Payroll Tax: Employee or Contractor

Payroll tax is a tax imposed by each state and territory in Australia where the employer’s taxable wages (including any employer superannuation contributions and assessable ‘fringe’ benefits) exceeds the relevant threshold for the period. Although employees are straightforward in being included in payroll tax obligations, contractors can be a grey area depending on the circumstances.

In Victoria the tax-free annual threshold for 1 July 2022 to 30 June 2023 is $700,000, with a monthly threshold of $58,333.

The Tax rate is 4.85% but for regional Victorian businesses the rate is 1.2125% but if you’re a businesses in bushfire affected local government area a different special payroll tax rate applies to you. (As of  1 July 2019, you are considered a regional Victorian employer if you are paying at least 85% of your wages to regional employees).

Wages are defined under the Payroll Tax Act 2007 (the Act) and include:

• wages,
• remuneration,
• salaries,
• allowances,
• commissions,
• bonuses,
• employer (pre-tax) superannuation contributions such as:
  • superannuation guarantee payments,
  • salary sacrifice contributions,
  • the value of non-monetary contributions (from 1 July 2007), and
  • superannuation contributions to defined benefit funds
• fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986 (Cth),
• the value of shares and options granted to employees, directors, former directors and some contractors,
• payments to some contractors who are deemed ‘relevant contracts’.
• payments by employment agencies arising from employment agency contracts,
• remuneration paid by a company to company directors, and
• employment termination payments and accrued leave.

If we take a deep dive into Contractors specifically, those that are considered ‘relevant contracts’ should be included in your Payroll Tax.

Relevant Contracts are defined as Contractors who predominantly provide labour services and work exclusively or primarily for one principal (business) in a financial year.

Regardless of whether the contractor provides services via a company, trust, partnership or as a sole trader, payments under these contracts are deemed to be wages (excluding GST). The principal (business) who engages the contractor is deemed to be an employer who is liable for payroll tax on those wages.

Some wages are exempt from payroll tax. These include:

• Primary and secondary caregiver leave (formerly adoption and maternity parental leave).
• Commonwealth paid parental leave.
• Contributions to redundancy benefit schemes.
• Wages paid to employees absent from work to volunteer as firefighters or respond to other emergencies.
• Wages paid to a person while on military leave as a member of the Defence Forces.
• Bone fide redundancy or early retirement payments.
• Wages paid from non-profit group training organisations. From 1 July 2018, this also includes for-profit group training organisations.