by Karen Howard, BAcct
Payroll tax is a self-assessed tax based on the wages paid by you the employer to your employees and certain contractors Australia-wide. Payroll tax is payable when the total of your group wages and contractor charges are above a certain threshold.
In Queensland, if your group’s weekly wage bill is more than $22,250 per week then you will need to register for payroll tax. Please note that this threshold is different in every state.
Table 1. Payroll tax threshold by state
State | Weekly | Monthly | Annually |
Queensland | $22,250 | $96,417 | $1,157,000 |
Victoria | $15,404 | $66,751 | $801,008 |
ACT | $34,230 | $148,330 | $1,779,960 |
WA | $17,115 | $74,165 | $889,980 |
Tasmania | $21,395 | $92,712 | $1,112,540 |
In addition, each State also has a different rate of payroll tax. The current rate in Queensland is 4.75% for employers who pay $6.5 million or less, and 4.95% for those that pay over $6.5 million in taxable wages in a financial year.
What are Taxable Wages?
Taxable wages are wages paid to the employee including gross salary and wages, annual leave, sick leave and long service leave. Superannuation, bonuses and commission also form part of taxable wages, as do certain allowances such as accommodation, telephone, meal and
overtime.
Currently, certain apprentice and trainee wages are eligible for a 50% payroll tax rebate. Also, if you operate in certain regional areas of Queensland, you will receive a 1% discount on your payroll tax.
How are businesses grouped?
Business may be grouped and treated as one unit for payroll tax if they are related or connected.
A group exists if:
They have common employees - the employees are used in more than one business
Companies that have related bodies corporate
An entity has tracing interest in corporations
Merged Groups – where a person is part of 2 or more groups
Controlling Interest - the same person, or set of persons, has a controlling interest in 2 or more businesses.
The most common grouping that we come across at ABA Advice Beyond Accounting is the same person or set of persons having a controlling interest in 2 or more businesses.
So, what constitutes a set of persons?
A set of persons are persons such as individuals who are spouses, parent and child, brothers, sisters or brother and sister.
As a person (an individual, a set of persons, a corporation, partnership or all bodies and associations), if you have a controlling interest (an interest greater than 50%) in more than one entity, then those entities need to be grouped for payroll tax purposes.
If at any point your grouping structure changes, you must lodge final returns for all members of the group in your current grouping status. Then, register again in a new group status.
Which contracts do I have to pay payroll tax on?
It is a common misconception that if persons are contractors, then payroll tax does not apply to them. The payroll tax provision applies to companies, trustees of trusts and partnerships, not just sole traders. Contracts that are liable for payroll tax are any kind of arrangement where you supply services, are supplied with services or re-supply goods. Generally, any arrangement involving services are always liable for payroll tax UNLESS one of the following nine exemptions apply.
The nine exemptions for payroll tax
Labour ancillary to the provision of goods
If the amount of labour on an invoice is less than 50% of the total contract amount or it can be shown that the provision of the materials and/or equipment is the principal object of the contract, then the contract will be exempt for payroll tax.
For example – Company A hires an excavator from company B, and it is a condition of the contract that company B must provide an excavator driver. As the object of the contract is to hire an excavator, the driver’s services are provided ancillary to this, meaning that the contract is exempt for payroll tax.
Type of services not ordinarily required
If less than 40% of the contractors gross trading income comes from your business in a financial year, they supply the same type of services to the general public and these services are not ordinarily required by your business, then the contract is exempt for payroll tax.
For example – Company C are accountants and hire Company D to paint their new office. Company D works for other businesses during the year and as this is a service not ordinarily required by company C, the contract is exempt.
Service provided for less than 90-days
If a contractor works for you for less than 90 working days in a financial year, the contractors’ charges will not be liable for payroll tax.
Please note that if a contractor works on a shift that covers 2 calendar days such as 10 pm – 6 am, this will be classed as 2 working days.
Services required for less than 180-days
If your business needs a type of service for less than 180 days in a financial year, then the contractors’ charges will be exempt.
For example – Matt is a gardener and contracts to a company for 100 days in a financial year. Conor is also a gardener and is contracted to provide the same services concurrently with Matt for 90 days. As your business only needs the gardening services for 100 days in the financial year, then these contract charges are exempt. However, if the gardeners worked at separate times in the year, then this would mean the work was required for 190 days in the financial year and the contract charges would not be exempt for payroll tax.
Services performed by two or more people
If a contractor engages others to provide their services, or two or more people are needed to complete the contract then the contractor charges will be exempt for payroll tax.
Example 1:
Sam is a concreter and enters into a contract to lay a driveway. He completes this work by himself. The preparation and concreting of the driveway are the object of the contract.
However, his spouse, Nikki provides the concreting business with administrative services such as maintaining the accounts. Sam would like to claim that Nikki is the second person working as part of this contract. However, as administration work was not the object of the contract, the exemption would not apply.
Example 2:
Ian is an electrician and enters into a contract to install ceiling fans into an office. As part of the contract, Ian is required to restore the ceiling to its original condition.
