The distinction between “employee” and “contractor” is crucial for many areas of tax, superannuation and other government obligations. The NSW Office of State Revenue (OSR) requires businesses to keep records to support the decision of whether your worker is an employee or contractor and the factors you relied on.
Employers are required to pay payroll tax on all of their taxable wages. Payments made to contractors or consultants, irrespective of the legal entity type, may be considered wages for payroll tax purposes.
TOTALITY OF THE RELATIONSHIP TEST
The legislation does not define either “employee” or “contractor”. Therefore, the NSW OSR uses the totality of the relationship test to determine whether a worker is an employee or contractor for payroll tax purposes. An employee works in your business and is part of your business, whereas a contractor is running their own business. Even if a worker has an ABN and calls themselves a contractor, an employer/employee relationship may exist.
The following characteristics can be used to assist in determining the employment relationship:
- Ability to sub-contract/delegate
- Basis of payment
- Equipment, tools and other assets required to complete the work
- Commercial risks
- Control over the work
Thus, the worker cannot sub-contract/delegate the work and is paid for the time worked. Your business provides all or most of the equipment and is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work. The worker receives direction on how to perform his/her duties.
If you identify that your worker is a contractor for payroll tax purpose, the next step is to determine whether payments made to that contractor performing work under a relevant contract are liable for payroll tax.
PAYROLL TAX CONTRACTORS’ EXEMPTIONS
ALL contractors’ payments are subject to payroll tax unless at least one of seven exemptions applies:
Exemption 1: Supply of labour is ancillary to the supply or use of goods owned by a contractor i.e. use of heavy tools and equipment
Exemption 2: Services you do not normally require and provided by a contractor who provides such services to the general public
Exemption 3: Services normally required for less than 180 days in the financial year
Exemption 4: Services provided for 90 days or less in any one financial year
Exemption 5: Discretion by the Chief Commissioner
Exemption 6: Contractors engaging labour to fulfil the contract
Exemption 7: Contractor conveys goods in a vehicle they provide.
PAYROLL TAX AUDIT CONTRACTORS
The NSW OSR identified a payroll tax shortfall in 8 out of 10 audits conducted last year. The NSW OSR detected $158 million in underpaid payroll tax, which resulted in businesses having to pay an extra $34 million in interest and penalty tax.
Employers made the most errors in relation to contractors’ payments in the following areas:
Contractors vs employees
Confusing employees with contractors. It is essential that before applying the contractors exemptions to workers, businesses properly determine whether the workers are in fact common law employees.
Contractor exemption – 180 days vs 90 days rule
Claiming the 180 days exemption as an extension of the 90-days rule and/or for extra labour used for peak periods.
Contractor exemption – Contractors engaging labour
Claiming the exemption when the additional labour engaged does not perform core services of the contract or that they are not engaged directly by the contractor.
If you require assistance with NSW payroll tax or your business has been selected for a Payroll Tax Audit and you have been requested to complete an Employers Questionnaire you should contact us on (02) 9223 9166 to get assistance with completing this form and discussing your options. Alternatively you can submit an online enquiry form.