Payroll Tax and Contractor Arrangements

Generally, payroll tax is payable by employers on all taxable wages paid to a common law employee, or where there is no employer–employee relationship, liability for payroll tax will arise if it is established amounts are paid under a 'relevant contract' to a contractor under the Payroll Tax Act 2007 No 21 (PT Act). This has the potential to catch contractor/principal arrangements.

The recent decision of NCAT in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40 (Thomas and Naaz) highlights when contractor arrangements can be caught by the PT Act.

In this case, the Chief Commissioner assessed that payroll tax was payable for several doctors who were contracted to a company running a number of medical centres. All the doctors (except three) arranged for the Medicare benefits assigned to them were to be collected by the company, and the company would pay the doctors 70% of the fee, retaining 30% as a service fee for the medical centre.

The Tribunal confirmed the Chief Commissioners Assessment of payroll tax payable by the applicant finding that the agreements between the medical centres and the doctors were “relevant contracts”. This was on the basis that the agreements related to the provision of the services of the doctors to the patients of the medical centres, and to the medical centre themselves. Moreover, those services were work-related and a necessary part of the medical centre business. We note that there are some exemptions that may apply for contractors but note none of them applied in this case.

The Tribunal considered the following factors as important in reaching the conclusion that services were provided to satisfy that the arrangements were relevant contracts:

(a) Services had to be provided on a five day per week basis including meeting weekend and roster commitments;

(b) Planned vacations required advance notice and were approved by the company;

(c) The doctors were required to promote the interests of the company and abide by the company’s operating protocols and documentation; and

(d) There was a restraint of trade in place for doctors that were leaving the company’s medical centre.

The Tribunal also found that the payments made to the doctors should be deemed wages for the purposes of the PT Act, as the payments were made for or in relation to the performance of work relating to a "relevant contract”. The Tribunal also decided that there was a clear, indirect relationship between the performance of work, the relevant contracts and the payments made to the doctors.

Takeaway:

If your business uses contractors for the performance of work only and none of the exemptions apply (such as using a contractor for less than 90 days in a year or using a company where 2 or more people provide the services), you may be liable for payroll tax. In NSW, the current payroll tax threshold is $1.2million.