payroll tax mccullough robertson cpa presentation 15 feb 2017
TRANSCRIPT
Lyndon Garbutt
Senior Associate
15 February 2017
Contractors, employment agents and grouping
Payroll tax
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What will be covered
■ Common issues
□ contractors
□ employment agent provisions
□ grouping (and exclusions)
□ joint and several liability
□ ensuring proper understanding of inter-State exposure
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Payroll tax – Contractors
Lyndon Garbutt
Senior Associate
15 February 2017
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Contractor provisions (post July 2008)
■ Post 1 July 2008 – all payments to contractors taxable
■ All Australian jurisdictions other than WA have specific contractor provisions
■ Exemptions generally the same, except ACT where only four exemptions
available
■ In ascertaining whether payments to contractors are taxable
□ Step 1: Identify whether contract at hand is a relevant contract (i.e. taxable)
□ Step 2: Identify whether any of the nine exemptions apply (specific order to
consider these in)
□ Step 3: If not exempt, consider whether eligible for a deduction for any non-labour
component
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Step 1 – What is a ‘relevant contract’
■ ‘Relevant contract’ – A ‘contract’ under which a person, in the course of
carrying on of a business
□ supplies to another person services in relation to the performance of work
□ has supplied to it the services of persons regarding the performance of work
□ gives goods to individuals for work to be performed by those individuals regarding
the goods and for the goods to be re-supplied
■ ‘Contract’
□ agreement, arrangement or undertaking
□ formal or informal
□ express or implied
■ ‘Relevant contract’ excludes an employment agency contract
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Step 2 – relevant contracts - exclusions
■ Main Exclusions
□ Labour ancillary to supply/use of goods by a contractor
□ Services not ordinarily required by the principal
□ Services required by principal normally <180 days per year (not ACT)
□ Services provided for 90 days or less per year (not ACT)
□ Commissioner’s discretion (if previous three don’t apply)
□ Contractor engages labour to fulfil actual work (not ACT)
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Step 3 – relevant contracts - labour & non-labour
components
■ Commissioner has discretion to determine non-labour component where contractor provides equipment and/or materials
■ Set deductions re certain classes of contracts
■ Can only be reduced by approved deduction regardless of actual amount of non-labour charged by contractor
■ E.g. architects 5%, bricklayers 30%, plumbers 25%, non-labour
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Managing exposure to contractor provisions
■ Consider evidence required to substantiate exemptions/concessions
□ number of days worked by contractors
□ labour engaged by subcontractors
□ qualifications of workers – bricklayers etc.
■ Best evidence – ensuring contractors invoices have appropriate details
prior to paying invoices
■ Consider relevant OSR rulings for each exemption/concession
■ Consider other tax issues/exposure – SGC, Workcover – insufficient for
payroll tax purposes to merely incorporate an entity to avoid exposure
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Exemption – Services ancillary to supply of goods
■ Examples
□ lease of a photocopier, with incidental servicing included in lease premiums
□ supply of a cherry picker, where licensed operator provided as part of agreement
■ Harmonised ruling PTA033 – exemption will apply if
□ labour component of any contract is less than 50%
□ evidence to substantiate the principal object of the contract is provision of
equipment and/or materials
□ amount attributable to non-labour components is reasonable
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Exemption – services not ordinarily required
■ Example
□ interior designer hired once a year to select artwork for company’s reception
□ painter hired to paint exterior of building
■ Harmonised ruling PTA022 – exemption will apply if
□ services being provided not ordinarily required by the business
□ contractor earns less than 40% of their income from the principal in the financial
year (excluding investment income etc.)
