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Revenue Ruling
Public Ruling

Ruling Number:PUB-PT-2002-14
Title:Contractor Provisions - Exclusions
Tax Line:Pay-roll Tax
Legislative Reference:Pay-roll Tax Act 1971
Previous Ruling:
Date of Ruling:07/11/2002
Attachments:
Introduction

The purpose of this Ruling is to assist employers/principals determine whether a relevant contract may be excluded from liability to payroll tax under the Contractor Provisions, because of the nature of the service or the circumstances in which that service was provided.

The Public Ruling PUB-PT-2002-13 Employment Relationships - Operation of the Contractor Provisions, sets out criteria to assist employers and principals to determine whether services are provided as an employee or as an independent contractor and should be read in conjunction with this Ruling.

The Act uses a broad definition of relevant contract in determining the liability for payroll tax [Section 3A]. However, some relevant contracts are excluded from tax liability because payments for services are not considered to be wages for the purposes of the Act.

Relevant Contracts Section 3A(2)(a)(b) and (c) of the Act.

Subject to the exclusions referred to below, ‘relevant contracts’ are those contracts where a person in the course of carrying on a business:
  • supplies services to another person for or in relation to the performance of work, or
  • is supplied with services from another person for or in relation to the performance of work, or
  • gives out goods to a natural person who performs work and resupplies the goods.

Generally, where a contract is a relevant contract and subject to the legislation, payments made under that contract will be considered to be wages and liable to tax in the hands of the deemed employer provided the threshold has been reached. The person making the payment is deemed to be the employer.

Excluded Contracts

The Act specifically excludes seven types of ‘relevant contract’. It should be noted that only one of these provisions has to be satisfied to render the contract exempt from tax.

1. Contracts where the supply of a person’s labour is ancillary to the supply of goods or the use of goods which are owned by the person (Section 3A(3))

This provision excludes contracts where the fundamental object of the contract is the supply or the use of goods, but where that supply or use requires substantial labour by the contractor. In these cases, the labour component is treated as ancillary to the contract itself.

Examples of where this exclusion may apply are:
      · a contract for the supply and installation of an air conditioner.
      · the hire of a mobile crane with an operator.
      In determining whether there is any payroll tax liability, the ancillary test is to be applied. Where the cost of the supply or use of goods is more than 50% of the total cost of the contract, the labour component will be considered ancillary and the whole contract excluded from payroll tax liability.

      Where the labour component represents more than 50% of the total cost of the contract, the contract will not be eligible for exclusion. The payment for the labour component will be treated as wages and a payroll tax liability will arise.

      Conditions applying to this exclusion

      The amounts allocated to labour and the supply or use of goods respectively, must represent genuine amounts payable under ordinary factors determining rates and prices in the industry involved. The two amounts must be shown separately in both the invoice or costing supplied to the person receiving the goods and services and in the records of the person supplying the goods and services.
It should be noted that the above exclusion and conditions do not apply to contracts involving services supplied by tradespeople (eg bricklayers and tilers, where it is normal for some goods to be supplied with the service) or owner/drivers.

In the case of services supplied by tradespeople, the Commissioner has determined that a certain percentage of the contract cost must be applied to the labour component. Information on allowable deductions for the non–labour component of a relevant contract is to found on page 9 of this Ruling.

Information about the pay-roll tax liability relating to services supplied by owner-drivers is contained PUB-PT 2002-12.


2. Contracts for services not ordinarily required by the employer/principal which are provided by a person who has performed services of a similar kind to the public generally in the same financial year (Section 3A(4)(a))
      This exemption recognises that businesses require certain services not associated with their mainstream business on an infrequent basis that does not justify the engagement of permanent staff.

      For the exemption to apply, two criteria are to be satisfied:
      • The business of the taxpayer must not normally require this service; and
      • The contractor hired to provide the service must have provided a similar service to other businesses during the same financial year.

For example, where a small retailer engages a shopfitter to refit the interior of his/her premises, this would not be a regular requirement of the retailer’s business, and the exemption criteria would be satisfied if the shopfitter has provided services to other retailers during that year.

