The NSW Office of State Revenue uses the traditional control test to distinguish between an employee and a contractor for payroll tax purposes. However, both payments to employees and contractors are subject to payroll tax.
There are, however, nine payroll tax exemptions available for payments made to contractors. We will explain 4 exemptions here as they are the most commonly used and exclude most contract payments from payroll tax.
- Supply of labour is ancillary to the supply or use of goods
If the contract is mainly for the supply or use of goods owned by the contractor, and labour supply is ancillary, then the payments to the contractors are exempt from payroll tax. For example, a construction company hires cranes from a contractor.
- Services normally required for less than 180 days in the financial year
If an employer requires a particular service for less than 180 days in a financial year, the contract for that service is exempt from payroll tax. It should be noted that the number of days of service is based on the service provided by both the contractors and the employees. For example, if the service is provided by the employees for 100 days, and then provided by the contractors for 100 days, the total service period is 200 days. The contract payments will be subject to payroll tax. However, if the service is provided by the contractors for 60 days, then the total service period is 160 days and the contract payments for that service are exempt from payroll tax.
- Services provided for 90 days or less in the financial year
This exemption applies a particular contractor as opposed to a particular service in exemption 2. If a particular contractor provides services (could be more than one type of services) for less than 90 days in a financial year, then the contract payments are exempt from payroll tax.
- Contractors engaging labour to fulfil the contract
If a contractor engages other people to fulfil the contract, the contract work is not performed by a particular individual’s personal effort but rather by the structure of the contractor’s business. Consequently, these contract payments are not subject to payroll tax.