For those in business, payroll tax is a costly and annoying administrative burden that is begrudgingly accepted. In recent times however it has taken the limelight off the back of a couple of cases that have dealt with it directly and indirectly.
This article is not intended to give you an overview of the cases nor their outcomes but is intended to give you some inside knowledge to assist you with some myth busting on how to address payroll tax in practice.
The myths issue
There are a number of myths that continue to circulate through the business community. None more so than dealing with payroll tax and how it can be overcome as a business grows. The reality though is that a lot of these strategies rely on the basis of remaining unscrutinised. Historically such a strategy may have been seen as effective given the reliance of paper lodgements, human error and inclination and the information silos that existed between regulators.
Those days are long gone.
The fact that lodgements are done online, systems compile and analyse data and quickly identify anomalies, combined with the sharing of information between state and federal regulators means relying on the hope that your client’s affairs will remain unscrutinised borders on lunacy.
The myths to be tackled here are:
- payments to an independent contractor are not taken into account for payroll tax purposes
- operating businesses in separate structures (controlled by the same persons) provides separate payroll tax thresholds
- the use of service entities, in combination with ‘contractors’ is a fail- safe strategy to avoid payroll tax being applied to payments between the service entities and contractors.
None of these are true.
Are all contractors created equally
Put simply, no.
A contractor is someone who performs a contract for services. They are usually not essential to the everyday operation of a business, are appointed for particular projects or goals, bring all they need to perform their tasks, do their tasks at their convenience, are responsible for their errors or failings and can have others assist them or perform the work for them.
An employee is someone who performs under a contract of service. They are essential to the everyday operations of a business, are appointed to perform in particular areas of a business, have all things needed to perform their tasks provided to them, must perform their tasks in compliance with agreed times, procedures and protocols set by their employer, are not responsible generally for their errors or failings in performing their tasks and cannot have others perform for them.
A contractor is a contractor, and an employee is an employee. Calling an employee a contractor and vice versa does not change this.
Many have tried to treat employees as contractors by having them enter “contractor” agreements. The problem with this approach is often a business owner wanting to introduce ‘employee like’ attributes to a contractor agreement such as restraint of trade, minimum or required hours of work, leave notifications and the like.
Commercially that might be acceptable, but from an employee/contractor perspective such a ‘contractor’ is an employee from a common law perspective. This means that despite working under a contractor agreement, none of the contractor exemptions for payroll will apply.
This is a good segway for the next myth.
Payments to contractors
The starting position is that all payments to contractors are included in the payroll tax calculation.
They fall within the relevant contract provisions which are included as wages. In order to have these relevant contracts excluded, one of the carve outs is required to apply. The carve outs are deserving of an article themselves, but the upshot is that one needs to apply and it’s up to the business owner to not only satisfy themselves of that but to collate evidence to support its application as part of their own record keeping.
Separate structures
Whilst businesses may be operated as separate commercial enterprises, legal entity separation through the use of different companies or trusts will not, of itself, separate those businesses for payroll tax purposes.
Common employees, related bodies corporate (ones that are owned by the same company which holds more than 50%, or controlled by the same individuals on the board), common control (where a person or sets of persons control a business) or common beneficiaries in trusts (even if they have never received a distribution) are all a basis for businesses to be grouped.
All is not lost though where businesses are grouped. It is important to first determine whether the businesses are in fact grouped under the legislation and if they are, whether their ownership or arrangements can be altered, so that they are no longer grouped. The second is to seek the Commissioner's discretion to “de-group” businesses, on the basis that they are not sufficiently connected.
The takeout is that planning is important as is an awareness of how the regime will apply to your affairs.
Service entities
For some businesses and professions, the use of service entities between contractors and pseudo-contractors is common.
Some important points to appreciate given recent cases are:
- they only work with contractors and not pseudo-contractors
- where there are contractors, relevant contractor carve outs are still required to apply in order to exclude those payments from payroll tax calculations
- fees charged by the service entity to the contractor must be paid by the contractor to the service entity out of monies collected by the contractor for rendering their services.
This last point has been quite contentious as it has been common practice for a long time for the service entity to be the collection point for monies owed to the contractor for services rendered, as the contractor’s agent. The service entity then remits to the contractor those monies, less an amount for the services of the service entity.
Summary
It is definitely time to seek advice if:
- you are a business owner or an adviser to a business owner where contractors or service entities are being used
- there is more than one business being operated with multiple thresholds being claimed
- there is one business operated across different states and claiming thresholds in each state or territory.