Conversely, where a large chain store engages a shopfitter permanently on contract or by way of a series of contracts, payment for the shopfitter’s services would be liable to payroll tax.

In cases where the above criteria are not satisfied, but the employer/principal believes that the exemption should apply to a particular contractor, application should be made to the Commissioner for determination.

3. Contracts where services are provided by one contractor for no more that 90 days in a financial year (Section 3A(4)(c))

This exclusion applies to a contract (or set of similar contracts) when the services of the contractor were provided for 90 days or less in any one financial year and were not:
(i) provided by a person who provides similar services to the employer/principal; or
(ii) for, or in relation to, the performance of work where any person who performs the work also performs similar work for the employer/principal.

Note: This exemption does not apply to wages paid to casual, short term or part-time employees which have always been liable to payroll tax.

A contract is eligible for exclusion when the same contractor works for the same employer/principal for 90 days or less in a financial year, and provides similar services on all those days. In determining the number of days worked, all contracts under which the contractor supplies the same type of service are to be included.

Once the 90 days are exceeded, and no other exclusion category applies, the labour component of all contract payments (including those for the first 90 days) becomes wages for the purposes of the Act and liable to payroll tax.

In determining the number of days worked, the carrying out of any work on a given day will count as a full day. Further, the days worked do not have to be consecutive days, as it is the total days in aggregate that determines whether the exclusion applies.

Alternative method

In situations where the principal has difficulty in calculating the total days worked by a contractor, the Commissioner has approved an alternative method of determining application of the 90 day test.

This alternative method uses a formula to calculate the estimated remuneration a contractor would receive from 90 days service with one principal, based on a relevant daily award rate. This provides the base figure. If the actual amount paid to the contractor for the labour component of the contract is equal to or less than the base figure, the contract is deemed eligible for exclusion under the 90 day test.

The formula for calculating the base figure is (A + B) x C
Where:
      A = the daily award rate for the type of work primarily performed by the contractor (current at the commencement of the contract and appropriate to the experience and skill level of the contractor)

      B = 20% of the daily award rate (to allow for sick pay, holiday pay and other payments included in entitlements of employees but which are not typically received by contractors)

      C = 90 days

      Where the contract involves a trade for which there is an approved deduction percentage for the non-labour component (see page 9 of this Ruling), that percentage may be deducted from the total contract payment for the purpose of comparison with the base figure.

      Where no approved deduction percentage exists, the principal may calculate the non-labour component of the contract and request the Commissioner to approve that figure as a deduction percentage for the particular contract.


4. Contracts for services ordinarily required by an employer/principal for less than 180 days in a financial year (Section 3A(4)(b))

This exclusion applies to contracts where the services provided in the contract are required by the business to help it function effectively, but so infrequently that permanent employees are not normally engaged. The requirements of the business are a crucial part of the exemption. Where a particular type of service is required for less than 180 days, the payments made in relation to the contract are exempt from pay-roll tax.

In contrast to the “90 day rule”, which involves determining the number of days on which an individual contractor provides services, this provision focuses on the number of days on which a particular type of service is required (regardless of the number of contractors involved).

For the purpose of this exemption, the carrying on of any work on a given day will count as a day. Further, the days worked do not have to be consecutive – it is the total days (over which the service is provided) during a financial year that determines whether the exemption applies.

Examples:
      A building company engages the services of a roof tiler for 120 days. During the same period, another roof tiler is engaged to perform services for 95 days. No further roof tiling work is required by the company during that year. As the service was required for a total of 120 concurrent days in the financial year, the exemption is satisfied.

      Another building company has a roof tiler on the payroll during a particular financial year. During that same year, a further roof tiler is engaged as a contractor. Clearly the type of service is required for more than 180 days, so the period of the contract is irrelevant and the service of each roof tiler is taxable.
      Note: It is immaterial whether the other persons providing roof tiling services are contractors or employees of the principal in determining the requirements of the business.


