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

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.


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50 Responses to Most contractors employed via a recruitment agency to face around 7% pay cut from 1 July
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milkman milkman 4:20 pm 21 Jun 14

Frustrated said :

Good.

Considering all the PS bashing, contractors or consultants are one of the biggest drains on taxpayers.

Consultants and contractors are the ones making the decisions and doing the more complex work. If the regular p#$es were capable, contractors and consultants wouldn’t exist.

Frustrated Frustrated 9:17 pm 20 Jun 14

Good.

Considering all the PS bashing, contractors or consultants are one of the biggest drains on taxpayers.

aaa123 aaa123 8:42 pm 20 Jun 14

aaa123 said :

So, if I can’t afford the unilateral pay reduction then they will graciously allow me to become unemployed. Nice. Thank you very much Candle/Clarius

To add as this correspondence was so recent I had a whole weekend to decide if I wanted to become unemployed or not. After that I guess they charge me penalties if I want to get out. Nice Candle/Clarius.

aaa123 aaa123 8:37 pm 20 Jun 14

Also sharing part of another email I got from my recruitment agency, Clarius, (aka Candle) recently:

Clarius will commence withholding the statutory amount for ACT Payroll Tax (currently 6.85%) as of July 1

Neither Clarius, (client name deleted) or (third party name deleted) will be increasing what they pay for your services based on these legislative changes.

I understand that these legislative changes may present a significant impact on your financial situation and appreciate that you may need to give it some consideration. If you are unable to continue in your role with (client name deleted) as a result, please advise us by COB Monday 23rd June so that we can convey this to (client name deleted) and work with them to ensure that a suitable replacement is found to minimise the impact to the project/business.

In amongst all their compassionate comments such as the above they managed to have a sob and cry about how low their margins are even though they freely entered into that and the margins costs have not changed at all for them.

So, if I can’t afford the unilateral pay reduction then they will graciously allow me to become unemployed. Nice. Thank you very much Candle/Clarius

aaa123 aaa123 8:23 pm 20 Jun 14

Just out of interest, I thought I would share the “negotiations” my recruiter have been doing with their contractors and I encourage others to do so. Let’s compare how much we are being shafted and what if anything the recruiters are doing to help share the pain.

Love it how my recruiter says they will immediately advise. They still haven’t advised of the recent announcement to change the start date to 1 October.

It took them a couple of weeks to provide any response to the proposed changes (not even a we know you are all concerned but don’t know yet). All our emails were completely ignored by Clarius for some time. I got a response only after saying that I was going to change recruiters since they wouldn’t respond to me.

On Thu, Jun 19, 2014 at 12:41 PM, Nicole Shepherd wrote:

2014-15 ACT Budget – proposed Bill – removal of the ‘genuine employer’ exemption at Schedule 2, Part 2.3, section 2.14 (1)(g) of the ACT Payroll Tax Act 2011.

Good afternoon

As you may have already heard, in the recent 2014-15 ACT Budget a Bill was introduced to remove the ‘genuine employer’ exemption at Schedule 2, Part 2.3, section 2.14 (1)(g) of the ACT Payroll Tax Act 2011, effective 1 July 2014.

Our office has been involved in several discussions with industry lobbying groups and legal advisors on the proposed amendment, ensuring industry concerns and questions are appropriately filtered to the office of the ACT Commissioner. These conversations continue.

While the amendment was introduced on 5 June, the Commissioner cannot advise with certainty that it will be passed and enacted in August 2014. The Bill however is proposed to apply from 1 July 2014 to ensure that a full year is covered by these new arrangements. We have recently received an indication this date may be delayed until 1 October 2014, this is yet to be confirmed.

We appreciate this Bill amendment will have an impact on many of our Pty Ltd contractors.

In line with the ACT Commissioner’s announcement and in accordance with Pty Ltd contract agreements, Clarius will commence withholding the statutory amount for ACT Payroll Tax (currently 6.85%) as of July 1 (or a future date if advised by the ACT Commissioner) in anticipation of the legislation being enacted.

If the Bill is not enacted, Clarius Group will be happy to revert back to the current assessment of exemption, if applicable, and any monies held for payroll tax will be repaid to your subcontracting company.

We are continuing our conversations with ITCRA, industry and the ACT Commissioner. We shall immediately advise if any changes are made to the conditions explained above.

In the meantime, we are processing extensions and new contracts as usual, while taking into account the changing circumstances.

Other information as per Australian Federal Government changes from 1 July 2014:
• increase in superannuation guarantee (SG) rate from 9.25% to 9.5%; and
• Increase in minimum wage rates by 3%.

