Payroll tax on contractors: when contractor payments count as wages

What changed

In most states and territories, contractor arrangements involving the provision of services can fall within the ‘relevant contract’ provisions, meaning payments may be treated as taxable wages unless an exemption applies.

The business receiving the services is treated as the employer, and the labour part of each payment counts as taxable wages. An ABN or a Pty Ltd structure does not change this on its own.

Western Australia is not harmonised with the other states on contractors. It operates differently and generally looks at whether the relationship is, in substance, an employer–employee relationship.

Where contractor payments are taxable, payroll tax generally applies to the labour component. GST and eligible amounts attributable to materials, tools or equipment may be excluded or deducted.

A payment is exempt if one exemption applies. Common exemptions include: services the business does not ordinarily require, from a contractor who serves the public generally; services of a type the business ordinarily needs for less than 180 days in a financial year; the same contractor working for 90 days or less in a financial year; and a contractor who ordinarily provides the services to the public generally. Once the 90 days is passed, every payment for that year is taxable, including the first 90 days.

Other exemptions may apply, including certain contractors who engage others to perform the work and some arrangements primarily involving the supply of goods or equipment. Available exemptions and their requirements vary by jurisdiction.

Onhire workers are treated differently. Under the employment agency rules, the agency that places the worker is treated as the employer and pays payroll tax on what it pays the worker, and the contractor exemptions do not apply.

Who it affects

• Businesses that engage sole traders, ABN or Pty Ltd contractors to do work that is part of their normal operations.
• Recruitment and labour hire agencies that on-hire workers to their clients.
• Businesses with workers in more than one state, where each state's own rules, threshold and rate apply.

What to do

• List every contractor arrangement and note which state the work is done in.
• For each one, check whether an exemption applies and keep the records that support it, such as day counts, contract terms and evidence the contractor works for others.
• Check that contractor invoices separate labour from materials, equipment and GST.
• If you use or supply on-hire workers, confirm who is lodging payroll tax on their wages.