Dec 2017 4 Minutes
Payroll Tax – The Often Forgotten But Painful Tax
We have noticed in recent times the Office of State Revenue (”OSR”), have ramped up their presence and are conducting a significant number of reviews. The major area they are focusing on are contractor payments. We also note that they are now focusing on specific industries such as the building industry.
Contractor payments are often over looked by many accountants and can result in significant payroll tax liabilities, as they often push a client above the threshold or alternatively add significantly to existing liabilities. Worse still, the reviews generally go back 5 years with the penalty in the 5th year often being 50% of the resulting liability.
Revenue Ruling PT6.1 helps establish the process of determining whether an employment relationship exists and is focussed on gathering detailed information about the relationship, as well as identifying the indicia that either support or do not support the existence of an employment relationship.
The factors the Commissioner considers are outlined in paragraph 52 of the Ruling. These include whether the worker:
- undertakes to produce a “given result” for a fixed fee rather than to simply do work i.e. the worker is paid for the result of the labour and not for the labour itself;
- provides the material and/or equipment necessary to undertake the task. The equipment should be more than “incidental” to the person’s services;
- has an unfettered discretion to delegate the work;
- bears the risk of making a loss in running a business through incurring significant expenses related to the income earned; and
- provides services to the general public.
The Commissioner notes at paragraph 51 of the Ruling that where all these factors exist in a relationship between a worker and the person for whom the services are provided, it is likely that the Commissioner will accept that the relationship is one of independent contractor/principal.
Further, the Commissioner provides at Schedule 1 of the Ruling a list of questions which when answered, will give an indication as to whether an employer/employee relationship exists. If the answer to most of the questions is “yes”, it is a strong indication that the person providing the services is an employee and payments made to that person would be subject to pay-roll tax.
These questions being:
- Is the person providing the services paid on a time basis (e.g. hourly rate) rather than on a per job basis?
- Is the contract wholly or principally for labour?
- Does the person requiring the services have the authority to control or direct the manner in which the work is to be performed?
- Is the person providing the services prevented from delegating or subcontracting his/her work to another person without approval?
- Is the person providing the services engaged for a lengthy period or on a continuing basis?
- Are the services provided by the worker ordinarily required by the person requiring the services in the normal course of their business?
- Is the person providing the services performing work similar to work carried out by an employee in the organisation?
- Are the work hours defined?
Further, it must be remembered that even if a contractor operates through an entity such as a trust or company this is basically irrelevant in determining whether the relationship between the contractors and the entities in question are one of independent contractor/principal for Payroll Tax purposes.
Specifically, section 11(E) of the Payroll Tax Act provides that:
“Where any person enters into any agreement, transaction, or arrangement ....., whereby a natural person performs or renders, for or on behalf of another person, services in respect of which any payment is made to some other person related or connected to the natural person performing or rendering the services and the effect of such agreement, transaction, or arrangement is to reduce or avoid the liability of any person to the assessment, imposition, or payment of pay-roll tax, the Commissioner may:
- disregard such agreement, transaction or arrangement;
- determine that any party to such agreement, transaction, or arrangement shall be deemed to be an employer for the purposes of this Act; and
- determine that any payment made in respect of such agreement, transaction, or arrangement shall be deemed to be wages for the purposes of this Act.”
As such, the Commissioner may disregard any agreement between an employer and third party and deem any payments to the third party to be wages for the purposes of the Act.
Should you have any concerns with respect to contractors and payroll tax liabilities, please contact Ariane Szabo .