An industry meeting will take place this afternoon, we shall advise of any pertinent updates tomorrow or Monday.
Kind regards
Nicole

Nicole Shepherd | General Manager Clarius, Candle and The One Umbrella
t. 02 6113 7555 | d. 02 6113 7503 | e. nshepherd@clarius.com.au | w. http://www.clarius.com.au

Clarius Group incorporates: Alliance Recruitment | Candle | Lloyd Morgan | SouthTech | The One Umbrella | Jav IT | Ignite

Find me on LinkedIn or follow Clarius | Compare Salaries at MySalaryPortal.com

This email message and accompanying data may contain information that is confidential and subject to privilege and privacy laws. If you are not the intended recipient, you are notified that any use, dissemination, distribution or copying of this message or data is prohibited. If you have received this email in error please notify us immediately and delete all material pertaining to this email. Unless otherwise agreed in writing, by engaging a person or contractor referred to you by us, you acknowledge and agree to accept the terms and conditions of the relevant Clarius Group Limited division from whom such person was referred. A copy of such terms is available from us. Help protect the environment. Print only if absolutely necessary.

Dondon Dondon 5:59 pm 19 Jun 14

justsomeaussie said :

[
What value are they adding for their 30%-40% cut?

I wonder this too, I was in a fortunate situation to bring a role to an agency that was on the panel. Due to being a Federal Department and even though I had already been interviewed and offered a position I was still required to get an agent that was on the panel to represent me.

Some agencies still wanted to add 15%-20% on top of my hourly rate, for what. I still needed a payroll company to provide me my Insurance and Workers Comp. They are just rent seekers, luckily I had the opportunity to shop around and find one that would negotiate on rates all I have really gotten out of them is a couple of coffees.

Dondon Dondon 5:53 pm 19 Jun 14

Timmytron said :

aaa123 said :

I challenge Mr Barr to respond to the above

+3

Why should contractors suffer as a result of ACT Government’s poor planning?

Unfortunately it is because we are seen as a cash cow.

bikhet bikhet 4:29 pm 19 Jun 14

justsomeaussie said :

Private industry doesn’t do anything like this in recruitment so why does government?

Because private industry doesn’t have to go through all the rubbish involved in evaluation that the public service does.

If a company is on the panel they have been assessed as providing value for money and so if you choose them you don’t have to go through as rigorous a process to get a bum on a seat – or a paperclip or whatever. Whether or not they actually provide value for money is another question though.

BerraCitizen BerraCitizen 4:08 pm 19 Jun 14

justsomeaussie said :

What value are they adding for their 30%-40% cut?

What value are they adding? Absolutely nothing! My pimp that is on the panel does absolutely nothing other than send one electronic invoice per month that is automatically generated from a web-based timesheet system I have to enter times into.

If I look at all of our family expenses (petrol, gas, water, petrol, phone, net etc), my pimp who does nothing, is the 2nd highest expense my family incurs behind my mortgage to the bank.

justsomeaussie justsomeaussie 2:46 pm 19 Jun 14

gusmo said :

For many industries Federal government agencies employ via a panel arrangement. If you are a legitimate small business in one of those industries and not on the right panel for the right agency you have to subcontract through an employment agency who is on the correct panel. Most employment agencies are on these panels, despite not having any actual direct employees that could fill roles requested of the panel and in many cases not even understanding the fields they are on the panel for. New businesses cannot join the panels in any sort of timely fashion as they are tendered once every few years.

Can anyone explain why these panels exist in this manner anyway? Each week we see the same jobs pushed through multiple recruitment companies all taking 30-40% of the margin.

If would be much simplier for the government and the person doing the work to just cut out the middle men (recruitment companies) since they are primarily just throwing people at a position and hoping something sticks. Exactly what value add are the bringing? They can’t determine what someone’s skill set is because they aren’t a specalist, they aren’t the department so they can only read the requirements.

What value are they adding for their 30%-40% cut?

Private industry doesn’t do anything like this in recruitment so why does government?

anton916 anton916 1:56 pm 19 Jun 14

The notice I received from my recruitment company suggests they have a consolidated front within their associated body to press ahead with this ridiculous claim.

It’s time we also did the same. Lets begin moving the chess pieces.

gusmo gusmo 1:30 pm 19 Jun 14

Mark of Sydney said :

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?

For many industries Federal government agencies employ via a panel arrangement. If you are a legitimate small business in one of those industries and not on the right panel for the right agency you have to subcontract through an employment agency who is on the correct panel. Most employment agencies are on these panels, despite not having any actual direct employees that could fill roles requested of the panel and in many cases not even understanding the fields they are on the panel for. New businesses cannot join the panels in any sort of timely fashion as they are tendered once every few years.

I suspect the tender process for the DHS Panels (which are piggy-backed by many smaller agencies) 2 years back would have seen a raft of smaller companies trying to come aboard had anyone expected the absurdity we are now witnessing.

Timmytron Timmytron 9:20 am 19 Jun 14

aaa123 said :

I challenge Mr Barr to respond to the above

+3

Why should contractors suffer as a result of ACT Government’s poor planning?

CUNNINGSTUNTS CUNNINGSTUNTS 9:04 am 19 Jun 14

aaa123 said :

I challenge Mr Barr to respond to the above

+1, Please enlighten us all

VYBerlinaV8_is_back VYBerlinaV8_is_back 8:26 am 19 Jun 14

aaa123 said :

I challenge Mr Barr to respond to the above

I’d like to hear Mr Barr’s response also.

milkman milkman 9:09 pm 18 Jun 14

aaa123 said :

I challenge Mr Barr to respond to the above

+1.

