Payroll Tax Common Errors
Payments made to contractors or consultants, irrespective of the legal entity type, may be considered wages for payroll tax purposes even if they hold an Australian Business Number (ABN) and/or provide tools and/or equipment.
Employers often confuse employees with contractors. It is essential that before applying the contractors exemptions to workers, businesses properly determine whether a worker is in fact an employee at common law. Revenue Ruling PTA 038 lists factors for consideration when determining whether a workers is an employee.
Employers often mistakenly claim the 180 days exemption as an extension of the 90 days rule and/or for extra labour used for peak periods (for the type of services that are ordinarily required by the business and already performed by its own employees).
Revenue Ruling PTA 020 emphasizes that the focus of the 180 days exemption is on the ‘type of service’ and whether it is ordinarily required by the employer for more than 180 days during a financial year. In contrast to the 90 days exemption, the focus is not on the actual number of days performed by a contractor. The 90 days exemption is explained in Revenue Ruling PTA 035v2.
Employers often mistakenly claim this exemption when the contractor is either not providing those services in the course of conducting a genuine independent business, or when the contractor is providing the majority of its service to that particular business.
Revenue Ruling PTA 021 contains a non-exhaustive list of the factors that are taken into consideration in determining whether a contractor is conducting a genuine independent business. It also sets out what would generally be accepted in making the determination that a contractor has ordinarily rendered services to the general public in a particular financial year.
Note: to claim for this exemption, a client must make a written request to the Chief Commissioner and include evidence that the contractor was providing services to the public in the year for which the claim is made.
Employers mistakenly claim this exemption when the additional labour engaged do not perform core services of the contract or when the additional labour is not engaged directly by the contractor.
Revenue Ruling PTA 023 lists requirements of additional labour for different types of contracting entities and also provides conditions that must be met for this exemption to apply. The exemption applies on a contract by contract basis even if the services are provided by the same contractor during a financial year if there is evidence that each contract is discrete.
Note: no exemption is available if the Chief Commissioner determines that the contract or arrangement was entered into with an intention of avoiding or evading tax, either directly or indirectly.
Many employers are confused by the payroll tax grouping provisions and fail to recognise that a grouping applies in their circumstances. Groupings are imposed by Part 5 of the Act and exist between:
- two companies which are related corporations of each other within the meaning of s50 of the Commonwealth Corporations Act 2001 (grouped under s70 of the Act)
- an employer and a person or persons utilising common employees in a business or businesses it or they carry on (grouped under s71 of the Act)
- two persons who carry on businesses which are commonly controlled (grouped under s72 of the Act)
- an entity and any corporation in which it holds a controlling interest through tracing of interests in shareholdings (grouped under s73 of the Act)
- all members of two groups having a common member (grouped under s74 of the Act).
Read more about service entities supplying services to professional practices which may be grouped by use of common employees.
Whenever you register for payroll tax or complete an annual reconciliation return, you should review your current business structure or structures, the ownership and control of any entity associated with an employer, and any employment arrangements. If you think you may be grouped but are unsure, you can contact us for advice.
If you require formal advice about the grouping implications of your existing circumstances you can seek a private ruling by applying to the Chief Commissioner in writing, setting out in detail the factual circumstances.
Many employers are unaware that members of a group are only allowed a single payroll tax free threshold entitlement between them, or are confused about how this works in practice.
The whole of the NSW threshold entitlement for a payroll tax group must be taken by a single nominated member (the ‘designated group employer’ for the group – s80 of the Act). All other members of the group do not receive any threshold amount, and must pay payroll tax on the whole of the NSW wages they pay (s8 and Schedules 1 and 2A to the Act).
To qualify as a designated group employer of a group, a nominated member must either:
- have paid wages during the preceding financial year that exceeded the threshold amount for that year (within the meaning of Schedule 1)
- be likely to pay wages during the current financial year that will exceed that amount.
If no member of a group is a qualified member, but the group together has paid wages during the preceding financial year that exceeded the threshold amount or will likely pay wages during the current financial year that will exceed that amount, the Chief Commissioner may approve any member of the group to be the designated group employer for the group (s80(3) of the Act).
To nominate a designated group employer for the group, all members of the group must notify the Chief Commissioner in writing (ss80(1) and 80(6) of the Act). This can be done at any time, but the easiest way is to nominate the designated group employer using the facility available within the online annual reconciliation return when completing each group member’s annual reconciliation return.
Note: the designated group employer for a group may, with the approval of the Chief Commissioner, lodge joint returns for itself and other specified members of the group (s87(2) of the Act).
Another common error is employers failing to recognise that all amounts paid in respect of the services of their employees need to be included in their taxable wages, no matter who pays those wages or to whom they are paid. Typical scenarios include:
- where someone other than the employer pays the remuneration to the employee for his or her services (liable under s46(1)(a) of the Act)
- where the employer pays the remuneration to someone other than the employee (liable under s46(1)(b) of the Act)
- where someone other than the employer pays the remuneration to someone other than the employee (liable under s46(1)(c) of the Act).
An even more common error applies to remuneration paid by or to third parties for the services of a director of a company (liable under ss46(2)(a) to 46(2)(c) of the Act). It is important to note that the company is liable in all circumstances where payments are made to someone other than the director or by someone other than the company for the services of a director to that company. This includes circumstances where payments are made to another company which holds shares in your company and places one or more of its employees on your Board as its representative.
