In Short
- Labour hire businesses keep responsibility for payroll tax, PAYG withholding and superannuation, even when clients supervise workers day to day.
- Most labour hire arrangements trigger the “employment agency contract” rules, which treat payments to workers as taxable wages.
- In on-hire chains, the agency closest to the end client usually pays payroll tax, but declarations must be completed to avoid double tax.
Tips for Businesses
Labour hire businesses should review contracts to understand when employment agency rules apply. Check payroll tax thresholds in each state or territory where workers perform services. Use declaration forms in on-hire chains to prevent double taxation. Confirm whether PAYG withholding applies, especially when paying individuals. Assess superannuation carefully, as contractors may still count as employees under super law.
A labour hire firm is a business with specific tax obligations. Because of how the various employment tax (payroll tax, pay as you go (PAYG) withholding and superannuation) legislation has been drafted, labour hire businesses generally have a higher standard to meet when it comes to complying with these taxes. This article explains how employment taxes apply specifically to labour hire businesses, including how they can ensure compliance.
LegalVision’s Employee Share Schemes Guide is a comprehensive handbook for any startup founder or business owner looking to attract and motivate top employees with an Employee Share Scheme.
What is Labour Hire?
Labour hire involves you, as a labour hire business, supplying workers to perform services for your client’s businesses. These workers remain your employees or independent contractors, even as they undertake tasks for your clients. In this arrangement:
- you hire and remunerate the workers;
- you manage the contractual relationship with the client;
- you maintain responsibility for all tax withholdings and other statutory obligations, including superannuation, for the workers; and
- the client supervises the workers’ day-to-day activities but is not considered their employer.
Payroll Tax Obligations
Payroll tax is a state and territory tax levied by state and territory revenue offices, not the ATO. An employer must pay payroll tax when payroll “wages” exceed the threshold in a state or territory. In that case, liability arises if the employer has a worker in that state or territory. There are deeming provisions in the payroll tax legislation that specifically capture certain payments as wages for payroll tax purposes. Relevantly for labour hire businesses, the “employment agency contract” provisions are usually enlivened by labour hire arrangements.
Continue reading this article below the formEmployment Agency Contracts
An employment agency contract arises when you engage an individual or entity to provide services to your client. These contracts arise when you engage a worker to perform services for a client, as an employee or independent contractor. Payments made to your worker under such contracts are treated as taxable wages.
For example, if you assign an independent contractor to a client under an employment agency contract, payroll tax may apply. The payments you make for the contractor’s services will likely be taxable.
A contract is generally not an employment agency contract if:
- there is a contract of employment between the worker and the client; or
- the worker provides services for the client’s benefit but does not operate within the client’s business like an employee. However, rules differ between states and territories, so seek advice where the worker performs the services.
Unlike other deeming provisions within payroll tax legislation, there are almost no exemptions from the employment agency contract provisions. This means that a labour hire business should keep this in mind when engaging in its labour hire activities.
Chain of On-Hire Arrangements
Complexities arise in chain of on-hire arrangements, where a worker may be supplied through multiple intermediary agencies before reaching the end client. For instance:
- Your client requests a worker from you, however you do not have a worker.
- You then approach another labour hire firm, who supplies one of their workers to your client.
In such arrangements, to prevent multiple payroll tax liabilities on the same wages, the employment agent closest to the ultimate client is generally regarded as the liable party for payroll tax. This means you would be responsible for the payroll tax o. This generally requires the parties to complete a declaration form (usually available on the website of the revenue offices for each state and territory). However, it is important to check the rules around the declaration as this can differ state to state.
If the parties do not complete the declaration, two payroll tax liabilities may arise within the labour hire chain.
PAYG Withholding Obligations
As a labour hire business, you are required to withhold tax from payments to your individual workers, whether they are employees or independent contractors. This is because payments under a labour hire arrangement are a specific category of payments that attract a PAYG withholding obligation for the entity making the payment to the labour hire worker. You can read more about this here.
Interposed Entity
If the worker is contracted with you through an interposed entity, such as a company or trust, you do not need to withhold tax unless there is no ABN on the invoice or other documents relating to supply of services issued by the interposed entity. This is because generally only payments to individuals will attract a PAYG withholding obligation, except where an avoidance scheme has been put in place. An example of an avoidance scheme is you directing an individual to set up a company because you do not want to withhold from their payments under the PAYG withholding system.
Superannuation Obligations
If your labour hire workers are employees, you must pay superannuation and comply with that obligation. The question is not as straightforward as whether the labour hire worker is a contractor.
The definition of an employee under the superannuation legislation is very broad and may capture an independent contractor in some circumstances. Under the superannuation legislation, “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.” The concept of ‘wholly or principally’ for a person’s labour exists in circumstances where:
- you provide payment for the contractor’s personal labour and skills, including physical, mental or artistic labour;
- the contractor performs their work personally and cannot delegate the work; and
- you make payments for each hour of work, rather than to complete a specific project.
Because of the nature of labour hire work, it is usually the case that labour hire contractors fall within the above meaning of “employee” for superannuation purposes. This means that the entity paying the worker would have an obligation to pay that worker superannuation.
Key Takeaways
Labour hire firms face unique tax obligations that set them apart from other businesses. As this article has explained, the specific drafting of employment tax legislation covering payroll tax, PAYG withholding, and superannuation imposes a higher compliance standard on labour hire businesses compared to other industries. Understanding how these employment taxes apply specifically to labour hire arrangements is essential for ensuring your business meets its obligations and avoids potential penalties. By implementing the compliance strategies outlined in this article, labour hire businesses can navigate these complex tax requirements with confidence.
If you are uncertain about your legal obligations surrounding your labour hire business, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
As a labour hire business, you remain responsible for PAYG withholding, payroll tax and superannuation. Even though your client supervises the workers day to day, the client is not their employer. You hire and pay the workers and manage the contract, so all tax and statutory obligations sit with you.
Where workers are supplied through multiple labour hire firms, the agency closest to the end client is generally liable for payroll tax. To avoid double tax, the parties must complete the required declaration. If they do not, more than one payroll tax liability may arise for the same worker.
We appreciate your feedback – your submission has been successfully received.
