Payroll Tax Contractor Deeming Risk for Builders

What it is

Contractor deeming is the reason a builder can believe it is nowhere near the payroll tax threshold and still owe five years of it.

Payroll tax is a state tax on wages. Most builders look at their payroll software, see a wages number well under the threshold, and stop thinking about it. That is the trap. Under the relevant contract provisions, payments to a subcontractor are treated as wages. The subbie invoices under an ABN. The subbie has their own company. It does not matter. If the arrangement is a relevant contract and no exemption applies, the payment is deemed wages, and it counts towards your threshold.

In NSW the provisions sit in Division 7 of Part 3 of the Payroll Tax Act 2007 (NSW), and the same architecture is repeated in the harmonised Acts in Victoria, Queensland, South Australia, Tasmania, the ACT and the Northern Territory. This entry is about deeming. Grouping is covered separately.

Why residential builders are the worst case

A builder running fifteen trades on three houses might pay 600,000 dollars in PAYG wages and 3.5 million dollars to subcontractors. On the payroll number, no registration. On the deemed number, the builder crossed the threshold years ago and has been unregistered ever since. That is not a late lodgement. It is an undisclosed liability accruing tax, interest and penalty every month it runs.

The exemptions, and why builders fail them

An exemption takes the payment back out of the wages base. Revenue NSW publishes seven contractor exemptions. The critical point is that they differ by state. Do not take a NSW list, apply it in Queensland and assume you are safe.

The two most misunderstood are the day-count rules.

• The 90-day exemption. A contractor providing the same or similar services on no more than 90 days in a financial year is exempt. The sting is day 91. Once they exceed 90 days, every payment made to them that year becomes taxable, including everything paid during the first 90 days. It is a cliff, not a sliding scale. A chippy doing two days a week all year is well past it.
• The 180-day exemption. Where a service is one your business ordinarily requires for less than 180 days in the financial year, payments to all contractors providing it are exempt. If you build houses all year, framing, plastering and tiling are required for far more than 180 days.

Two more that builders reach for and usually miss.

• The results contract. It is not satisfied because the subbie quoted a lump sum. It requires a contract genuinely for a result, the subbie supplying the plant and tools needed, and the subbie being liable to fix defects at their own cost. Labour-only trades priced per square metre rarely satisfy it.
• The contractor who genuinely conducts a business. This turns on the subbie servicing the public generally, not on having an ABN. A subbie who works for you and nobody else, on your sites, under your program, is not conducting a business to the public.

Labour hire is a separate door

If you take workers through a labour hire firm, the employment agent provisions may apply instead. They deem the agent to be the employer and tax the payments made to the worker. They are not the relevant contract rules and the exemptions are not the same.

Western Australia runs a different test

WA is not harmonised on contractors and has no relevant contract deeming provision at all. It applies the common law employee test to the totality of the relationship, weighing control, the right to delegate, whether the worker runs an independent business and how integrated they are with the principal. A builder working in both NSW and WA runs two different tests on the same subbie.

What it costs

A retrospective assessment can reach back five years. On top of the primary tax the commissioner adds interest, which in NSW is the market rate plus a premium rate, and penalty tax. On a builder with a few million in annual subbie spend, that is a business-ending number, and it usually arrives during a bank refinance or a sale.

The detection signal and what to do

The signal is one ratio. Take total subcontractor payments for the year, from your TPAR or your accounts payable ledger, and put it beside the wages you declared for payroll tax. If subbie spend is a large multiple of declared wages and you are not registered, you are the risk.

Review every subbie against the exemptions in the state the work is performed, and keep the evidence when you engage them rather than at audit. If you should have registered, a written voluntary disclosure made before an investigation starts generally carries no penalty tax. One made during an investigation still earns a 20 per cent reduction.