s completely separate, the worker may be an independent contractor.

The PTA038 public ruling does provide further guidelines for the integration test.

You should identify whether the worker is in fact running their own business or are they just participating in your business.

In addition to the factors mentioned, you must also consider how the worker sources customers.

For example, if the worker is providing the services as a result of winning a tender, this will usually indicate that the worker is operating a business.

If the worker incurs expenditure in earning the income or provides his or her own materials and equipment, the greater the expenditure incurred in earning income and the greater the materials and equipment supplied by the worker, the more likely it is that the worker is operating a business rather than operating as an employee.

The number of customers the worker has had over the life of their business and during the financial years concerned should also be considered.

If the workers work only for you in a financial year, this is a strong indicator that an employee–employer relationship may exist.

Another thing to consider is the Australian Taxation Office rules. Broadly speaking, if a worker is deemed an employee under tax office rules (for example, you’ve made this decision following their online decision tool), then they will also be regarded an employee for payroll tax purposes.

If you determine that the worker is an employee, then the payments made to them should be included as taxable wages under the broad definition of wages, and they are treated the same as all your other employees.

However, if you determine the person is in fact a contractor, then payments to them are taxable unless you can exclude them under any one of the nine contractor exemptions.

For the rest of the video, we are going to assume that we have determined that the contractors are not employees at common law and therefore we need to look at the contractor provisions of the Payroll Tax Act to determine whether payroll tax applies.

The slide now on your screen has some further factors that may indicate that the person is a contractor.

These are generally the opposite of those we covered when identifying if someone is an employee.

These include: being paid for the results they achieve rather than the time taken to perform the work; the person provides their own tools or materials to do the work; the person is free to subcontract the work to others; the person is providing services to the general public; they are in a position to make a profit or loss; and they can accept or refuse the work.

While the term ‘contractors’ is the term used for payroll tax legislation, it also includes sub-contractors and consultants.

It is the facts and circumstances under which the person is engaged that is relevant, not the name.

So, the first thing you should consider is if the person performing the work is actually an employee.

If they are, payroll tax applies and they are captured under the broad heading of taxable wages.

If they are not an employee, you should consider if the person is engaged under a relevant contract.

If no relevant contract exists, payroll tax does not apply. Where a relevant contract exists, consider whether one of the nine exemptions are applicable.

If none of the exemptions apply, payroll tax will be payable on the total amount less GST and less any applicable contractor deduction.

If an exemption does apply, payments are not subject to payroll tax. There are a lot of factors to consider when deciding if a contractor is in fact an employee or if an exemption applies.

That completes our look at the contractor provisions for payroll tax. We hope you have found the session helpful and it has given you a clear understanding of how to treat contractors for payroll tax.

In the next contractor video, we will be discussing contractor exemptions in detail.

For now though, thank you for watching our video.

Goodbye.