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Exemption – less than 90 days (not ACT)
■ Focuses on number of days services provided by the contractor
■ Harmonised ruling PTA014 – ‘Day’ includes
□ part of a day on which the same or similar services are provided by the contractor
□ non-consecutive days
■ Management systems need to be able to record days worked
■ Harmonised ruling PTA035 – Replacement method
□ estimates total remuneration for 90 days work by reference to likely award rates
and award hours
□ if below ‘safe harbour’ amount then can assume the worker worked less than 90
days
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Exemption – less than 180 days (not ACT)
■ Focuses on number of days services required by the principal
■ Need to consider days on which types of services provided by workers,
irrespective of whether they are employees or different contractors
■ Harmonised ruling PTA014 – ‘Day’ includes
□ part of a day on which the same or similar services are provided by the contractor
□ non-consecutive days
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Exemption – Commissioner’s discretion
■ Exercised if Commissioner is satisfied services performed by a person who ordinarily performs such services to the public at large
■ Harmonised ruling PTA021 – must be able to demonstrate the contractor
□ provides the services as part of conducting a genuine independent business
□ ordinarily renders the services to the general public
■ PTA021 – various factors taken into account in determining if above two criteria satisfied
■ PTA021 – exemption will automatically apply if
□ a contractor provides services to two or more principals during financial year
□ principal claiming the exemption does so for an average of ten days or less in each month services are provided
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Exemption – Contractor engaging labour (not ACT)
■ Depending on entity type, following people need to be engaged
□ company – two or more people employed or engaged by the company
□ trust – two or more people employed or engaged by the trust
□ partnership of natural persons – two or more people of which one must not be a
partner
□ sole trader – two or more persons, including the sole trader
■ Harmonised ruling PTA023 – exemption will only apply if the contractor
□ is carrying on a business
□ has overall responsibility to fulfill the terms of the contract
□ engages directly the persons performing the work required under the contract
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Exemption – Contractor engaging labour
■ Harmonised ruling PTA023 – anti-avoidance arrangements
□ multiple contracts between same parties in same financial year
– separate discrete contracts for particular jobs
– labour must be engaged for each job if exemption to apply to all contracts
□ teams of contractors
– same group of contractors working consistently together on various jobs
– deemed contract to exist between each contractor and the principal if
• principal pays each contractor separately
• difficult to establish formal relationships between the team of contractors
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Exemption – Contractor engaging labour
■ Harmonised ruling PTA023 – anti-avoidance arrangements
□ contractors sharing services of same person
– applies where Principal engages two contractors, but contractors engage same
person to provide labour under each separate contract
– must be demonstrated
• work performed by the person or persons engaged by both contractors
must be distinct
• remuneration paid to the person or persons must be at a commercial rate for
work performed
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Exemption – Contractor engaging labour
■ Harmonised ruling PTA023 – anti-avoidance arrangements
□ if Commissioner regards arrangements having been entered into with intention to
avoid payroll tax then exemption won’t apply
□ anti-avoidance provisions may apply if any labour engaged by contractors
– were formerly employees of the principal
– are not paid at a commercial rate and is/are
• a spouse or child of the contractor
• a beneficiary of a trust set up by the contractor
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Concessions – non-labour components
■ Contractor provisions only intended to capture payments for labour
■ Commissioner has discretion to determine non-labour component where contractor provides equipment and/or materials
■ Can only be reduced by approved deduction regardless of actual amount of non-labour charged by contractor
■ Harmonised rulings PTA019 and PTA018 – set deductions (from gross
payments) for certain categories of contractors
□ architects – 5% non-labour
□ bricklayers – 30% non-labour
□ carpenters – 25% non-labour
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Payroll tax – Employment
agents
Lyndon Garbutt
Senior Associate
15 February 2017
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Importance of employment agent provisions
■ post 1 July 2008 – most jurisdictions have specific employment agent provisions
■ Not well understood, despite being relevant to scenarios where contractors generally engaged:
□ examples: IT workers, engineers, cleaners and certain industries such as mining
■ Focus should be on the concept, not the term ‘employment agent’
Worker
Taxpayer
Client
Fees Payments
Services
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Employment agent v engaging contractors
