The ACT government proposes to implement a retrospective change to the payroll tax system which will apply from July 1 (although it is not expected to be passed until later in the year).
This is the details of the change, as best I understand it.
The change will affect most contractors who are employed via a recruitment agency and use a management company. It will mean that most of these contractors will lose their payroll tax exemption.
In anticipation of the change becoming law in it’s current form, from 1 July recruitment agencies are expected to begin deducting 6.85% of the gross payments which are paid to the management company and then forwarded to the contractor by the management company after deducting such things as admin fees and insurances (and withholding super, PAYG tax etc).
As the payroll tax will be applied to the gross payment (with the recruitment agency having no knowledge of how much of that payment is returned to the contractor in the form of income and other benefits), the % of income that the contractor will lose will be greater than 6.85% as it applies to money the contractor never receives in the form of income, fringe benefits etc. I believe that if the contractor received a benefit from the management company that an employer might be exempt from a payroll tax liability under other circumstances, the contractor would still be charged payroll tax on that component.
It seems there will be no exemptions in place for contracts signed prior to the announcement ie where the contractor did not have the opportunity to factor this extra cost into their negotiations and rate charged.
It seems that contractors are faced with a choice:
- Dump the management company and go direct through the recruitment agency (assuming that there would be a reduction in administration costs to somewhat offset the income loss). However this would be a guarantee of payroll tax liability even if the legislation does not pass. It may also not be a good option for people with salary packaging or other arrangements in place with their management company.
- Hope that there is a change to the proposed legislation so that the tax is not retrospective or is delayed until next year. If that happens the contractor would (hopefully) receive a refund of the payroll tax withheld by the agency.
I would think that there would also be a major impact on businesses providing the management company services.