Contractors & Personal Services Income - Part 2


4.85% payroll tax is levied on the Victorian wages (or deemed wages) payable by an employer (or group employer) to the employees, directors, certain former directors and designated contractors, if the total taxable Australian wages exceeds $500,000 per annum.

Payroll tax is levied on payments by employment agents arising under employment agency contracts.

Payroll tax is potentially levied on dependent contractors and on independent contractors through the labour hire agency provisions.

State payroll taxation and regulation of labour is complex, inconsistent and uncertain.

Incorrectly classifying the relationship between the end user, any intermediary and the worker can have significant tax consequences for them.

Legislative references are to the Payroll Tax Act 2007 (Vic) (PTAV 2007)

Designated contractors

Each State and Territory levies payroll tax on wages (or deemed wages) within their jurisdiction.

An 'employer' is a person that pays wages or the designated person of grouped employers (sec. 3 & 80 PTAV 2007).

The extended definition of wages includes payments under prescribed contracts and termination payments to dependent contractors (sec. 31 PTAV 2007).

A 'designated contractor' includes a person that supplies services or received services in relation to the performance of work (e.g. an interposed entity) or supplied goods to an individual or group member who performed services on the goods and returned the processed goods, but excludes (Div. 7, Pt. 3 PTAV 2007):

  • payments to certain owner drivers, insurance agents and door-to-door sellers (PTA.006; PTA.007);

  • services performed for no more than 90 days;

  • services that the designated person has engaged others to do all or part of the services;

  • services ancillary to the supply of goods;

  • services of a type not ordinarily acquired by the person that are supplied to the person and are rendered to a number of other people;

  • services of a type ordinarily acquired by the person performed for less than 180 days; and

  • services that the SRO excludes because they are rendered to the public generally.

A designated contractor includes certain interposed entities providing the services of a worker and certain outsourced assembly or repair arrangements (sec. 33 PTVA 2007; PTX-019; PTX-014). 

The definition includes all contractors unless exempt and, in part, avoids the interpretation problems of linking taxable contractors to ‘employee like’ tests such as payments ‘under a contract that is wholly or principally for the labour of the person’.

The exemptions are central to delineating dependent contractors and independent contractors.

Services performed for no more than 90 days

Payments to a designated contractor who provides services for no more than 90 days in total in a financial year are exempt (PTA.035).  In calculating the 90 days:

  • Any service on a day is counted as a full day (PTA.014).
  • Once the 90 day threshold is exceeded, all payments, including for the 90 day period are taxable.
  • Contracts between the designated contractor and the end user are aggregated.

A replacement calculation method permits the end user to test the 90 day threshold by determining the remuneration payable for 90 days to a designated contractor under a formula and comparing it to the amount actually paid in 12 months.  If the amount actually paid exceeds the 90 day payment amount, then the exemption does not apply.

Services that the end user has engaged others to do

Payments to a designated contractor who engages others to perform the services are exempt if the designated contractor is carrying on a business with overall responsibility to complete the designated contract and the services are provided in the course of that business by (PTA.023):

  • at least 2 persons on behalf of a company designate contractor;

  • a partner and at least one other non-partner or at least 2 non-partners of a partnership designated contractor;

  • a sole trader and at least one other person or at least 2 other persons of a sole trader designated contractor; and

  • those persons are engaged by the designated contractor and not directly by the end user.

Services ancillary to the supply of goods

Payments to a designated contractor are exempt where the market value of materials and equipment exceed 50% of the total contract price including the ancillary services (PTA.033).

The value of the materials and equipment and services must be reasonable and substantiated.

Services not ordinarily acquired and are rendered to the public

Payments to a designated contractor for services not ordinarily acquired by the end user are exempt if the designated contractor usually provides those same services to the public generally and derived less than 40% of gross trading income (excluding investment income or remuneration) from the end user during the financial year (PTA.022).

Services performed for less than 180 days

Payments made for services of the type the end user ordinarily required for less than 180 days in a financial year are exempt (PTA.020).

The 180 day test concerns the type of services (e.g. carpentry) acquired from all designated contractors while the 90 day test concerns the actual services provided by a specific designated contractor.  Accordingly, if the type of services is required for less than 180 days in a financial year all payments to those designated contractors are exempt even in respect of a specific designated contractor that may have provided services for more than 90 days.

SRO determines services rendered to the public generally

If a designated contractor is not excluded by the other 5 tests, the SRO can exclude the designated contractor if satisfied that the designated contractor performs services of that kind for the public general in that financial year having regard to the circumstances (PTA.021):

The SRO accepts that a designated contractor is providing services to the public:

  • if the designated contractor provides services to at least 2 end users (not members of a group) for the financial year; and

  • in respect of the end user claiming the exemption, the designated contractor did not provide services for not more than 10 days per month on average (excluding the months no services are provided) for the financial year.


Where any person enters into an arrangement whereby an individual performs services for or on behalf of another person in respect of which any payment is made to the individual for those services and the effect of the arrangement is to reduce or avoid the liability of any person to the imposition of payroll tax, the SRO may disregard the arrangement, determine that any party to the arrangement is an employer and any payment are wages for the purposes of payroll tax (sec. 47 PTAV 2007).

Quetel P/L v CSD (Qld) (1991) 22 ATR 551 considered a similar general anti-avoidance provision in the Stamps Act 1894 (Qld) and applied the principles applicable to the former income tax anti-avoidance provision (sec. 260 ITAA 1936).  Accordingly, the Predication Principle and the Choice Principle would apply to the payroll tax general anti‑avoidance provision.

Under the Predication Principle, ordinary business and family dealings that are not blatant, artificial or contrived are not impermissible tax avoidance (FCT v Newton (1956) 96 CLR 577 at 596 and 646).

Under the Choice Principle, a taxpayer is entitled to choose the form of a transaction to satisfy the requirements of the statute so that the tax attaching under the statute is less than it otherwise would be (FCT v Westraders P/L (1979-1980) 144 CLR 55 at 60-61).

Labour hire intermediaries

The scope of the labour hire payroll tax obligation is uncertain so can apply to intermediaries that are not traditional labour hire firms

An employment agency contract is a formal or informal, expressed or implied contract under which an employment agent procures the services of a service provider for a client of the employment agent but does not include a contract that results in a contract of employment between the service provider and the client.  The legislation deems the employment agent to be an employer, the service provider to be an employee and the payment to the service provider in relation to the provision of the services to be wages (Div. 7, Pt. 3 PTAV 2007).

CXC Consulting P/L v CSR (Vic) [2013] VSC 492 and Freelance Global Ltd v CSR (NSW) [2014] NSWSC 127 have given an expansive meaning to ‘procure’ so the provisions may apply to intermediaries that are not traditional labour hire firms such as any intermediary:

  • providing the services of directors and employees;

  • providing labour and materials that includes a contract for the performance of work (e.g. a builder); and

  • providing the services of a subcontractor (e.g. lawyer engaging a barrister).


The provisions do not contain needed exemptions and the relevant contractor exemptions do not apply to rationalise the expansive scope of the labour hire provisions. 


If the effect of an employment agency contract is to reduce or avoid the liability of a party to the contract to the assessment, imposition or payment of payroll tax, the SRO may disregard the contract, determine that a party to the contract is taken to be an employee and determine that a payment in respect of the contract is taken to be wages (sec. 42 PTAV 2007).


The expansive interpretation of the provision makes it difficult to think of circumstances that the specific anti-avoidance provision would apply.