■ Most taxpayers – regard their arrangements with workers as falling within
contractor provisions
■ Employment agent provisions – similarly broad, but generally no exemptions
or concessions available to reduce payroll tax otherwise payable
■ Potential overlap for both contractor and employment agent provisions to
apply
■ If overlap then the employment agent provisions take precedence
□ generally all payments to workers captured unless
– another entity has already paid payroll tax on the underlying labour
– the worker is providing services to an exempt entity and the agent has a
declaration
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What is an employment agency contract
■ Key elements (post 1 July 2008)
□ ‘employment agency contract’ – includes an ‘agreement, arrangement and undertaking’, whether ‘formal or informal, express or implied’
□ objective of arrangement is the procurement of the services of another person (Service Provider) by an entity (Employment Agent) for a client of the Employment Agent (Client)
□ no contract of employment exists between the Service Provider and Client
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Employment Agents – who is potentially captured
■ Explanatory notes – suggest the service provider must be a natural person (worker) who is ‘procured’ to perform ‘employee-like functions and the worker does not become an employee of either the agent or the client’
■ Developing case law
□ Freelance Global Limited v Chief Commissioner of State Revenue [2014] NSWSC 127
□ CXC Consulting Pty Ltd v Commissioner of State Revenue [2013] VSC 392
□ Moore Park Gardens Management c Chief Commissioner of State Revenue [2006] NSWCA 115
□ UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852
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Employment agency contracts - Summary
■ Broad application
■ Whether an employment agency contract exists will depend on the totality of the relationships between the different parties
□ carefully analyse the contracts/arrangements in place
□ consider if a contract for results exists
□ whether a party may be viewed as acting as an agent in sourcing labour
□ whether arrangements relate to services of a specific individual
□ are the arrangements aimed at procuring a natural individual to perform ‘employee-like’ functions or duties of a similar nature to an employee
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Employment agency contracts - Summary
■ Particularly be mindful regarding situations where contractors commonly used
□ professionals in the mining industry
□ cleaners
□ IT workers
□ businesses connecting industry experts/consultants/specialists with clients
■ If applicable, will over-ride the contractor provisions
■ Generally will mean a higher level of taxable payments compared to what is taxed under the contractor provisions
■ Important to understand risk of employment agent provisions applying
■ Seek legal advice to ensure arrangements properly documented to reflect intended contractor arrangements and/or to manage any shortfalls
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Payroll tax – Grouping
Lyndon Garbutt
Senior Associate
15 February 2017
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Grouping – Importance of understanding provisions
■ Grouping provisions drafted broadly to capture broad range of
arrangements
■ Common traps
□ structures with discretionary trusts
□ ‘related corporation’ provisions
□ common employees
■ Implications
□ availability of tax free threshold
□ joint and several liability
■ Structuring tips
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Payroll tax – grounds for grouping
■ Five grounds
□ Related corporations (section 69)
□ Common employees (section 70)
□ Commonly controlled businesses (section 71)
□ Tracing of interests in corporations (section 72)
□ Smaller groups subsumed into larger groups (section 73)
■ One ground for exclusion – section 74
□ not available regarding related corporations
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Payroll tax – Calculation tips for groups
■ Group situations
□ Effect: Only one entity within group gets benefit of tax-free threshold – all other entities pay payroll tax on all taxable wages
□ Queensland: Mechanism by which excess threshold can be allocated to other group members
■ Calculation should be done on an individual basis for each group member
■ Although total payroll tax payable can be ascertained by totalling group taxable wages this does not identify individual payroll tax liabilities of each group member
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Payroll tax – strategies (grouping)
■ Strategies at 2 levels
□ Level 1 - generally optimal to try and ensure clients do not fall within grouping
provisions
□ Level 2 - if this cannot be achieved – structuring needs to focus on maximising
possibility of a notice of exclusion being granted
■ Need to be tailored to specific circumstances of each client
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Payroll tax – related corporations
Ground 1
■ Related bodies corporate
■ Corporations Law definition
□ holding company of another body corporate
□ subsidiary of another body corporate
□ subsidiary of an holding company of another body corporate
■ No basis for seeking exclusion order if related corporation
■ Grouping on this ground can easily be identified through data-matching
software and ASIC records
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Payroll tax – common employees (3 tests)
