On Thursday evening the ACT Legislative Assembly passed the ACT Payroll Tax Reform Bill. This Bill prevents “genuine employers” from being exempt from payroll tax if they pick up contract work through a recruitment agency. Unfortunately, yet again, the ACT Government has done a poor job in formulating policy.
This new policy has the following effect – if a company, sole trader, or partnership:
- directly enters into a contract with a client, then the Payroll Tax Threshold applies to them;
- enters into a contract via a Recruitment Agency, where at least one director and one employee works on the contract, then the Payroll Tax Threshold applies to them; or
- enters into a contract through a Recruitment Agency, where only one company member, or just employees, or just directors work on the contract, then the Payroll Tax Threshold does not apply and they will always have to pay Payroll Tax on the contract.
What were they thinking??? If there was to be any fairness to this legislation it should apply to all business contracts entered into with clients, or it shouldn’t apply at all. This tax is really a peculiar tax on Recruitment Agencies; it should be called the ACT’s “Recruitment Agency Tax”.
The Federal Government engages much of its IT workforce by contracting Recruitment Agencies to find appropriate personnel. These subcontracted personnel may either work directly or be engaged through a company.
Contractors who work directly with the Recruitment Agency are treated as employees of the Recruitment Agency, and are subject to the existing Payroll Tax Legislation.
Companies, who are already subject to the existing company Payroll Tax Legislation, will now be slugged with a Recruitment Agency (Payroll) Tax if they are not large enough to be able to put at least one Director and one employee on the contract, that is, if the contract allows it.
This tax, therefore, disadvantages small struggling companies that are trying to get off the ground and pick up work any way they can.
The overall effect of this tax will be to reduce company profits from Federal Government contracts. This will make it less attractive for interstate companies to bid for Federal Government contracts, reducing supply, and in-turn pushing up the cost of Federal Government contracts in the ACT.
Recruitment Agency margins plus this new Recruitment Agency (Payroll) Tax will add over $20,000 per year to the cost of an average contract. Consequently, it will become prohibitively expensive for the Federal Government to use Recruitment Agencies. Government departments will either need to contract with IT companies directly, or improve their efforts in attracting the highly-skilled contracted IT workforce into the permanent ranks of the Public Service.