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It is often a surprise to business operators when they discover their ‘independent contractors’ are, in fact, employees at common law. Misclassifying employees as contractors can lead to significant implications in both employment and tax law. The distinctions between these classifications are often subtle, making the determination complex and rarely straightforward.

The next surprise is that even in a correctly classified, true principal-contractor arrangement, payments made to contractors are deemed to be wages for the purpose of calculating payroll tax liability. It is only once a relevant exemption is applied that such payments can be excluded.

In the recent case of Loan Market Group Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 390, the NSW Supreme Court held that mortgage brokers were deemed employees and payments of commission to the brokers were “for or in relation to the performance of work relating to a relevant contract”, rendering the commission paid subject to payroll tax.

The takeout being, where an “act of helpful activity” is provided to a business, it is likely to constitute services and thus:

• a relevant contract will exist; and
• payments paid (or payable) under that contract for services will be wages.

The rules are expected to be applied across many industries other than financial services (and medical and allied health, which has been widely publicised in recent years), where services are provided by independent contractors and by intermediaries.

The broad nature of the provisions means that businesses that rely on contractors to carry out their usual business activities run the risk of these payments increasing their payroll tax liability. That is, unless, one of the prescribed exemptions applies.

When contractors’ payments may be excluded

There are several exemptions to the relevant contract provisions, and most can be applied across the states and territories (with some notable exceptions).

1. Services only ancillary to the supply of goods

A contract (and payments made under it) may be exempt from payroll tax if the contract’s main purpose is to supply materials/equipment, and the labour or services provided are only incidental to this.

For example, a construction company engages a crane operator to assist with the construction of a new development. The total contract amount is $150,000 with $90,000 being for the crane itself.

To remember: the amount relating to the materials and/or equipment must be more than 50% of the total contract amount.

2. 90-day exemption

Payments may be excluded where the independent contractor provided the same or similar services under a relevant contract to the deemed employer for 90 days or less in a financial year.

For example, a construction company engages a surveyor for a period of 67 days.

To remember: the days for which the service is required do not need to be consecutive and services required for part of a day will count as a full day.

3. 180-day exemption

A contract for services of a kind usually needed by the business for less than 180 days in a financial year is also an exempt. This exemption differs from the 90-day exemption in that:

• It focuses on the service that the principal requires.
• More than one contractor can provide the service at the same time.

For example, a dive school engages dive instructors for a 4-month period during its tourist season. These services are not otherwise required by the business during the year.

To remember: the 180-day exemption in no way extends the 90-day exemption.

4. Services not ordinarily required

A contract may be exempt where the Commissioner accepts that the services are not associated with the usual activities of the business, and the contractor provides the services to the public generally.

For example, a business engages an external consultant to manage a one-off office re-location project and engage with the business’ staff in respect of change management protocols. The fees payable to the consultant represent less than 40% of the consultant’s gross trading income for the payroll tax year.

To remember:  this exemption is not always self-assessed and can require a determination by the relevant state Commissioner in certain circumstances.

5. Services otherwise approved as exempt

If a contractor provides services of a similar kind to the general public, the contract may be exempt even if the arrangement does not fit within the:

• services not ordinarily required exemption;
• 180-day exemption; or
• 90-day exemption.

For example, a marketing business engages an accounting firm to provide accounting services throughout the course of the year. The other exemptions do not apply, however, the accounting firm provides those same services to the general public.

To remember: the contractor must have provided their services to the public generally – simply being available to provide them will not be sufficient.

6. Services performed by 2 or more people

Payments made to a contract will be exempt from payroll tax liability if a contractor engages 2 of more people to fulfil the purpose of the contractor.

Relevantly, the:

• 90-day exemption;
• 180-day exemption; and
• services not ordinarily required exemption,

apply in priority. Those exemptions must be unable to be applied for the ‘2 or more persons’ exemption to be capable of applying.

To remember: it is not enough, for example, for the contractor to engage a second person to provide administrative support to them or their standalone business.

The other exemptions

There are three specific exemptions, which allow payments to be excluded where the contractor is:

7. An owner-driver (i.e. most courier providers).
8. Hired to sell domestic goods (i.e. door-to-door sales).
9. Hired to sell insurance and the principal is an insurance company with an AFS licence (which relevantly did not apply to the Loan Market decision because that exemption is not available in New South Wales).

What businesses actually need to remember

• The term contractor is broad and does not exclude those who operate via a company.
• The starting position is that a business will need to include contractor payments in payroll tax calculations (among all other ‘taxable’ wages).
• Only one relevant contract exemption needs to be satisfied.
• Record keeping is critical – a claimed exemption must be able to be substantiated by evidence that is ideally collected in real time.

If in doubt – seek advice.

Our tax team at Macpherson Kelley is here to help you understand how these laws apply so that your business remains compliant. Contact us today to discuss how we can assist you in managing your payroll tax obligations effectively.