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Tough choice on payroll tax

THREE months after WA’s Commissioner of State Revenue announced a payroll tax amnesty in relation to ‘contractor’ payments, the issue is still causing disquiet in the business community.

The aim of the amnesty was to resolve uncertainty over the status of many contractors in construction and other industries.

Genuine contractors are not subject to payroll tax, but the Office of State Revenue has assessed that many contractors are employees.

Deacons partner John Groppoli said the most common difficulty a-rose in cases where a business had both contractors and employees per-forming the same work and receiving regular payments in the same manner.

In these cases, he recommended that the business make a choice – all of the workers should be made either contractors or employees.

Mr Groppoli said having workers who were incorporated and operating through a company structure was not necessarily sufficient to make them contractors.

The Office of State Revenue would look beyond this arrangement and assess the substance of the relationship between the business and the worker.

This would include looking at whether they were paid by the payroll department, which could imply regular payments of a kind received by employees, or whether the contractors issued invoices to the accounts department.

RSM Bird Cameron partner Rami Brass said this issue was causing difficulties for many businesses.

“For the commissioner, the amnesty is a very effective tool for flushing out sub-contractors who may be employees,” he said.

“However it is unfair that penalties may apply in borderline cases. There are many cases where it is genuinely unclear whether the person is a sub-contractor or an employee.”

Mr Brass said that trying to obtain a definitive answer on the status of workers could be very costly and time consuming for businesses.

The legal uncertainty surrounding this area was highlighted by Deacons lawyer Peter Katz, who said there were at least eight common law tests that could be used to decide whether a worker was a contractor or an employee (see below).

“The difficulty with this is that there is not one test. The courts weigh up the totality of tests,” Mr Katz said.

Two recent court rulings, both dealing with courier companies, highlighted the uncertainty.

In one case (Hollis v Vabu) the High Court ruled that a bicycle courier was an employee.

In another case (Vabu v Federal Commissioner of Taxation) the Supreme Court in NSW ruled that couriers were contractors.

This showed that the answer could depend not just on the facts of each case, but also on the reason the question was being asked in the first place, Mr Katz said.

Mr Groppoli advised that payroll tax should be just one factor when businesses choose to engage either contractors or employees.

He said a broader strategic assessment should look at all the costs and benefits of using con-tractors.

Some of the benefits include less legal liability and the ability to engage specialists for short periods of time.

On the flipside, businesses have less control over contractors, who can work for others or delegate work to others.

Also, confidentiality clauses (for instance in relation to client lists) are less likely to be enforceable.

In addition, the courts may still decide that a contractor is an em-ployee.

In this uncertain environment, the Commissioner of State Revenue has asked businesses to accept the payroll tax amnesty.

Under the amnesty, employers have until June 30 to declare their payroll tax obligations in relation to contractor payments where an employer-employee relationship existed.

Employers who accept the amnesty will not have to make payments for the years prior to 1999-2000 but will be obliged to make payments for 1999-2000 onwards.

The commissioner has warned that employers who fail to take up the amnesty will leave themselves liable to payroll tax on five previous financial years and the current year, plus the added burden of penalties.

The State Government expects to raise at least $10 million of additional revenue as a result of its stricter treatment of contractors.

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