Payroll tax is a blind spot for many.
Do I Have To Pay NSW Payroll Tax?
The business is growing. You hire more staff and contractors. And suddenly payroll tax is an issue – a huge issue – an issue you didn’t see coming.
Rough Estimate
To assess whether payroll tax is an issue for you or not, start with a rough estimate. Add up everything you pay for workers – anything you pay for work to get done – wages, paid leave, super, contractor payments, other benefits everything. Does the total in that bucket exceed $1m?
If you are well below $1m, then don’t worry about payroll tax. If you might be getting close, have a closer look
Two Baskets
To work out whether you need to pay payroll tax or not, you need to separate your workers into two groups. To make this easier imagine two baskets.
Put all your individual workers into the first basket. Individual workers are those who receive a wage from you. And they are those who gave you an ABN in their own name, so no partnership, trust or company involved.
And then you put everybody else into the second basket. Everybody working for you through a partnership, trust or company.
FIRST Basket – Individual Workers
Now you start looking more closely at the individuals sitting in your first basket. Those receiving a wage or working as sole traders.
You look at the totality of relationship. That is the key phrase – totality of relationship. You look at each individual and assess the totality of your relationship with them or their relationship with you – whichever way you look at it.
Totality of relationship means that you don’t just consider one factor, but the total – all six factors together. You look at the total relationship.
A worker is your contractor if they are:
1 – Able to delegate – they arrive in a team
2 – Paid for a result, not time – they fix problems at their own cost
3 – Provide their own tools to complete the work
4 – Bear the commercial risk – they can make a loss
5 – Have control over their work – when and how
6 – Independent of you – you don’t tell them what to do
If considering these six factors somebody looks like a contractor, move them to the second basket. Otherwise leave them in the first basket.
Moving into the second basket is good. You want that. It means you get a second chance. Because everybody left in the first basket is subject to payroll tax.
SECOND Basket – Contractors
Now you look at the second basket. Your contractors – those who work for you through a partnership, trust or company as well as those who came from the 1st basket.
Your aim is to get everybody out of this 2nd basket. But you can only take them out, if one of the 7 exemption applies.
These exemptions are about all or nothing. An exemption either applies to a contract or it doesn’t apply. There is no pro-rata thing going. One day over – gone.
So you go through these 7 exemptions for each contractor. If an exemption applies, great – you can take them out. If none applies, you leave them in there.
# 1 Services Ancillary to the Provision of Goods
It is all about the goods. The labour provided under the contract is ancillary to the supply or use of goods.
Think of the glazier who delivers and installs the new state-of-the-art glass panels. It is all about the panels. The glazier installing them is just the side show.
# 2 Services Not Ordinarily Required
Your business doesn’t ordinarily require these services. And the contractor supplies the same type of services to the general public in that year.
Think of a plumber who comes to the site once-off to repair a broken pipe. You usually don’t have a broken pipe. And the plumber has plenty of other customers on other sites.
# 3 Services Required For Less Than 180 Days
The business ordinarily only uses these services for 179 days a year or less. So this is about the service itself. Not the worker. Think of a ski-resort that only needs road clearing for 179 days a year.
# 4 Services Provided For Less Than 90 Days
This is now about the worker, not the service itself. The worker works for less than 90 days in a financial year. Think of a virtual CFO who only comes for a day each month.
# 5 Services Generally Supplied To the Public
This exemption only applies if the Chief Commissioner says so. So you need to specifically apply for this one.
This exemption applies when satisfied – based on evidence provided – that the contractor actually provided that type of service to the general public during the financial year.
# 6 Services Performed by Two or More People
The contractor doesn’t arrive alone but brings at least one other person to help them. Think of the arborist who needs another person to hold his safety lines.
These six exemptions apply across Australia (apart from WA). That is why they are called the ‘six general provisions’. But there is one more. One specific exemption that only applies to NSW.
# 7 Services Provided by an Owner-Driver
The contract is solely for the conveyance of goods in a vehicle provided by the contractor. The contractor must own or lease the vehicle and must not be an employee. Think of the truck driver who delivers cement for you in their own truck.
Numbers’ Game
The rest is now just a numbers’ game. You add up everything you pay for the individuals left in the 1st basket and the contractors in the 2nd basket.
And if the total exceeds $1m*, you pay payroll tax. That is why you try to get everybody out of the 1st basket into the 2nd basket and then everybody out of the 2nd basket. That is why you try.
As part of the NSW COVID-19 Stimulus Package there is no payroll tax during the corona virus crisis until 30 June 2020.
* The threshold for payroll tax is $1m from 1 July 2020 onwards. Lower thresholds apply to the years before that.
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Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.
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