Payroll Tax – Who is an employee?

By

In the recent decision of Freelance Global Ltd v Chief Commissioner of State Revenue, the Supreme Court of New South Wales ruled that Freelance Global Ltd (“Freelance”), a company which described itself as a specialist in facilitating work for independent contractors, was an “employment agent” for the purposes of payroll tax.

The case highlights the importance of understanding who is an employee for payroll tax purposes as the consequences can be significant if you get it wrong.

How does the Freelance system operate?

In simple terms, Freelance would enter into a contract with a client company, and Freelance would arrange an independent contractor to perform services for that client company. The services performed by the independent contractor for the client company would be as Freelance’s delegate, and the contractors were the beneficiary of a trust that Freelance set up

Were the individual’s contractors or employees for payroll tax purposes?

Freelance designed an in house criterion to assess whether individuals were independent contractors. One of the factors in this criterion included whether the independent contractor functioned through a company. Those accepted as independent contractors by Freelance would be invited to become a beneficiary of a trust.

When an independent contractor would perform services for a client company, as Freelance’s delegate, Freelance would invoice the client company for those services. The Freeland Trust No. 1 would then distribute the amount of the invoice to the independent contractor, less Freelance’s fee, as an advance of the Trust.  It was this distribution that was characterised by the Court as “taxable wages”, and thus subject to payroll tax.

The Judgement is very long and traverses a number of technical areas, which I will not descend into.

This case highlights the importance of ensuring that your business is taking into consideration all “taxable wages” for the purposes of payroll tax. Taxable wages are generally those wages that are paid to an employee.  However, in many instances “contractors” can also be deemed employees under the relevant state Payroll Tax Legislation, which is often very complicated.

This case highlights the importance of considering all aspects of the legislation when determining whether a worker is an employee or an independent contractor. The Court states clearly that simply because a worker retains his or her own corporate structure does not mean they are independent contractors. Unfortunately, there is no hard and fast rule for determining whether a worker is an employee or an independent contractor.

If you are unsure as to whether you are engaging employees or independent contractors please do not hesitate to contact me. It is essential to get it right, as getting wrong can be very costly.

Tagged in: , , , , , , , , , , , , , , , ,


You may also be interested in:

6 Things You Can Expect When Declaring Bankruptcy

Declaring bankruptcy should be your last resort when you are faced with financial difficulties, whether as an individual or as a business owner. It is not exactly a “Get Out of Jail Free” card, as it comes with many adverse consequences, which may significantly impact your financial standing over a considerable period. So what consequences continue reading

How do you determine if a company is insolvent?

The answer to the question “How do you determine if a company is insolvent?” is important because there are serious consequences for a director if debts are incurred after the company has become insolvent, including civil penalties, compensation proceedings and criminal charges. However, it is often difficult to know when a company has crossed the continue reading

What to do if you receive an ATO Director Penalty Notice

Did you know that company directors may potentially become personally liable for unremitted Pay As You Go (PAYG) deductions and Superannuation Guarantee Charges (SGCs)? The Australian Taxation Office (ATO) has significant powers to recover a company’s unpaid liabilities personally through its directors and may issue a Director Penalty Notice (DPN). This article focuses on the continue reading

Liability Limited by a scheme approved under professional standards legislation | Website by VA