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

By 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.

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

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.

dungfungus 3:33 pm
15 Jun 14
#2

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.

switch 4:15 pm
15 Jun 14
#3

rommeldog56 said :

the new “CBR” symbol

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

milkman 4:48 pm
15 Jun 14
#4

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?

aaa123 5:02 pm
15 Jun 14
#5

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.

rommeldog56 7:50 pm
15 Jun 14
#6

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 ???

farout 9:29 am
16 Jun 14
#7

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.

dks00k 10:18 am
16 Jun 14
#8

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??

farout 11:58 am
16 Jun 14
#9

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?

CUNNINGSTUNTS 12:40 pm
16 Jun 14
#10

“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.

dks00k 1:10 pm
16 Jun 14
#11

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

VYBerlinaV8_is_back 1:33 pm
16 Jun 14
#12

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.

dungfungus 2:07 pm
16 Jun 14
#13

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.

p1 3:41 pm
16 Jun 14
#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?

aaa123 5:56 pm
16 Jun 14
#15

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.

aaa123 6:01 pm
16 Jun 14
#16

p1 said :

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?

They can and will withhold the money direct from the contractors paycheck. In fact, many of the recruitment agencies seem to have decided they can do this even before the changes are passed into law! It isn’t like a normal employee/employer relationship where certain things are protected/illegal.

rommeldog56 6:20 pm
16 Jun 14
#17

Remit funds to the ATO ? I thought the OP says that its the ACT Government, not the Feds/ATO ? If its a form of or extension to payroll tax, then wouldn’t it be the ACT Government ?

If it is the Feds/ATO, then it would apply Australia wide – not just in Canberra.

milkman 6:22 pm
16 Jun 14
#18

The recruiter shouldn’t be withholding the money. The payroll company is liable for the tax, that is where it will be taken from.

aaa123 6:40 pm
16 Jun 14
#19

rommeldog56 said :

Remit funds to the ATO ? I thought the OP says that its the ACT Government, not the Feds/ATO ? If its a form of or extension to payroll tax, then wouldn’t it be the ACT Government ?

If it is the Feds/ATO, then it would apply Australia wide – not just in Canberra.

Yes I did realise moments after my post that ATO was incorrect and fully expected to be pulled up on it.. it is a state tax and would be sent to wherever state taxes are remitted.

aaa123 6:42 pm
16 Jun 14
#20

aaa123 said :

rommeldog56 said :

Remit funds to the ATO ? I thought the OP says that its the ACT Government, not the Feds/ATO ? If its a form of or extension to payroll tax, then wouldn’t it be the ACT Government ?

If it is the Feds/ATO, then it would apply Australia wide – not just in Canberra.

Yes I did realise moments after my post that ATO was incorrect and fully expected to be pulled up on it.. it is a state tax and would be sent to wherever state taxes are remitted.

Oops again I meant “territory tax”.

aaa123 6:44 pm
16 Jun 14
#21

milkman said :

The recruiter shouldn’t be withholding the money. The payroll company is liable for the tax, that is where it will be taken from.

Not as far as I understand from the proposed law. The recruitment agencies wouldn’t be threatening to withhold the tax if it wasn’t their problem

Dondon 7:33 pm
16 Jun 14
#22

milkman said :

The recruiter shouldn’t be withholding the money. The payroll company is liable for the tax, that is where it will be taken from.

No, the payroll tax is applied at the agent level, with the exemption in place the agencies were able to get through not paying the tax as the contractor would be exempt through the use of a payroll company. Now that the tax needs to be paid for some people their agency will provide a basic pay service and the contractor won’t need to utilise a payroll company if they don’t require any salary packaging options.

Andrew Barr MLA 8:41 pm
16 Jun 14
#23

The Payroll Tax Act 2011 (http://www.legislation.act.gov.au/a/2011-18/default.asp) currently provides a number of payroll tax exemptions for employment agents.

There are seven specific exemptions available when wages are paid by an employment agent to a subcontractor, under a contract between the agent and the subcontractor, for work performed by that subcontractor for a client of the employment agent. The subcontractor must demonstrate it is a bona fide employer in its own right.

