State revenue authorities are increasing their scrutiny of how payroll taxes are applied to contractors.
Payroll tax provisions that apply to contractors differ significantly from other tax categories and the common law distinction between employees and contractors. There are both relevant contractor provisions and employment agency provisions in the payroll tax legislation that mean amounts paid to many contractors are considered "wages" and are subject to payroll tax obligations for engaging entities, even if they are not captured as salaries or wages for other tax or legal purposes.
Recent court authorities have reinforced the breadth of these provisions, confirming that intermediaries and businesses that rely on contractors to carry out their normal business activities increase the risk of having amounts paid to those contractors considered as "wages" for payroll tax purposes. These decisions have challenged previously held common understandings of how the payroll tax provisions apply.
To date, Queensland and South Australia have announced amnesties for medical professionals, being the industries most directly impacted, to allow time to restructure and bring their arrangements into line. The amnesty is operative until 30 June 2024 in South Australia and 30 June 2025 in Queensland. Whether other states will follow remains unclear.
These amnesties do not assist those in other industries.
Reviews are currently being conducted across various industries that are heavily reliant on contractors or intermediaries, such as the medical, finance, technology and construction industries. Other industries are also under review.
Data matching and data sharing that takes place means that errors and discrepancies are very visible to the state revenue authorities.
If you engage contractors or are an intermediary that assists in facilitating payments to contractors and have not recently reviewed your payroll tax classifications and positions, we recommend you do so.
Provisions in payroll tax legislation
Relevant contractor provisions deem contractors to be employees for payroll tax purposes, unless an exemption applies. Under these provisions, amounts paid or payable by a relevant contractor employer to a relevant contractor are treated as wages in relation to the work or services provided under the contract.
On the other hand, the employment agency provisions capture a chain of on-hire arrangements rendering each entity within the chain potentially liable for the payroll tax owing on the services provided by the end service provider.
Both sets of provisions were created to "catch those relationships where the sub-contractor works exclusively or primarily for the one person and where the object of the contract between the parties is to obtain the labour of the sub-contractor". As such, the types of relationships that were meant to be captured by the relevant contractor provisions are, for all intent and purposes, those arrangements that are identical in substance to the typical employment relationships.
However, the actual ambit of the provisions is much wider.
- wages include amounts paid or payable by an intermediary to a service provider where the funds flow through the intermediary entity - even where the service provider is beneficially entitled to those funds at all times. For example, Medicare benefits paid to a medical practice and passed onto medical practitioners
- the requirement that amounts be paid for or in relation to performance of work requires no more than that services be work-related. That is, a payment made need not be for services provided to the payer to constitute wages - it is sufficient that they are work-related services to someone. For example, services provided by medical practitioners to end patients
- there need not be proportionality between the services performed and the amounts paid for that amount to constitute wages.
The NSW Supreme Court is also currently considering applying payroll tax to a franchise aggregation model in Loan Market Group Pty Ltd v Chief Commissioner of State Revenue (2020/0027826). The matter has been heard and judgment is pending.
On the flip side, there has been one win for the taxpayer that took the argument in Integrated Trolley Management Pty Ltd v Chief Commissioner of State Revenue  NSWSC 557. That was a matter that considered the employment agency provisions with the taxpayer succeeding on the basis that trolley collectors were engaged as subcontractors under the terms of their contracts and as such, their services were not procured for a client of an employment agent as the services performed were not "for or in" a client's business, but for the trolley collectors' own business.
Navigating audits and litigation related to payroll tax can be both costly and complex. To avoid that and best reduce risks, it is important to prepare early and seek expert legal advice.
Anyone who engages or acts as an intermediary to engage with contractors should review their payroll tax treatment if they have not done so.
Reviews ought to consider the following:
- whether the current treatment remains the correct treatment
- whether there is adequate evidence available to defend positions taken historically
- whether contracts of engagement ought to be revised to better achieve certainty going forward in treatment, given the recently clarified operation of the provisions.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.