Payroll tax exemptions for contractor payments

[Narrator]

Hi, in this module we’ll talk about the contractor exemptions for payroll tax.

Payments to contractors are taxable under a relevant contract unless one of the 9 contractor exemptions apply. Of these 9, 6 are general exemptions and the other 3 relate to specific industries. As soon as any one of the exemptions applies to that contractor, payments to that contractor are exempt from payroll tax.

If you are claiming any of these exemptions, it is important you keep evidence of entitlement in case you are audited.

So here are the 9 exemptions. Don’t worry, we’ll talk about these exemptions in detail soon.

As we go through the exemptions in detail, please keep in mind that you need to apply an exemption to each contractor that you wish to exempt, and that only one exemption per contractor needs to apply for those payments to be exempt.

One thing to note though: you will see a link to the public ruling for each exemption. We encourage you to consult these rulings for further information when applying the exemptions.

The first exemption we’ll talk about is where the labour provided is ancillary or secondary to the provision of the goods.

A contract may be exempt from payroll tax if the main purpose is to supply goods, and the provision of the service is only incidental to this. Where the amount relating to the provision of materials and/or equipment under a contract is more than 50% of the total contract amount, the provision of labour under the same contract will be considered ancillary, provided that there is evidence to substantiate that the provision of materials and/or equipment is the principal object of the contract and the amount attributable to materials and/or equipment is reasonable, having regard to the type of services provided.

Looking at an example: Black Pty Ltd needs to hire a crane. Orange Pty Ltd provides the crane under a contract. A condition of the contract is that Orange provides a crane operator as well. Any amounts paid to the contractor operating the crane are exempt as the principal purpose of the contract is the provision of the crane. The operator’s services are secondary.

This exemption is not intended for situations where the contractor may bring their own tools or equipment to do their work. There is a separate contractor deduction for this that we will talk about later on.

Rather, this exemption is intended to capture situations where the object of the contract is the supply of the goods, and the services performed are secondary to this.

For the above example, the crane operator is supplied with the crane as it takes technical expertise and a licence to operate the crane. So, the hiring company is obliged to supply the operator as well as the crane, the provision of which is the purpose of the contract.

The second exemption is for circumstances where services are not ordinarily required by the hiring business.

From time to time, businesses may require services that are not associated with their mainstream business activities. As these services are required so infrequently, it would be more practical for businesses to engage contractors instead of permanent staff to perform these services when the need arises.

Contracts to provide these services by contractors who ordinarily provide these services to the general public are excluded under the contractor provisions of the Payroll Tax Act. Consequently, payments made under such contracts would not be subject to payroll tax.

For the exemption to apply, the following criteria must be fulfilled: the services provided by the contractor must not ordinarily be required by the hiring business, and the contractor must ordinarily provide the services in question to the general public.

To satisfy this criterion, the contractor would need to have derived less than 40% of gross trading income from the principal during the relevant financial year.

Where the above criteria is not satisfied but you believe you are entitled to this exemption, you may apply to the Commissioner for a determination.

We have a couple of examples to explain the exemption further.

Example 1: A bank hires painters to paint its new office. The painters work for the general public during the year, and the bank also does not usually require its offices to be painted all the time. In these circumstances, payments made to the contractor painters is exempt from payroll tax. This would be no different if any of you hired a painter to paint your office or workplace. You wouldn’t be expected to have staff on hand for the rare occasions you require painting services and when you do engage contractors to do that work, there would be no payroll tax to be paid on payments made to them.

Let’s look at another example.

A large bank hires a painter to paint all of their offices in Queensland. As soon as one office is complete, the painter begins work on the next office. While doing this work for the bank, the painter still has active websites that suggest they are available for work for the general public. But during that financial year, the painter only works for the hiring bank. As the painter worked only for the bank during that financial year, the contract is not exempt from payroll tax under this exemption and the bank may be subject to payroll tax on the payments they make to this contractor.

There are 2 exemptions that look at the number of days worked. These are the 180-day and the 90-day exemptions. As we go through them, please remember that like the other exemptions, they operate independently of each other.

We’ll firstly look at the 180-day exemption.

