One of the most persistent assumptions in workforce management is surprisingly simple:
“They’re a contractor, so payroll tax doesn’t apply.”
That assumption can become expensive. A contractor may have an ABN, they may operate through a company, they may send an invoice every month and charge GST. None of those things, by themselves, necessarily remove the engagement from payroll tax.
For businesses regularly using contractors, consultants or contingent workers, understanding this distinction is increasingly important.
Payroll tax is not limited to traditional employees
Payroll tax is administered at a state and territory level in Australia, and the exact legislation, thresholds and exemptions differ between jurisdictions. However, contractor provisions can cause certain contractor payments to be treated as taxable wages.
In Queensland, the Queensland Revenue Office states that most arrangements with contractors involving services are considered relevant contracts for payroll tax purposes unless an exemption applies.
New South Wales takes a similar approach through its relevant-contract provisions. Revenue NSW explains that payments to contractors under a relevant contract can be liable for payroll tax even though the worker is engaged as a contractor rather than a traditional employee.
That is where many businesses are caught.
Having an ABN does not settle the question
Imagine a business engages a specialist consultant.
The consultant:
- has an ABN
- operates through a Pty Ltd company
- invoices monthly
- charges GST
- signs a contractor agreement.
At first glance, the arrangement may look completely separate from payroll, but payroll tax legislation can apply its own rules. Revenue NSW specifically notes that contractor payments may potentially be taxable even where a worker is not a common-law employee, has an ABN or payments are made to a company or trustee employing the worker.
The question therefore isn’t simply: “Is this person called a contractor?”
It is: “How is this particular contractor arrangement treated under the payroll tax legislation applying to us?”
What is a relevant contract?
While the terminology and rules should always be checked against the relevant jurisdiction, a relevant contract broadly captures certain arrangements under which services are provided by a contractor.
Where the provisions apply, the legislation can effectively deem the party receiving the services to be an employer and the person providing the services to be an employee for payroll tax purposes.
It does not necessarily mean the person has suddenly become an employee for every other legal purpose.
That distinction is important.
A worker’s treatment under payroll tax legislation can be different from their treatment under workplace relations, superannuation, taxation or other legislation.
Businesses therefore need to avoid applying one classification test across every regulatory obligation.
The exemptions matter
The next mistake is assuming every contractor payment is automatically taxable.
That isn’t correct either.
Contractor provisions contain exemptions, and determining whether one applies can materially change the payroll tax outcome.
For example, current Queensland contractor exemptions include circumstances involving:
- services provided for no more than 90 days in a financial year
- services of a type required by the business for less than 180 days
- services performed by two or more people
- services ancillary to the supply of goods
- certain services not ordinarily required by the business
- specified owner-driver arrangements
- certain other legislated exemptions.
But an exemption needs to be genuinely satisfied.
It should not be assumed simply because the contractor appears independent.
Scenario 1: The long-term specialist contractor
A business engages a highly experienced engineer through the engineer’s company. The engineer works for the business for eleven months and they invoice a daily rate each month. The business initially categorises every payment as a supplier expense and excludes the arrangement entirely from its payroll tax review.
The risk?
The company structure and invoices do not, by themselves, determine the payroll tax treatment. The business should assess whether the arrangement falls within the relevant-contract provisions and, if so, whether an exemption can actually be substantiated.
Without that assessment, a substantial amount of contractor expenditure may be sitting outside the organisation’s payroll tax calculations incorrectly.
Scenario 2: The contractor with several employees
A construction business engages a specialist company to complete work. The contractor employs several people. Management assumes that because the contractor has multiple employees, the payments must be exempt.
But what matters may include who actually performs the work required under the particular contract. Revenue NSW provides guidance demonstrating that merely having multiple employees in a contractor business does not necessarily establish the two-person exemption where only one person performs the contracted services.
This is exactly why contractor assessments need to examine the substance of the arrangement rather than simply company structure.
Scenario 3: The genuine project supplier
Another business engages a specialist provider to deliver a defined project. The provider uses multiple employees, provides significant equipment, works for multiple customers and independently controls how the project is delivered – the position may be very different. Parts of the payment may potentially fall outside payroll tax or an exemption may apply depending on the jurisdiction and circumstances.
Where a contractor payment contains labour and genuine non-labour components such as materials, tools, equipment or vehicles, some jurisdictions also provide mechanisms for excluding qualifying non-labour components from taxable payments. Again, documentation becomes critical.
The record-keeping problem
Even where a business legitimately qualifies for an exemption, it should be able to demonstrate why.
Useful records may include:
- executed contractor agreements
- invoices
- ABN and entity information
- dates on which services were performed
- details of the individuals performing the work
- evidence of services provided to other customers
- information supporting any exemption relied upon
- records distinguishing labour and qualifying non-labour components.
Revenue authorities may require evidence supporting an exemption during an audit.
A spreadsheet simply identifying someone as Contractor – Exempt is not the same as having evidence supporting that conclusion.
Labour hire adds another layer
Businesses also need to distinguish direct contractor engagements from employment agency or labour hire arrangements. For example, in NSW an employment agency that procures workers to work in and for a client’s business may itself have payroll tax obligations in relation to the workers it supplies.
This can materially affect how organisations compare:
- direct employment
- independent contracting
- labour hire
- consulting
- outsourced services.
A rate comparison without understanding the underlying statutory costs can therefore be misleading.
What businesses should do
Businesses with material contractor expenditure should periodically conduct a contractor workforce review.
That review should answer five questions for every material engagement:
- Who is actually performing the work?
- What services are being provided?
- How long and how frequently are those services provided?
- Does the arrangement fall within the contractor provisions?
- If an exemption is being claimed, what evidence supports it?
This is particularly important for businesses with large contingent workforces, specialist professional contractors or long-running individual engagements.
Contractor does not automatically mean payroll-tax free
The biggest payroll tax mistake is often not an incorrect calculation. It is failing to perform the calculation at all because someone has been placed in the contractor category.
Contractors can offer businesses valuable flexibility and access to specialist capability. But the commercial benefit of a contracting model should be assessed alongside the statutory obligations that may come with it.
Classification is the starting point, not the conclusion.
Know before you engage
If contractors form a significant part of your workforce, understanding the commercial structure behind those engagements is critical.
APSG supports businesses with flexible workforce and contracting solutions designed around the practical requirements of the engagement.
Planning to engage specialist contractors or expand your contingent workforce? Talk to APSG before you engage.
Payroll tax legislation and exemptions differ between Australian states and territories. This article provides general information only and does not constitute taxation, legal or financial advice. Obtain specialist advice regarding your specific circumstances.
