Definition a taxing matter

A KEY test to prove workers are bona fide contractors for income tax purposes is being proposed as an option for defining contractors under WA’s extended payroll system.

From July 1 the WA Government wants to drag what it calls “employee-like” contractors into the payroll tax net. It also will lift the top payroll tax rate to 6 per cent from January 1.

However, the Government has given no indication of how a person will be deemed to be an “employee-like” contractor.

Discussions are starting soon between Government and industry groups to define “employee-like” contractors.

One proposal is to apply the key test to show whether a contractor had been caught by alienation of personal services income provisions.

Under alienation provisions, contractors can be treated like employees for income tax purposes unless they can satisfy the results test. To satisfy the test, contractors are required to provide a “result”, provide their own tools to produce the result and be liable for the cost of rectifying defective work.

Using the results test for payroll tax purposes will provide uniformity between state and federal laws and be easier for the employer to assess whether a person is a contractor for payroll tax purposes.

However, the definition of a contractor differs between different types of legislation, which could make it hard to apply the test. Another concern is that alienation provisions affected the employee while payroll tax affects the employer.

Labour hire firms, who have already faced problems with the alienation provisions, are concerned with what the payroll tax provisions could mean for them.

There are already provisions within payroll tax legislation that make labour hire firms liable for the payroll tax liabilities on some of the contractors they “employ”.

This could increase the payroll tax burden they have to face.

Taxation Institute WA president Graham Cotterill said what the WA Government was proposing was very similar to what the Federal Government proposed with alienation.

“But the two tax provisions will not affect each other,” Mr Cotterill said.

“If the State Government can get some of the criteria to ensure people are contractors on the same ground as the Federal Government it will be easier for everyone.”

With the payroll tax, if a contractor cannot meet whatever test the Government proposes, he or she may find it harder to get work.

However, Mr Cotterill said there was a chance that contractors who could show they had passed the Federal Government’s alienation tests could become more hireable.

Jackson McDonald tax consultant Graham Harrison, who will be representing the CCI on the consultative group, agrees a contractor who could show he or she had passed the alienation tests could become more hireable.

“But the key difference between alienation and payroll tax is the alienation provisions affect employees and payroll tax affects employers,” Mr Harrison said.

“The concern I have with this is the Government is trying to catch more people in the net and meeting the alienation requirements could keep people out of the net.”

Master Builders Association director of housing Gavin Forster said the payroll tax extension could add to the number of different definitions of a contractor.

Contractors are defined differently for workers’ compensation purposes, in common law and for alienation provisions.

“In the past contractor definitions have not been transferable between legislation and there’s no reason why this should change,” Mr Forster said.

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