The 180-day exemption focuses on the number of days that a particular type of service is required by the hiring business. From time to time, businesses may require certain services but do not require these services for the whole year. An example of this is seasonal businesses, such as fruit picking or ski fields. The 180-day exemption focuses on the number of days on which a particular type of service is ordinarily required by a principal in the financial year.

Where a particular service is provided by both employees and contractors, the number of days on which such a service is provided to the principal by both the contractors and employees must be taken into account.

The days for which the type of service is required do not have to be consecutive. It is the total number of days for which a particular type of service is ordinarily required during the financial year that should be considered.

In essence, where a type of service is required by an employer for less than 180 days in a financial year, payments to all contractors providing that service are exempt even though an individual contractor may have worked for more than 90 days in the same financial year.

It is important to note that even if someone works for only 1 hour during a day, it still constitutes 1 day’s work.

To give you a quick example: a diving school operator on the Great Barrier Reef engages a number of contract diving instructors each year for 120 days during the tourist season. The business has no requirement for the services of diving instructors outside of the season. In this example, as the business only needs diving instructors for 120 days (less than 180) there is no payroll tax on these payments. It may be that the dive school has 10 or 20 diving instructors engaged during the busy part of the year.

No matter the number of people engaged, as long as the business did not require this type of service for more than 180 days in the financial year, then the exemption can apply.

Let’s look at another example.

A building company engages the services of a contract gardener, Jim. He performs gardening services for 100 days in a financial year. A second contract gardener, Paul, is engaged to perform the same services alongside Jim for 95 days. No other landscaping work is required by this building company for the rest of the financial year. As the building company only requires landscaping services for 100 days in a financial year, this exemption can be applied.

Now let’s change the circumstances a little bit. If Paul performed the 95 days of service after Jim has completed his 100 days of service, this exemption does not apply because the total number of days that the building company requires landscaping services is 195 (that’s 100 days plus 95 days). As a result, contracts entered into with Jim and Paul would be taxable unless they can be excluded under one of the other contractor exemptions.

Now, let’s have a look at our next exemption that relates to days worked.

We now know that the 180-day exemption relates to how many days the service was required by the business. In contrast, the 90-day exemption applies to how many days the contractor has provided you the service. If a relevant contract involves the provision of services by a person providing the same or similar services to a principal under the contract for no more than 90 days in a financial year, it is an exempt contract.

Similar to the 180-day exemption, the carrying out of any work on a given day will count as a full day and the days worked do not have to be consecutive. It is the total number of days worked during the financial year that is relevant. Once the 90-day limit is exceeded, the total payments made to that contractor during the financial year, including payments made for the work performed in the first 90 days, are subject to payroll tax.

If you are unable to establish days worked, then the public ruling PTA035 contains a replacement method, which allows you to use formula to calculate the estimated remuneration a contractor would receive from an employer for 90 days of service.

This method is based on the award hourly rate as defined by the Fair Work Ombudsman. You should keep your records of your workings for a period of 5 years in case you are audited at some point in the future.

Let’s look at an example.

A contract security officer works for Night Pty Ltd for 80 night shifts (on non-consecutive days) in total for a financial year. The security officer works from 10pm to 6am in each shift. This means 1 shift is considered to be 2 calendar days. Therefore, the security officer has worked for 160 days. All Night Pty Ltd’s payments to him are therefore liable for payroll tax.

Let’s see another example.

A company contracts a concreter for concreting work for 35 days and also to drive a cement mixer for another 80 days. The contractor provides the business with similar services for a total of 115 days. Any amounts paid to him are taxable.

So just to recap: the 180-day exemption relates to how many days you require a service, whereas the 90-day exemption relates to how many days the type of services were provided to you by a contractor.

Our next general exemption is where a contractor engages others to perform the work of the contract.

Payments made to a contractor will be exempt from payroll tax if the contractor engages others to provide the services they are contracted for. So generally, 2 or more people are required to fulfil the contract.

If the contractor is a partnership of 2 or more people, the exemption only applies if 1 or more partners and 1 or more employees provides the services.

The exemption will not apply if the work is only performed by the partners. The services performed must be only for the purposes of the contract before the exemption can apply.

In addition, all the following conditions must be met for the exemption to apply.

