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Most contractors employed via a recruitment agency to face around 7% pay cut from 1 July

By aaa123 - 14 June 2014 50

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.

What’s Your opinion?


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50 Responses to
Most contractors employed via a recruitment agency to face around 7% pay cut from 1 July
1
rommeldog56 2:08 pm
15 Jun 14
#

Does anyone know if the above is, in whole or in part, correct ? How would one find out ?

Surely not ? Maybe to help offset the reduction in ACT payrol taxes ? How could the ACT Gov’t justify this ?

Still, I suppose anything can now be expected from this Government – it would pail into insignificance compared to the toy train set, hastening to triple Annual Rates, building a jail that was already too small – despite being told so, great quality road resurfacing, going into debt for another b$1 when already deeply in debt, Skywhale, the new “CBR” symbol, project cost blow outs being the norm, more local MLAs, etc, etc.

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2
dungfungus 3:33 pm
15 Jun 14
#

Well, the socialists masquerading as the ACT Government are already locked us in to nearly $5 billion of debt going forward so they have to raise revenue somehow to pay the interest on the borrowings and preserve the sacred AAA credit rating.
Clearly, they don’t understand the main purpose of operating a corporation to contract services with.
It’s the “limited liability” component that a company provides. All they see is a possible tax avoidence scheme and a chance to force all contractors to join a trade union.
Politicians who make blunders still collect their pay and have no accountability so why shouldn’t ratepayers who need to operate as corporations?
Obviously the Government is not interested in attracting private sector business to the Territory.

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3
switch 4:15 pm
15 Jun 14
#

rommeldog56 said :

the new “CBR” symbol

Which is so obvious that they have to write “Canberra” underneath it so people know what it means.

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4
milkman 4:48 pm
15 Jun 14
#

More stupidity from our commy overlords. Reducing the pay of people who already have no job security just means these people will clam up and spend less into the local economy.

What are these idiots thinking?

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5
aaa123 5:02 pm
15 Jun 14
#

rommeldog56 said :

Does anyone know if the above is, in whole or in part, correct ? How would one find out ?

As the OP this information is generally correct. I may not understand the finer detail and it is possible that the legislation may be changed before being passed, but it will involve a cut to contractors income. It really amounts to a sneaky way of introducing a state income tax. Business don’t care about it (at least in the short term) as it comes out of the contractors income directly.

The management company that I use has communicated to us that they have contacted many recruitment agencies and that they have generally stated that they intend or are considering withholding the payroll tax from our payments from 1 July before it passes into law.

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6
rommeldog56 7:50 pm
15 Jun 14
#

aaa123 said :

rommeldog56 said :

Does anyone know if the above is, in whole or in part, correct ? How would one find out ?

As the OP this information is generally correct. I may not understand the finer detail and it is possible that the legislation may be changed before being passed, but it will involve a cut to contractors income. It really amounts to a sneaky way of introducing a state income tax. Business don’t care about it (at least in the short term) as it comes out of the contractors income directly.

The management company that I use has communicated to us that they have contacted many recruitment agencies and that they have generally stated that they intend or are considering withholding the payroll tax from our payments from 1 July before it passes into law.

Well, if that is the case – and I’ll await the “official” announcement by the ACT Gov’t (assuming there is one !) – then who was scared for the future of Canberra under a Federal Coalition Government ? Who needs the Fed’s to do over Canberra – the ACT Labor/Green’s Gov’t is doing a great job of stuffing this place up instead !!! OMG. What next ???

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7
farout 9:29 am
16 Jun 14
#

Aren’t they also increasing the payroll tax threshold? So if the Management Company structures itself to be a bunch of small companies below the threshold (which is what I assume is what they do already), I can’t see how they would be liable for payroll tax.

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8
dks00k 10:18 am
16 Jun 14
#

farout said :

Aren’t they also increasing the payroll tax threshold?

Yes.

So you would assume that some small businesses will be better off under the proposed changes.

However the changes also specifically target the relationship between the contractor, management company, and recruitment agency which negates the threshold altogether. As a contractor, I would question how the payroll tax can be passed on until current contracts expire. Surely passing on a tax, for which a contractor is not legally liable for, would be a breach of contract??

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9
farout 11:58 am
16 Jun 14
#

dks00k said :

However the changes also specifically target the relationship between the contractor, management company, and recruitment agency which negates the threshold altogether.

Where can one find the details how it specifically targets the relationship? Is there a draft bill or similar available at this point? What if both the management company and the recruitment agency are below the threshold – would that get around the liability?

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10
CUNNINGSTUNTS 12:40 pm
16 Jun 14
#

“It will mean that most of these contractors will lose their payroll tax exemption.”

Feel free to correct me here but the above quote isn’t correct, the payroll tax exemption is applied to the employer not the employee, why people persist in stating that its a tax on contractors?

This change will mean the Payroll company must pay the tax, as such the fee’s will need to increase to cover the new tax that COMPANY must pay, at no point is the government introducing payroll tax to employees.

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11
dks00k 1:10 pm
16 Jun 14
#

farout said :

Where can one find the details how it specifically targets the relationship?

The Payroll Tax Amendment bill is here…

http://www.legislation.act.gov.au/b/db_49730/current/pdf/db_49730.pdf

I’m no expert but it looks incomplete to me. I gather it means that Schedule 2, section 2.14 (1) (g) will be repealed from the current Act (page 94)…

http://www.legislation.act.gov.au/a/2011-18/current/pdf/2011-18.pdf

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12
VYBerlinaV8_is_back 1:33 pm
16 Jun 14
#

milkman said :

More stupidity from our commy overlords. Reducing the pay of people who already have no job security just means these people will clam up and spend less into the local economy.

What are these idiots thinking?

It’s an idealogical tax grab, that won’t raise much but appeals to the social justice crew.

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13
dungfungus 2:07 pm
16 Jun 14
#

What happens if the recruitment company is domiciled in another State or Territory?
Remember Canberra in the days of regulated drinking hours and the daily exodus to Queanbeyan?
I’ll bet the bean counters have already got this sorted.
The socialists have lost again.

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14
p1 3:41 pm
16 Jun 14
#

dks00k said :

As a contractor, I would question how the payroll tax can be passed on until current contracts expire. Surely passing on a tax, for which a contractor is not legally liable for, would be a breach of contract??

This was my first thought. If I am employed by a company to do a job, that company can’t just start putting less money into my bank account each week for the same amount of work? But perhaps I am missing the the idea?

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15
aaa123 5:56 pm
16 Jun 14
#

CUNNINGSTUNTS said :

“It will mean that most of these contractors will lose their payroll tax exemption.”

Feel free to correct me here but the above quote isn’t correct, the payroll tax exemption is applied to the employer not the employee, why people persist in stating that its a tax on contractors?

This change will mean the Payroll company must pay the tax, as such the fee’s will need to increase to cover the new tax that COMPANY must pay, at no point is the government introducing payroll tax to employees.

The legislation will require the recruitment agency to collect and pay the tax to the ATO. However the recruitment agencies can and will deduct the payroll tax from the amount forwarded to the management company, in turn the management company reduces the contractors pay by the same. In addition, because it is the recruitment agency that is required to collect the tax on the gross payments the “payroll tax” will actually be a tax on revenue. The management company doesn’t forward all of the funds to the contractor in the form of salary and other benefits. Expenses come out first.

So yes it is a tax on contractors that will come directly out of their pay packet. The client, the recruitment agency and the management company will not have to pay a cent, it will be just withheld from the contractors income and forwarded to the ATO.

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