5. Contracts where payment is made at a rate exceeding $500 000 per annum (Section 3A(4)(d))

This provision recognises that a person being paid at this rate would not be a regular employee. Consideration of this magnitude suggests that a contractor would be engaging other employees or be providing services to the public generally.


6. Contracts where the Commissioner is satisfied that the services are provided by a person who has performed services of a similar kind to the public generally in the same financial year (Section 3A(4)(e))

This provision allows for those cases which do not qualify under other exclusions but which are not intended to be caught by the legislation. The Commissioner may exclude from payroll tax, a contract where the contractor who provides services:
      • is conducting their own business unconnected with and independent of the person receiving them; and
      • has performed similar services for other customers in the same financial year.

      Both conditions must apply.

      While the other exclusions examine the arrangements between the parties to a contract, this exclusion is concerned with the extent to which the contractor has business arrangements with other persons. For the purpose of deciding whether a relevant contract is eligible for exclusion, it is necessary to examine what the contractor does in their business when not providing services to the person who is the principal in the contract under consideration.
      The eligibility of a particular contract is dependent on the Commissioner’s discretion. In making a determination the Commissioner will review the contractor’s business and consider various issues, including:
      • the degree of entrepreneurial risk assumed by the contractor in operating the business;
      • the use of a business name by the contractor;
      • the history of the formation of the contractor’s business;
      • the nature of the service contractor’s business and the type of services provided;
      • the level of capital investment undertaken by the contractor;
      • organisational structure (whether contractor is a sole trader, partnership or company);
      • whether the contractor engages staff;
      • whether the contractor has separate business premises;
      • whether the contractor advertises his/her services;
      • the extent and nature of plant and equipment provided by the contractor in execution of the services;
      • whether the contractor bears the cost and responsibility for faulty materials/workmanship;
      • whether the contractor quotes competitively for jobs on an all inclusive basis;
      • whether the contractor charges for services on an hourly rate and adds on the cost of materials; and
      • any other factor which the Commissioner considers relevant.

      There are, however, two objective tests that can be applied by a principal in deciding whether to exclude a contract without the need to seek the Commissioner’s decision.
      Test 1 – The Remuneration Test
      This test examines the total amount paid to a contractor in the one financial year and provides eligibility for exclusion where:
      • the contractor’s business operates over a full financial year; and
      • the total amount paid (including payments by any person with whom the principal is in business) is less than 40% of the equivalent annual award for an employee providing the type of services provided.

      Where the total amount paid to the contractor is 66% or more of the equivalent annual award for the type of service supplied, the contract will not be excluded. Where the amount paid is between 40% and 66%, a written application may be made to the Commissioner for determination if the principal considers the exemption should nevertheless apply.

      Test 2 – The Ten Day Test
      This test examines the duration of a relationship between a contractor and a principal and provides eligibility for exclusion where:
      • the contractor provides services to the same principal for an average of 10 days or less a month; and
      • the contract was in force for consecutive months in a financial year.



7. Contracts where the person, who contracts to provide services, engages labour to perform those services (Section 3A(5))

This provision excludes contracts in which the contractor employs or engages other persons, whether employees or contractors, to perform some or all of the work required under the contract.

Eligibility for exclusion, however, requires the following conditions to be met:
      • the contractor must be carrying on their own independent business; and
      • the contractor must be performing the type of work required under the contract.
        Example: Where a carpenter is working under contract to supply carpentry services, engagement of a person to perform administration work for the contractor’s business will not be considered as work which is the object of the contract. In contrast, where workers are engaged to work with the contractor in performing work which is the object of the contract, then the contract would be eligible for exclusion.
          • The contractor must have sole responsibility for completing the terms of the contract and the other workers must be engaged directly by and work only for the contractor.
          This means that the workers engaged by the contractor must have no involvement in the contract, nor be engaged by the principal for similar work under separate contracts.
          Where a number of people work together to perform work for a principal, it is important to be able to establish the actual contractual relationship between the relevant parties.
          In determining the circumstances in which this exclusion will apply, both the nature of the contractor and the nature of the people engaged to work on the contract need to be considered.
      Status of contracting entityNumber of persons engaged by the contractor and working on the contract
        Partnership (of two or more “natural persons”)
        • Partner(s) and one or more other persons; or
        • Two or more persons not being the partners.