1. The contractor must be carrying on a business.
2. The contractor must have the overall responsibility to fulfil the terms of the contract in the course of the contractor’s business.
3. The persons performing the work under the contract must be engaged directly by the contractor and not the principal.
4. The services supplied by the persons performing the work must be a necessary part of, and are supplied in the course of, the contractor’s business.

And: 5. The person must be engaged by the contractor to perform the work, which is the object of the contract.

As an example: Peter is a plumber. He enters into a contract with a client to carry out some plumbing work. He performs the plumbing work, which is the object of his contract. His spouse, Sharon, joins him for the day and completes administrative services such as maintaining the accounts and banking for the business. As administrative work is not considered the object of the contract, the hiring business is unable to claim this exemption. So, even though there were 2 people at the job site, only 1 of them is performing work that is actually required under the contract.

Let’s see another example.

Samantha carries on a business as an electrician. She enters into a contract with a client to install electrical items in a room and restore the walls to their original state. To perform the work required under the contract, she engages a plasterer and a painter. The work performed by the plasterer and painter is considered part of the object of the contract.

Our next exemption relates to occasions where you may not be able to exclude payments under another exemption, but where you believe the person performing the work is a genuine independent contractor.

In these circumstances, you can apply to our office for permission to exclude them under the Commissioner’s discretion exemption.

There is a criteria that if you can satisfy, you can apply the exemption without applying to the Commissioner. This criteria is where the contractor has provided services to 2 or more principals during a financial year and they worked for that principal for an average of 10 days or fewer per month.

When working out the average days worked per month, you exclude any months where no work was performed by the contractor.

For example, if the contractor did not work for you in December or January, you would add up the days worked and divide by 10, instead of 12.

Let’s look at an example.

John is a computer programmer. During the 2016–17 financial year, he provided services to Principal A and Principal B. Under his contract for service with Principal A, he provided his services during the financial year as outlined on the slide. John worked for a total of 133 days for Principal A. Out of 12 months, he only worked for 7 months. So, the average days he worked for Principal A was 19—that’s 133 days divided by 7 months. Consequently, payments made by Principal A to John are subject to payroll tax. So, the average days he worked for Principal A was 19 days per month. We get 19 by taking 133 days and dividing it by 7 months.

If the criteria cannot be satisfied, then a written submission to the Commissioner is required. The submission should set out the full facts and circumstances of the relationship the principal has with the contractor. The Commissioner will consider the totality of the relationship and make a decision.

The Commissioner will review the contract’s business and consider factors such as: (a) the use of a business name by the contractor; (b) the extent and nature of advertising undertaken by the contractor; (c) the range of clients serviced by the contractor; (d) the extent and nature of plant and equipment provided by the contractor in execution of the services; (e) the engagement of staff or sub-contractors by the contractor; and (f) the use of business premises by the contractor.

There are other factors that the Commissioner may consider. They are all listed in the public ruling PTA021.

This was our last of the general exemptions.

We will now have a quick look at the 3 industry-specific exemptions.

The first is the owner-driver exemption. To qualify for an exemption, the contractor doesn’t need to own the vehicle used for the conveyance of goods. The vehicle may be made available through direct ownership, or through hiring, leasing or borrowing. The main purpose of the contract must be to deliver goods.

Some contract owner-drivers may convey goods for the purposes of installing those goods at the point of destination, or for use in connection with repair, maintenance or servicing work at the point of destination. In these types of circumstances, the main purpose of the contract is not the conveyance of goods as such, but rather their installation or use in connection with repair, maintenance or servicing work. And accordingly, the exemption will not apply.

With regards to couriers, the exemption will generally apply to those who use motorcycles, cars or trucks to convey goods. This is subject, though, to all the conditions detailed in public ruling PTA006 being fully satisfied.

In relation to bicycle couriers, the Commissioner considers that in most instances such persons are employees of the courier business. Therefore, as an employee of the courier business, payments made to the courier are subject to payroll tax under the general definition of wages.

If you are an insurance company and hire a contractor to sell insurance for you, commissions paid to that contractor, for the sale of insurance, are exempt. Exempt insurance agents are not your employees; are genuine independent contractors with an agency business; hold an Australian Financial Services licence or are an authorised representative of an insurance business that holds an Australian Financial Services licence.

