For many Australian businesses, payroll tax was once viewed simply as a tax on wages. Today, however, it has evolved into a high-stakes compliance environment where the definition of "employer" is broader than ever.
As state revenue offices shift from a "low rate, broad base" approach to a "high rate, narrow base" strategy, they are increasingly targeting arrangements that businesses previously assumed were exempt—specifically regarding contractors and grouped entities.
If you engage contractors, use service trusts, or operate across state lines, here is what you need to know about the current legal landscape.
1. The "Contractor" Trap: When is a Contractor an Employee?
The most significant area of audit activity currently revolves around the "relevant contract" provisions. Revenue offices may look beyond the written contract to the substance of the arrangement. If a contract supplies services "for or in relation to the performance of work," it may be deemed a taxable arrangement.
Recent case law highlights how small factual differences can lead to vastly different outcomes.
The Loss: Medical Centres (Optical Superstore and Thomas and Naaz)
Medical practices have traditionally operated on a model where doctors are independent contractors, and the practice collects patient fees on their behalf, remitting the net amount to the doctor.
The Verdict: The Courts rejected the "conduit theory" (the idea that the practice was simply passing money through). Because the agreements provided services in relation to work, the payments to doctors—including Medicare rebates—were deemed "wages" for payroll tax purposes.
The Win: The Gig Economy (Uber Australia vs Chief Commissioner)
In a landmark 2024 decision, Uber successfully argued that its drivers were not employees for payroll tax purposes.
The Verdict: The Court distinguished this from the medical cases. It found that Uber acted as a collection agent for the driver. Crucially, the rider pays the driver (via Uber) for the work; Uber does not pay the driver for the work. This subtle distinction—that the payment was not "in relation to the driver's work" but rather a pass-through of the rider's payment—placed Uber outside the relevant contract provisions.
Key Takeaway
The "Uber defense" is highly specific. Unless you are acting strictly as a collection agent where the end-user pays the worker directly, your contractor arrangements may still be at risk.
2. The "Employment Agent" Risk
Businesses often use employment agencies to procure workers, assuming the agency handles all tax liabilities. However, under Employment Agent provisions, the agent closest to the business client is generally treated as the employer.
In the recent XL Retail Services case, a company providing trolley collection and cleaning services was deemed an employment agent. Even though the workers were subcontractors, the aggregate payments made to them were subject to payroll tax because XL Retail procured their services for a client.
3. The Myth of National "Harmonisation"
While Australian states claim to have a "harmonised" payroll tax system, the reality is a patchwork of inconsistent rates, thresholds, and rules.
Threshold Roulette
Determining if you are liable depends on where you are. The tax-free threshold ranges from $900,000 in Victoria to $2,000,000 in the ACT.
The WA Anomaly
Western Australia is a significant outlier. Unlike other states, WA legislation does not contain the standard "contractor" or "employment agent" provisions.
The Compliance Nightmare
This means a national business must calculate its "national payroll" differently for WA than for the rest of the country. You cannot simply apply one calculation method across all jurisdictions.
4. Grouping: You Can't Split to Save
To prevent businesses from splitting into smaller entities to stay under the tax-free threshold, strict "grouping" rules apply.
The Trigger
Entities can be grouped via:
- Related corporations
- Common control (directors/owners)
- Inter-use of employees
The Risk
Once grouped, you are entitled to only one tax-free threshold for the entire group. More dangerously, all group members are jointly and severally liable for the tax debt. Revenue offices can recover unpaid tax from a group member that employs no one, simply because they are part of the group.
Trusts and Retroactive Fixes
You cannot retrospectively "fix" a grouping issue. In Smeaton Grange Holdings, a taxpayer attempted to disclaim an interest in a trust to avoid grouping. The Court ruled that liability is based on the state of affairs at the time the liability arose—you cannot rewrite history.
5. Managing the Risk
Given the complexity, "set and forget" is not a viable strategy for payroll tax.
Check Nexus Rules
If employees work across state lines, apply the four-step "Nexus" test (starting with their principal place of residence) to determine which state gets the tax.
Medical Practices (NSW)
Be aware of the new rebate for GP wages (effective 4 September 2024), provided your practice meets bulk-billing thresholds (80% for Sydney, 70% elsewhere).
Director Liability
Remember that directors can be issued penalty notices and held personally liable for unpaid company payroll tax.
Conclusion
As Bruce Collins of Tax Controversy Partners notes, "Small differences of fact make big liability differences." With aggressive audit programs and complex interstate differences, professional advice is essential to ensure your contractor and grouping arrangements do not trigger unexpected liabilities.
Understanding these critical areas—contractor classification, employment agent risks, interstate variations, and grouping provisions—is essential for any Australian business managing a payroll.