        Note: Where the work is performed only by partners in the business, the contract will not be eligible for exclusion.
      Company
        Two or more
        Sole Trader (“natural person”)
        • Sole trader and one or more other person(s); or
        • Two or more other persons.

          As this exemption is applied on a contract by contract basis, each contract is examined on its merits. For example, where a contractor has five contracts with the same principal but engages other workers on only three of them, the eligibility for exclusion would apply to those three contracts.

          Further, where workers are shared by separate contractors having contracts with the same principal, the exclusion may still be available provided the sharing of services is a commercial arrangement. That is:
          • the work done for each contractor is distinct; and
          • the payment made by each contractor is commensurate with the work performed and at a commercial rate.
      Anti-avoidance Provision

      Section 3A(5) contains an anti-avoidance provision, which means the exclusion will not apply where the Commissioner determines that the arrangement was entered into with an intention of avoiding payment of payroll tax.

      In situations where the conditions outlined above are not satisfied, but the principal considers that an exclusion should apply, application should be made to the Commissioner for a determination.

      Prevention of double taxation (Section 3C)

      Where payroll tax is paid in relation to a relevant contract payment by the deemed employer/principal, no other person shall be liable for payroll tax in respect of that payment.

      However, if the deemed principal fails to pay payroll tax in respect of the relevant contract, any other person (other than the deemed principal) who pays for the work under the relevant contract is liable to pay the applicable payroll tax.

      Allowances/deductions for non-labour component of a relevant contract

      Where no exclusion applies and a contract is subject to tax, the labour component of the gross contract payment that is considered to be wages may be calculated by excluding the costs of materials and equipment incurred by the contractor.

      For a contract to be eligible for a deduction of a non-labour component, the contractor must have supplied materials and/or equipment in the ordinary course of carrying out the contract.

      The Commissioner will allow, without verification, the following percentage deductions for particular types of contractors on the basis that they approximate the amount of each contract representing the cost of materials and equipment.
          Type of contractor Deduction from gross payments to contractor
          (* see note below)
          Architect 5%

          Blind fitter 25%

          Bricklayer 30%

          Building supervisor 25%

          Cabinet maker 25%

          Carpenter 25%

          Carpet layer 25%

          Computer programmer 5%

          Draftsperson 5%

          Electrician 25% *

          Engineer 5%

          Fencing contractor 25% *

          Painter 30% (if painter provides the paint)

          15% (otherwise)

          Plasterer (wall & ceiling) 20% *(excludes plaster board fixer)

          Plumber 25% *

          Roof tiler 25%

          Tree feller 25%

          Vinyl floor layer 37%

      *Note: A special case exists for contracts with plaster board fixers, electricians, concreters and plumbers who provide, at their own cost, vehicles, equipment and all of the materials essential for the job. Because the services are considered to be ancillary to the supply of goods, such contracts are excluded under section 3A(3).


      However, this exclusion does not apply to contracts where the materials have been purchased from the person engaging the contractor. In these cases, the contract is considered to be a relevant contract and is liable for payroll tax and the deduction percentage for the relevant trade, as listed above, will apply.

      If a deduction is not yet approved for a particular class of contractor, an employer/principal can apply in writing and supply sufficient details regarding the cost of materials and equipment provided by the contractor to allow a percentage deduction to be calculated.

      Enquiries in relation to this Revenue Ruling should be directed to the Revenue Advice and Audit Section on telephone (03) 6233 5438 or e-mail at audithelp@treasury.tas.gov.au. Copies of this ruling may be obtained from our Web site at www.treasury.tas.gov.au/tax and follow the "Revenue Rulings" link.

      All rulings must be read subject to Revenue Ruling PUB-GEN-2001-1.



      Peter Coe
      COMMISSIONER OF STATE REVENUE

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