If you are a business hiring a contractor to sell goods door-to-door for domestic purposes, amounts you pay that contractor may be exempt. Among other things, the salesperson cannot be your employee; must sell directly to the public (for their use only, and not for resale); must only sell goods at the buyer’s home or work. The goods purchased must be used by the purchaser solely for domestic purposes, and must not include goods purchased to be further processed in the course of manufacture or goods purchased for commercial or industrial purposes.

This concludes our section on contractor exemptions.

As we mentioned, please consult the applicable public rulings when applying the exemptions.

If you are required to pay payroll tax on contractor payments where the contractor provided materials and equipment, you may deduct an approved non-labour component from your taxable wages.

You must declare the entire payment (both labour and non-labour components) less any approved deduction as wages. Use the approved percentages in the table on the screen to work out the non-labour component deduction. If a profession or trade is not listed, contact the Office of State Revenue in writing for advice.

So, to help summarise the contractor arrangements, you may wish to refer to this slide. The first thing you should consider is if the person performing the work is 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 contract that the person is engaged under includes a labour component. If ‘no’, the contractor provisions do not apply and no payroll tax applies.

Where there is a labour component, you should consider whether 1 of the 9 exemptions applies. If none of the exemptions apply, the amounts are taxable less GST and any approved contractor deduction. If an exemption does apply, payments are not subject to payroll tax.

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

Thank you for watching our video. Goodbye.

A contract security officer works for Night Ltd for 80 night shifts (on non-consecutive days) in total for a financial year. The security officer works from 10pm to 6am in each shift. This means 1 shift is considered to be 2 days. Therefore, the security officer has worked for 160 days. All Night Ltd’s payments to him are liable for payroll tax.

You contract Bob as a concreter for 30 days and to drive a cement mixer for another 75 days. Because Bob provides you with similar services for a total of 105 days, any amounts paid to him are taxable.

A building company hires a contract landscape gardener (Landscaper A) to perform landscaping services for 100 days in a financial year. A second contract landscape gardener (Landscaper B) is hired to perform the same services concurrently (i.e. at the same time) for 95 days. No other landscaping work is required by this building company for the rest of the financial year.

As the building company only requires landscaping services for 100 days in the financial year, it is exempt under the 180-day exemption. No payroll tax is payable on payments made under both contracts with Landscaper A and Landscaper B, as they are exempt relevant contracts.

However, if Landscaper B performed the 95 days of service after Landscaper A has completed his 100 days of service, the 180-day exemption does not apply. This is because the total number of days that the building company requires landscaping services is 195 (100 days + 95 days). As a result, contracts entered into with Landscaper A and Landscaper B are relevant contracts. Payments made under these contracts are subject to payroll tax, unless one of the other exemptions under the contractor provisions applies.

Two librarians are given a fixed fee to work in a legal firm’s library. They only work on weekends and are the only librarians of the firm. The 180-day exemption will apply because the legal firm needs librarian services for less than 180 days in that financial year.

A ski resort requires instructors for 160 days in each financial year. For the busiest times in that period, the resort hires extra contractors for 100 days. As the ski resort requires instructors for less than 180 days (i.e. 160 days), the contracts are exempt.

Orange Ltd is a consultancy firm. Black Ltd contracts the services of Orange Ltd for an IT project. Orange Ltd employs a contractor to perform IT consulting services. The contractor brings in his wife to help with his bookkeeping and general administration. Black Ltd cannot gain an exemption as only 1 person is performing the actual work of the contract.

Black Ltd needs a crane. Orange Ltd supplies the crane under a contract. A condition of the contract is that Black Ltd must also hire the crane operator from Orange Ltd. Amounts paid to the contractor are exempt because the supply of the crane is the principal purpose and the operator’s services are secondary.

A bank hires painters to paint its new office. As a bank does not usually require its offices to be painted and the painters work for the public generally that year, this contract is exempt.

A large bank hires painters to paint all of their offices in Queensland. As soon as one office is complete, the painters begin work on the next office. As the painters do not have time to work for any other businesses in that financial year, this contract is not exempt.