How about it Mr Barr?

aaa123 aaa123 8:26 pm 18 Jun 14

I refer to an article in today’s canberra times titled “IT agencies want existing contracts exempt from new tax”

This article contained a number of incorrect comments, including from Mr Barr, who I challenge to comment on, given that he seems to have decided to not continue to comment on the issues raised in various posts on this site.

Firstly, the article quoted the payroll tax rate as 6.5% instead of 6.85%.

Secondly, Mr Barr claimed that the ACT had one of the lowest rates of payroll tax in the country, a bald lie. The ACT has the highest rate of payroll tax in the country. The lowest rate is 4.75%.

Barr’s claim that 1000 contractors are affected is grossly underestimated. Please Mr Barr tell us where you got this figure from. The article mentions only a few of the many recruitment companies affected and just these quote having hundreds of affected contracts. Barr intends to impose a new tax, with only weeks notice, which will increase the tax bill for thousands of workers already locked into fixed rate contracts by around $10,000 or more each. He thinks this is a great idea in this economic climate. I wonder what local retailers think about that.

The article is misleading in that it implies it is large international recruitment agencies that will bare the brunt of this. This is not the case. Most recruitment agencies have already announced that they intend to withhold a portion of payments made to management companies from 1 July before the tax is passed into law to cover their liability.

This change means a cut in income to the contractor of 7% or more. In some cases the % will be much higher. That is because the supposed “payroll tax” is not actually levied on the value of the income and other benefits that the contractor receives. It is actually a tax based on the payment that the recruitment agency makes to the management company. The management company pays various expenses such as insurances, admin costs etc and out of what is left pays the contractors salary, super etc. So this tax is not actually a payroll tax at all! The justification for this tax is based on Barrs absurd suggestion that the recruitment agency is the “employer”. This is nonsense. It is the management company that pays the contractor, handles their PAYG tax, super etc and THAT is who is the employer and where any potential payroll tax liability should (and does) lie! In fact the contractors may have “payroll” tax deducted twice: once on the gross value that the recruitment agency pays to the management company and again on the value of the contractors salary package if the management company exceeds the payroll tax threshold.

This new tax has so many issues:

It is not a “payroll” tax. It is a tax levied on the payment that one company makes to another company.
Payroll tax is not intended to be a tax to be deducted directly from the workers salary, but this is what is going to happen
The employer is clearly the management company, not the recruitment agency and suggestion otherwise by Mr Barr is fiction
The contractor effectively pays “payroll tax” on money they never receive because some of it it pays business expenses
It is unfair because contractors are locked into contracts where they now lose 7% or more of payments with no ability to terminate the contract without penalties
It is unfair because it will be retrospective
It will result in double taxation in some cases

I challenge Mr Barr to respond to the above

aaa123 aaa123 8:39 pm 17 Jun 14

Andrew Barr MLA said :

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

Well if you value certainty as being certain you are going to be ****ed up the ass then I guess that would be a good thing…

Mr Barr,

On what basis do you suggest this will promote economic growth.

You propose cutting contractors tax home income by around 7% with only a few weeks notice. In many cases, the take home income will be cut even further due to the supposed “payroll tax” being imposed on gross revenue rather than salary package. You still haven’t responded as to why this payroll tax is being imposed on gross revenue. Are you ignorant as to basic accounting?

Even the current suggestion that this change may occur has contractors and their families slamming their wallets shut. Many contractors were already reducing spending out of fear of the current economic climate. Many of us earn acceptable incomes and could boost the economy via extra spending but we are cutting way back already due to uncertainty of the economic climate and just because… well we wouldn’t be surviving as contractors if we didn’t stick some money away for the hard times. Making contractors more fearful is not good for the economy. I suggest that there are probably way more than the suggested 1000 contractors affected (as well as families and related businesses) affected by this change and they will all slam their wallets shut. There are small businesses providing payroll services who face major loss of business and possible closure due to this change. These are genuine businesses providing services to independent contractors who don’t want the hassles of handling their own PAYG, super etc and these arrangements are not tax avoidance schemes.

These changes WILL reduce the number of people that are willing to work as contractors.

Economists and business would generally agree that:

It is good for the economy and business to have a “flexible” labor force. Contractors are readily able to be let go for any reason so surely this is good for business and the economy to have contractors available

Business wants to be able to make agreements with their “workforce” that is generally free from regulation and government interference – contractors provide this

Business want their workforce to be flexible about work hours without having to pay penalty rates – contractors provide this! We charge a fixed hourly rate generally

Business wants to be free of government regulatory changes which result in them having to fork out extra benefits to employees like paid maternity leave – contractors provide this

So I would suggest Mr Barr that contractors are good for the economy and promote an efficient and flexible work force, and are valued as an option by business so please provide evidence to the contrary if you insist this is the case!

Canfan Canfan 12:21 pm 17 Jun 14

An update and potential backflip on the change – http://the-riotact.com/government-payroll-backflip/127987

Genie Genie 11:12 am 17 Jun 14

Go direct through a recruitment agency !? Pass !

Recently got offered an APS 5 role through a recruitment agency, at the APS 3 salary.
Couldn’t afford a pay cut for a promotion 🙁

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