Employees vs Contractors - Part 5 - Payroll Tax

In New South Wales, the Office of State Revenue uses the traditional control test to determine whether a worker is an employee or a contractor for payroll tax purposes. Despite this distinction, payments to both employees and contractors are generally subject to payroll tax.

However, there are nine exemptions available for contractor payments. Below, we explain four of the most commonly used exemptions, which often allow businesses to exclude contractor payments from their payroll tax liabilities.

1. Supply of Labour Is Ancillary to the Supply or Use of Goods

If the contract primarily relates to the supply or use of goods owned by the contractor, and the labour component is merely ancillary, then those payments are exempt from payroll tax.

Example: A construction company hires a crane from a contractor. The contract primarily concerns the use of the crane (a good), not the contractor’s labour. The payment is exempt from payroll tax.

2. Services Normally Required for Less Than 180 Days in the Financial Year

If a business typically requires a specific service for less than 180 days in a financial year—regardless of who performs it (employee or contractor)—the payments made under the contract are exempt from payroll tax.

Important note: The 180-day count is cumulative, including both employee and contractor work.

Example:

• Service provided by employees for 100 days

• Then by contractors for 100 days

• Total = 200 days → Not exempt

  But, if only contractors are used for 160 days → Exempt

3. Contractor Provides Services for 90 Days or Less in the Financial Year

This exemption focuses on the individual contractor, not the service itself. If a specific contractor performs any number or type of services for 90 days or less in the same financial year, the contract payments are exempt from payroll tax.

Example: A contractor is hired for two short-term projects, totalling 85 working days during the year. This payment qualifies for exemption.

4. Contractor Engages Others to Fulfil the Contract

If a contractor subcontracts or employs others to carry out the work, the services are not considered to be delivered solely by the individual’s personal effort. Instead, the contractor is seen as running a business.

As such, payments under the contract are not subject to payroll tax, because the labour is not directly attributed to a single person.

Example: A contractor runs a business that uses a team of workers to complete the job. Even if the invoice is in the contractor’s name, the service is delivered by multiple individuals → Exempt

Final Thoughts

Understanding these exemptions is vital for business owners who engage contractors and want to manage their payroll tax exposure. If you're unsure whether your contractor arrangements qualify, seeking professional guidance can save you from costly missteps.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.