To restore the ceiling to its original condition, Ian engages the services of a plasterer and painter. As the work of the painter and plasterer are required under the contract, this contract is exempt for payroll tax.
Approved by the commissioner as exempt
If a contractor working for you provides similar services to the general public and the contractors services are provided to two or more principals in a financial year and are used for an average of 10 days or less in a month, you do not need to apply for an exemption but can claim an exemption.
Services provided by owner-driver
If a contractor uses their own vehicle to carry goods and only provides incidental services and is not your employee and the employer makes no contribution directly or indirectly to the costs of the vehicle, then these contracts are exempt.
For the sale of insurance
This exemption is solely for the use by insurance companies that hire contractors to sell their policies, paying them commissions. To get the exemption, the contractor must not be your employee, be a genuine independent contractor with an agency business and hold an Australian Financial Services licence.
Door-to-door sales
If you use a contractor to sell goods door-to-door for domestic purposes and the contractor is not your employee and is selling directly to the public, then the amounts paid to the contractor are exempt for payroll tax.
Payroll tax exemption evidence
As with all government policies, you must provide evidence on why the contractor is exempt for payroll tax. All evidence must be legible, easy to access, retained at the time the exemption is claimed and kept for 5 years.
Evidence that is accepted by the Queensland Revenue Office includes
Contract and sub-contract agreements
Contractor payment summary
Timesheets
Work/ purchase orders
Tax invoices for the contractor which show why the exemption should be claimed e.g. number of contractors working the job.
Details of the contractor you engage such as ABN, contact details, website address and any other advertising materials.
Accounting records of payments made to a contractor (showing days the work was done)
General ledger summaries
Workcover policy records
Attendance records from when contractors attended your work site/business premises.
Further information can be found on the Queensland Revenue Office website
Karen’s 6 top tips for managing payroll tax
Make sure you register for payroll tax as soon as you go over the threshold.
At ABA we review payroll tax thresholds every month when we complete the IAS (Instalment Activity Statement) for a business.
However, I recommend that you review this threshold every time you complete a pay run so that you can register as soon as you go over the threshold to avoid interest charges from the Queensland Revenue Office.
Ensure that you have good records of evidence for each individual contractor that you use.
You will also need to ensure that the information the contractor provides to you is accurate and complete. For example, if the contractor worked as part of a team, their invoice needs to note, for example, that ‘Bob and his team’ completed the work.
The easiest way to retain and report evidence is to upload the documents to the relevant transaction in Xero. This means you will have easy-to-find electronic records that will save you time should you ever be audited.
The ABA experience with payroll tax audits
ABA has noticed an increase in audit activity by the Queensland Revenue Office with regards to contractor payments. When this happens, they have audited the last five years of contractor payments and asked for evidence to prove that the contractor charges are exempt. Depending on the size of the business and the number of contractors involved over the years, these audits can take our clients and ourselves weeks of work to provide the relevant evidence. Even if good records have been kept!
Based on the submission of the information, the Queensland Revenue Office will review and then request specific evidence in relation to the contractor information that you have provided. Once this evidence is submitted, it will be assessed, and the Revenue Office will determine whether they consider the evidence acceptable.
Once they have reviewed all the evidence, you will be issued with a final assessment for each of the years that were assessed. This means, depending on the outcome, you may receive a bill for each of the years that were assessed. The payment of this bill is then due virtually immediately!
The only way to protect your business from the significant costs involved if the Revenue Office does audit your payroll tax records, is to have tax audit insurance. We offer all our clients the option to take out Audit Shield insurance, which, depending on your level of cover, could cover the hourly costs of accounting assistance to resolve the audit queries. Audit insurance also covers you for audits on Income Tax, FBT, record-keeping, SMSF’s, Super guarantee compliance and worker compensation. If you have already taken out tax audit insurance, please make sure your insurance premiums are up to date.
How can ABA help you manage your payroll tax obligations?
Payroll tax remains a challenging and complex area of tax law and few businesses can afford to get it wrong. We don’t mean to scare you, but the costs of an audit, backdated daily interest charges and late lodgement penalties of 75% can be crippling for your business if you get this wrong.
Given that there is a renewed focus by the government to crack down on payroll tax, especially on contractor payments, we recommend you remain vigilant about your payroll tax thresholds and evidence to prove that your contractor payments are exempt.
If your business and use of contractors is growing and becoming harder to manage, or you simply want to free up your time and have peace of mind that your payroll tax is being effectively managed. We encourage you to reach out and discuss how ABA can help you take care of your payroll tax obligations. Not currently a client? Simply book your free discovery meeting today to see how we can help you with all your bookkeeping, tax accounting and business advisory needs.
Remember, when ABA completes your payroll, BAS and IAS, we will review payroll tax thresholds and we will inform you when you are close to the threshold. Then ask for the information needed to register you for payroll tax. And should you be unfortunate enough to be audited, the team at ABA will be there to support and assist you every step of the way!
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