The exemption found at Schedule 2, Part 2.3, section 2.14 (1) (g) of the Act exempts wages if the subcontractor is a genuine employer of the individuals who perform the work for which wages are paid.

This provision is inconsistent with the approach of other Australian jurisdictions.

The Act does not define ‘genuine employer,’ leading to complexities in administration and application.

The Government proposes to amend the Act to remove the exemption provided to employment agents on wages paid to subcontractors simply due to being a genuine employer. The 6 remaining exemptions found in the Act will continue to be available to employment agents in the appropriate circumstances.

By removing the exemption found at Schedule 2, Part 2.3, section 2.14 (1) (g), a payroll tax exemption will no longer be available where a contractor employs themself or joins with other unrelated contractors to create a payroll company.

This will remove an exemption in the current legislation that provides a tax advantage to contractors who are not bona fide employers.

Where a contractor is a body corporate, partnership or sole trader and has two people working on a contract, one of whom is an employee of the business, the payroll tax exemption will continue to apply under sections section 2.14 (1) exemptions (c), (d) and (e).

This amendment will provide more certainty to Canberra employment agents and contractor communities with regards to their payroll tax liabilities under the Act.

Repealing the ‘genuine employer’ exemption will remove confusion around the exemption of wages under the Act and provide a level playing field for those employment agents competing for contractors.

This will increase certainty of the ACT’s taxation regime and promote economic growth.

These amendments also align with the priorities of taxation reform, by providing for the administration of a more efficient, equitable and simpler form of taxation.

Dondon 9:19 pm
16 Jun 14
#24

Andrew Barr MLA said :

These amendments also align with the priorities of taxation reform, by providing for the administration of a more efficient, equitable and simpler form of taxation.

However these changes have come in with minimal notice to allow Contractors renegotiate their rates to cover the pay roll tax. Zero transition period.

I will now be $15k out of pocket for the next financial year as contracts have already been negotiated and signed.

Dondon 9:21 pm
16 Jun 14
#25

ALso you fail to address how the tax is going to shaft contractors for monies earned in June yet paid in July.

aaa123 9:23 pm
16 Jun 14
#26

Andrew Barr MLA said :

The Payroll Tax Act 2011 (http://www.legislation.act.gov.au/a/2011-18/default.asp) currently provides a number of payroll tax exemptions for employment agents.

There are seven specific exemptions available when wages are paid by an employment agent to a subcontractor, under a contract between the agent and the subcontractor, for work performed by that subcontractor for a client of the employment agent. The subcontractor must demonstrate it is a bona fide employer in its own right.

The exemption found at Schedule 2, Part 2.3, section 2.14 (1) (g) of the Act exempts wages if the subcontractor is a genuine employer of the individuals who perform the work for which wages are paid.

This provision is inconsistent with the approach of other Australian jurisdictions.

The Act does not define ‘genuine employer,’ leading to complexities in administration and application.

The Government proposes to amend the Act to remove the exemption provided to employment agents on wages paid to subcontractors simply due to being a genuine employer. The 6 remaining exemptions found in the Act will continue to be available to employment agents in the appropriate circumstances.

By removing the exemption found at Schedule 2, Part 2.3, section 2.14 (1) (g), a payroll tax exemption will no longer be available where a contractor employs themself or joins with other unrelated contractors to create a payroll company.

This will remove an exemption in the current legislation that provides a tax advantage to contractors who are not bona fide employers.

Where a contractor is a body corporate, partnership or sole trader and has two people working on a contract, one of whom is an employee of the business, the payroll tax exemption will continue to apply under sections section 2.14 (1) exemptions (c), (d) and (e).

This amendment will provide more certainty to Canberra employment agents and contractor communities with regards to their payroll tax liabilities under the Act.

Repealing the ‘genuine employer’ exemption will remove confusion around the exemption of wages under the Act and provide a level playing field for those employment agents competing for contractors.

This will increase certainty of the ACT’s taxation regime and promote economic growth.

These amendments also align with the priorities of taxation reform, by providing for the administration of a more efficient, equitable and simpler form of taxation.

Mr Barr,

I thank you for replying to this post.

However you have not addressed in your post my main concerns, perhaps I did not state them clearly.