Ground 2
■ First two tests – Employer and other business owners grouped if either
□ one or more employees perform duties in connection with one or more
businesses carried on by the employer and one or more other persons
□ one or more employees employed solely or mainly to perform duties in
connection with one or more businesses carried on by one or more other persons
■ Final (third) test - Employer and other business owners grouped if one or
more employees perform duties
□ in connection with one or more businesses
□ in connection with, or in fulfilment of the employer’s obligation under, a
relevant agreement
■ Broad application – Consider: secondees, book-keepers, cleaners
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Payroll tax – common employees – professional
groups
■ PTA017.2 – Service entities
■ Where captured, Commissioner will generally exercise his discretion to
exclude if
□ each professional practice has independent ownership
□ professional practices carried on independently of, and not connected with, each
other
□ professional practice owners have no controlling interest in their own right in the
services business
□ services business does not derive more than sixty percent of its income from any
one professional practice
□ there is no suggestion structure is to avoid payroll tax
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Payroll tax – common ownership and control
Ground 3
■ Common control – where same person (or persons) have more than 50%
control of two or more entities
■ Section 71(6): Deems any person who may benefit from a discretionary trust
to be a controller of the trust for payroll tax grouping purposes
■ Consider when setting up discretionary trusts and whether specific family
members should be excluded
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Payroll tax – tracing of interests in corporations
Ground 4
■ With effect from 1 July 2008
■ Wide reaching provisions due to use of broad definitions
□ a ‘relevant entity’ and a corporation constitute a group if there is a controlling
interest
□ ‘relevant entity’: a ‘person’ or two or more ‘associated persons’
□ ‘Associated persons’ include ‘related persons’
□ ‘Related persons’ – spouses (including de facto partners), siblings etc.
■ Effect: Provisions can be used to group passive individuals such as wives,
siblings etc.
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Payroll tax – subsuming smaller groups into larger
groups (Ground 5)
■ If person member of two or more groups, the members of all the groups
together constitute a group
■ Potential issue for
□ ‘Silent’ partners
□ Entities grouped on basis of common employees
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Payroll tax – joint and several liability
■ Post 1 July 2008: Joint and several liability of group members
■ Specific provisions (section 51A), not just for annual/final liabilities but also
for periodic liabilities, penalties and interest
■ OSR will issue garnishee notices to all group members and will potentially
instigate legal action to recover unpaid debts against any group member
■ Potentially at risk
□ passive individuals (spouses, siblings etc.)
□ investment trusts
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Payroll tax – structuring businesses
■ Be mindful of grounds for grouping when advising on appropriate business structures
■ Consider
□ common control
□ common employees
□ effect of smaller groups being subsumed into larger groups
■ Understand client’s intentions and if appropriate ensure:
□ beneficiaries of particular trusts exclude particular individuals as required
□ combined shareholdings and directorships do not cause > 50% control
□ appropriate staff are engaged to undertake particular functions
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Payroll tax – exclusion orders
■ Pre 1 July 2008
□ Exclusion order could be granted where Commissioner thinks it is just and reasonable and is satisfied that
...a business carried on by a member of that group is carried on substantially independently of and is not substantially connected with the... business carried on by any other member of that group (section 69(7))
■ Post 1 July 2008
The commissioner may make an exclusion order only if the commissioner is
satisfied a business carried on by the person is carried on independently of, and is
not connected with the carrying on of, a business carried on by any other member
of the group
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Payroll tax – exclusion orders
■ Relevant factors
□ nature and extent of commercial transactions between group members
□ extent to which group members share resources, facilities or services
□ who is involved in making managerial decisions
□ financial interdependencies between group members
□ common suppliers and purchasing power
□ nature of the businesses conducted by the various members and possible connections
□ connections between ultimate owners
■ Refer Harmonised ruling PTA031.2 and Form OSR-PT1
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Contact
Lyndon Garbutt
Senior Associate
T +61 7 3233 8921
Disclaimer: This presentation covers legal and technical issues in a general way. It is not designed to express opinions on
specific cases. This presentation is intended for information purposes only and should not be regarded as legal advice. Further
advice should be obtained before taking action on any issue dealt with in this presentation.