Companies also mistakenly exclude amounts paid by or to third parties in relation to former directors of that company and persons who by arrangement are to be appointed as directors of the company (liable under ss46(2) and 46(3) of the Act).
For companies, whenever you complete your annual financial statements or ATO company tax return, you should review the total remuneration paid to or on behalf of any executive or non-executive director and ensure that all these amounts have been included in your payroll tax returns.
Some common errors made by employers when claiming the apprentice and trainee rebates include:
- not claiming the rebate despite being eligible
- only claiming the rebate on the apprentice/trainee hourly wage instead of claiming their total remuneration including superannuation, allowances and bonuses
- continuing to claim the rebate despite the workers no longer being considered an apprentice or new entrant trainee by NSW Department of Industry
- claiming wages for the whole year when the employee was only eligible for a part period
- claiming a rebate for an apprentice or trainee not registered with NSW Department of Industry
- double claiming the same wages paid to the same employee under different payroll tax registrations. This could happen where the client is a member of a group and a rebate for an employee’s wages is claimed under the client registered with NSW Department of Industry and again under the actual employer of the employee
- claiming apprentice/trainee rebate and also claiming Jobs Action Plan (JAP) rebate for the same employee. Employers can claim only one rebate
- claiming wages paid to an apprentice/ trainee registered with an external training provider or engaged through an employment agency. The employment agency may correctly claim the rebate for that employee while the employer that hires through the employment agency also mistakenly claims the rebate
- claiming wages paid to an ineligible trainee (see cl5(5)(b) of Schedule 2 to the Act).
An ineligible trainee is someone that:
- was employed for > 3 months full time
- was employed for > 12 months part time or casual
before entering into their traineeship contract.
Read more about apprentices and trainees.
Employers who employ in more than one jurisdiction may find it difficult to establish in which jurisdiction the wages they pay are liable.
All wages paid to an employee for a month's service are taxable in one jurisdiction. The nexus provisions determine in which jurisdiction the wage is taxable.
Where are wages taxable?
If a worker performs services in only one jurisdiction in a calendar month, payroll tax is payable on those wages in that jurisdiction. If a worker performs services in more than one jurisdiction in a calendar month, a four-tiered test is used to determine where the wages for that month are taxable:
- the employee's principal place of residence
- the employer's registered Australian Business Number address/principal place of business
- the place where the wages are paid to the employee
- the place where most of the services were performed.
Read more about the nexus provisions through our revenue rulings:
- Revenue Ruling No. PTA 001 – NSW payroll tax liability for wages paid by an employer
- Revenue Ruling No. PTA 002 – Expatriate employees Revenue Ruling No. PTA 039 – Payroll Tax Nexus Provisions
- Revenue Ruling No. PT 058 Liability where Services Performed Offshore
Employers should be aware that all contributions to superannuation made on behalf of an employee or director are liable for payroll tax. Common errors include:
- not including superannuation payments made to employees
- not including additional payments in excess of the super guarantee
- not including additional payments made to directors of the business outside the payroll system
- not including payments made to an employee’s superannuation fund under salary sacrifice arrangements as taxable wages
- not including payments made to a ‘relevant contractor’s’ superannuation as taxable wages
- including superannuation payments paid to an owner of an individual sole trader business or to an equity partner of a partnership business as taxable wages (any payments to owners of a sole trader or a partnership business are not taxable wages)
- including contributions made by an employee from their own Pay-As-You-Go (PAYG) post tax pay (these amounts are not taxable as the wage has already been reported as part of the employer’s gross salaries and wages).
Employers often mistakenly claim motor vehicle allowances paid (payment made as a flat or fixed amount) to staff as exempt wages, when no records were kept to demonstrate business kilometres travelled. Sufficient records must be kept in order to claim an exemption and only the amount not exceeding the exempt component can be claimed.
Another common error found in lodgement is not declaring the excess accommodation allowances paid as a taxable wage. If an accommodation allowance has exceeded the exempt component, the excess component is taxable.
Read more about exempt motor vehicle and accommodation allowances.
Employers also frequently fail to report allowances paid to employees as after PAYG tax allowances. All allowances paid to an employee are liable for payroll tax, regardless of how the ATO taxes the allowance.
Employers should be aware that all fringe benefits with taxable value under the Fringe Benefits Tax Assessments Act 1986, except tax-exempt body entertainment fringe benefits, are taxable for payroll tax.
The value of fringe benefits for payroll tax purposes is the total of the Type 1 and Type 2 aggregated amounts grossed up by the Type 2 rate of 1.9608 (01 July 2015 onwards)
Some common errors made by employers in relation to taxable fringe benefit amount include:
- omitting to declare the taxable value of fringe benefits
- using the reportable fringe benefit amount from PAYG Summaries/ Payroll system
- using the amount of fringe benefits tax (FBT) payable
- using the fringe benefits taxable amount (line item 15 on FBT return) when Type 1 fringe benefits were paid
- deducting meal entertainment fringe benefits
- deducting car and novated lease salary sacrifice amount from the car benefits taxable value.
Read more about fringe benefits through our Revenue Ruling PTA 003.