Payments to a contractor can be subject to payroll tax under multiple bases.  Of these bases, 3 are now well-known.  This article summarises the 3 "known" bases and also discusses a potential 4^th basis. 

Below, when I refer to a “section” (sometimes abbreviated to “s”) I am referring to a section of the NSW Payroll Tax Act. 

THE 3 "KNOWN" BASES

Payroll tax applies to payments made by a business entity (a “taxpayer”) to a contractor under any of the following 3 bases:

1. Employee: The contractor, though labelled a “contractor”, is in fact an employee of the taxpayer under the general law meaning of the term employee.
2. Employment agent under s 37: The taxpayer is an “employment agent” under the definition of that term in section 37 of the Act.  A taxpayer will satisfy the definition of “employment agent” in s 37 if, under a contract, the taxpayer procures another person to provide labour in and for the conduct of the business of the taxpayer’s client (see, eg, the December 2023 decision of the NSW Court of Appeal in Chief Commissioner of State Revenue v Integrated Trolly Management Pty Ltd [2023] NSWCA 302).
3. No contractor exemption: The contract between the taxpayer and the contractor does not qualify for any of the “contractor exemptions” listed in section 32(2) of the Act.

In other words, if a business taxpayer makes a payment to a contractor, the payment will be liable to payroll tax (subject to the taxpayer meeting the payroll tax threshold and not being exempt from payroll tax, eg, under Part 4 of the Act) unless the taxpayer can show that (a) the contractor is not an employee; (b) the taxpayer is not an “employment agent” as defined in s 37; and (c) one of the “contractor exemptions” in s 32(2) applies to the contract between the taxpayer and the contractor.  

THE 4^th BASIS

There may also be a 4^th basis under which payroll tax could apply to payments to a contractor.  It is section 42 of the Act.  Under section 42, any party to an employment agency contract, including a party that is not the employment agent (eg, the party to whom workers are supplied by the employment agent) can be deemed to be an employer and have payments they make under the contract treated as wages for payroll tax purposes.  

Section 42 states:  [I]f the effect of an employment agency contract is to reduce or avoid the liability of any party to the contract to … payroll tax, the Chief Commissioner may … determine that any party to the contract is taken to be an employer for the purposes of this Act; and determine that any payment made in respect of the contract is taken to be wages for the purposes of this Act.

When might Revenue NSW seek to apply section 42? 

One possible situation is where the employment agent (as defined in s 37) under an employment agency contract is not itself liable for payroll tax, eg, because it is below the payroll tax threshold. 

Compare the scenarios where a business entity that requires workers for use in its business obtains workers from:

(a) multiple small contractors (which in turn engage sub-contractors to provide labour to the business entity), each of which is under the payroll tax threshold; vs

(b) a single, large, contractor (which in turn engages sub-contractors to provide labour to the business entity) which is over the payroll tax threshold.

Although the small contractors and the large contractor will both satisfy the definition of “employment agent” in s 37, only the large contractor will be liable to payroll tax on the payments it makes to sub-contractors.  Therefore, under scenario (b), payroll tax will be payable to Revenue NSW, but under scenario (a), it might not be.  Query whether Revenue NSW could successfully seek to apply s 42 to a contract between the business entity and a small contractor.  If so, Revenue NSW could require the business entity to treat payments to the small contractor as taxable wages notwithstanding that:

• the small contractor is not an employee of the business entity;
• the business entity is not an employment agent; and
• the contract between the business entity and the small contractor qualifies for a contractor exemption.

As far as I am aware, there is no caselaw or other guidance on section 42.  However, the application of s 42 may not be entirely theoretical – in the course of arguing a case for a client, I have been asked by Revenue NSW to provide submissions on the application of this section.