Whatever justification you have for the changes, they are clearly unfair for contractors who have already entered into fixed rate, fixed term contracts prior to the announcement.

Those contractors who have done so will have about 7% less take home pay and they will still be locked into their contracts which would mean penalties if they broke their contract, even if they could find another client who would provide a better rate to take into account the extra costs (in the current climate).

You also do not address my point that the payroll tax will be applied to gross payments and not just to components of the contractors salary package.

Further these changes should not be retrospective. I do not understand the justification for that. The changes should only apply to contracts signed after the announcement. The extra taxes should only apply after the changes have become law.

rommeldog56 10:34 pm
16 Jun 14
#27

Andrew Barr MLA said :

This will increase certainty of the ACT’s taxation regime and promote economic growth.

So, Andrew how will removing 7% of a persons salary promote economic growth ? They will not have those $ to spend in the ACT economy !

Andrew Barr MLA said :

This provision is inconsistent with the approach of other Australian jurisdictions.

So, if consistency in the ACT with approaches in other jurisdictions is so important Andrew, when will your Gov’t repeal the progressive abolition of stamp duty on purchase of a house here and the corresponding ramping up of the Annual Rates each year for all ACT Ratepayers, because they have already paid stamp duty ! Now, that would restore consistency with other jurisdictions ’cause they are not dumb enough to do that in the first place.

Mark of Sydney 9:08 am
17 Jun 14
#28

As a small business operator, I’m a little puzzled by this. Our turnover is under the payroll tax threshold ($1.75m pa in the ACT if I understand it correctly), and so we don’t pay the tax.

But all this talk about recruitment and employment agencies? Are we talking about bona fide businesses here, or employment arrangements dressed up as contracting arrangements? If so, you may have bigger compliance issues to deal with than payroll tax — ATO tax obligations, workers compensation and other insurance risks such as public liability spring to mind.

If you’re operating a genuine business why would you be engaged through an employment agency?

CUNNINGSTUNTS 10:11 am
17 Jun 14
#29

Mark of Sydney said :

As a small business operator, I’m a little puzzled by this. Our turnover is under the payroll tax threshold ($1.75m pa in the ACT if I understand it correctly), and so we don’t pay the tax.

But all this talk about recruitment and employment agencies? Are we talking about bona fide businesses here, or employment arrangements dressed up as contracting arrangements? If so, you may have bigger compliance issues to deal with than payroll tax — ATO tax obligations, workers compensation and other insurance risks such as public liability spring to mind.

If you’re operating a genuine business why would you be engaged through an employment agency?

Because they manage the payroll, taxes and insurances as you correctly highlighted these are things all contractors must consider. Having a management company is a far cry away from the “employment arrangements dressed up as contracting arrangements” you labelled it as…

Mark of Sydney 10:56 am
17 Jun 14
#30

But I didn’t refer to the management company, but to the employment agency. Again, if you’re operating a genuine business why would you be engaged through an employment agency? Sounds like employment to me.
As I understand it, the payroll tax exemption for small businesses is designed to encourage business activities. I’m not making a judgement on the OP’s specific arrangements, but how many of the arrangements caught out by the new rules involve people working full-time on a client’s premises, using the client’s systems and equipment, and not really taking on any additional risks than an employee doing similar work, other than the lack of security associated with a fixed-term contract? How would this be any more a business activity than working as a casual employee whose pay rate reflects the fact that their employer is liable for payroll tax?

CUNNINGSTUNTS said :

Mark of Sydney said :

As a small business operator, I’m a little puzzled by this. Our turnover is under the payroll tax threshold ($1.75m pa in the ACT if I understand it correctly), and so we don’t pay the tax.

But all this talk about recruitment and employment agencies? Are we talking about bona fide businesses here, or employment arrangements dressed up as contracting arrangements? If so, you may have bigger compliance issues to deal with than payroll tax — ATO tax obligations, workers compensation and other insurance risks such as public liability spring to mind.

If you’re operating a genuine business why would you be engaged through an employment agency?

Because they manage the payroll, taxes and insurances as you correctly highlighted these are things all contractors must consider. Having a management company is a far cry away from the “employment arrangements dressed up as contracting arrangements” you labelled it as…

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