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The Payroll Tax Act 2007 (the Act) has specific provisions relating to the treatment of amounts paid by employment agencies for payroll tax purposes. These provisions apply to an employment agency contract, which is defined as:

  • A contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.

A contract includes an agreement, an arrangement and an undertaking. It is not, however, an employment agency contract if it is, or results in the creation of, a contract of employment between the service provider and the client. This arrangement is known as a placement arrangement. In these circumstances, the client is liable for payroll tax as the employer.

Typically, an employment agency agreement/arrangement involves:

  • A service provider contracting with the employment agent, and 
  • An employment agent contracting with the client. 

This arrangement can be differentiated from a placement arrangement where the parties would typically contract as follows:

  • Service provider with the client, and 
  • Employment agent with the client, and/or 
  • Service provider with the employment agent.

Employment agency contracts are not eligible for the contractor exemptions under s32(2) of the Act.

Deeming provisions

The Act contains several deeming clauses that determine the Victorian payroll tax liability of employment agents. Under an employment agency contract:

  • The employment agent is deemed to be an employer,
  • The service provider or on-hired worker is deemed to be an employee of the employment agent regardless of the structure through which services are provided, and 
  • All payments made to or on behalf of the service provider are deemed to be wages regardless of the service provider’s structure (i.e. company, partnership or individual). 

Amounts deemed to be wages

The Act deems certain amounts paid or payable by an employment agent under an employment agency contract to be wages. These are:

  • Any amount paid or payable to, or in relation to, the service provider in respect of the provision of services in connection with the employment agency contract, 
  • The value of any benefit provided for or in relation to the provision of services in connection with the employment agency contract that would be a fringe benefit if provided to a person in the capacity of an employee, and 
  • Any payment made in relation to the service provider that would be a superannuation contribution if made in relation to that person in the capacity of an employee.

What are not wages?

  1. Allowances and reimbursements for service providers

Allowances paid to employees are generally subject to payroll tax. Accordingly, allowances paid to service providers (or on-hired workers) constitute deemed wages. The only allowances that may not be wholly taxable are:

  • Accommodation allowances, 
  • Motor vehicle allowances, and 
  • Living-away-from-home allowances.

Accommodation or motor vehicle allowances paid to a service provider are deemed wages only to the extent these allowances exceed the exempt rates

A living-away-from-home allowance is a fringe benefit and therefore the value for payroll tax purposes is the value determined in accordance with the Fringe Benefits Tax Assessment Act 1986 (FBT Act).

Reimbursements of business expenses incurred by employees on behalf of their employers are not taxable unless they have a taxable value under the FBT Act. A reimbursement of an expense is not subject to payroll tax if it has all of the following characteristics:

  • At the time of payment, the expense has already been incurred by the employee (if the payment was made in advance, the employee has provided the employer with a receipt relating to the expense and refunded any excess from the advance payment), 
  • The employee’s expenditure was incurred in the course of the employer’s business, and 
  • The precise amount is reimbursed.

Payroll tax is not imposed on amounts paid as reimbursements of business expenses, as described above, by the employment agent to the service provider.

The employment agent must retain sufficient information to demonstrate that the payment is a reimbursement (e.g. copies of receipts provided by the service provider).

  1. GST

The Act (s44(1)) specifically excludes any GST payable on the supply to which wages paid or payable relates. Therefore, the GST portion of the payment to a service provider, if any, under an employment agency contract is not included as wages for payroll tax purposes.

  1. Exempt organisations

Wages paid to a service provider, under an employment agency contract, are exempt where:

  • The wages would be exempt from payroll tax under Part 4 (other than under Division 4 or 5 of that part, s50 or clause 16 of Schedule 2) of the Act had the wages been paid by the client to the service provider as an employee, and 
  • The client has given the employment agent a declaration to that effect. 

Wages that are exempt under Part 4 of the Act include wages paid by these organisations:

  • Non-profit organisations having as their whole or dominant purpose a charitable, benevolent, philanthropic or patriotic purpose (but not including a school, an educational institution, an educational company or an instrumentality of the state), 
  • Public benevolent institutions (but not including an instrumentality of the state), 
  • Religious institutions, 
  • Certain not-for-profit non-government schools, 
  • Certain school councils, 
  • Public hospitals, 
  • Certain public health services, 
  • Non-profit private hospitals, and 
  • Municipal councils. 

The employment agent must obtain a client declaration before claiming the exemption. For more information, refer to our ruling on employment agency contracts declaration by exempt clients. There is no exemption merely because the client’s wages are below the payroll tax threshold. 

Government department


If you hire workers to a Commonwealth department or agency, you will pay payroll tax.

Generally, for constitutional reasons, states cannot legislate to tax the Commonwealth. However, under the employment agency provisions, payroll tax is imposed on employment agents and not on commonwealth government departments and agencies. 


If you hire workers to a state government department or agency, you will generally be subject to payroll tax under the employment agency provisions.

This is because state government departments and agencies are not exempt under Part 4 of the Act. The payroll tax liability is imposed on the employment agents and not on the state government departments and agencies. 

An exception to this, however, is where a specific Victorian Government agency falls within an exemption in Part 4 of the Act, for example Ambulance Victoria and the Victorian Institute of Forensic Mental Health.


If you hire workers to local government, wages paid or payable, except for wages relating to certain municipal construction or business operations, are exempt from payroll tax under Part 4 of the Act.

Consequently, provided the client that is a municipal council has given the employment agent the relevant declaration by an exempt client, wages relating to workers on-hired to the municipal council are exempt from payroll tax under s40(2) of the Act.

Chain of on-hire

In some cases, multiple employment agency contracts may arise. For example, one employment agent (Agent 1) on-hires labour to another employment agent (Agent 2), which then further on-hires that labour to their client.

A strict application of the employment agency provisions would result in both employment agents being liable for payroll tax. The Commissioner has ruled that, in these circumstances, only the employment agent closest to the ultimate client will be regarded as being liable for payroll tax. Agent 2 needs to provide Agent 1 with a Chain of on-hire declaration.

Nursing agencies

Generally, the employment agency provisions will apply to nursing agencies in the same way as they do to other employment agents. In some instances, however, a nurse’s wages may be paid through an employment agency even though the nurse is actually an employee of the client.

Under such circumstances, the contract is not an employment agency contract and the employment agency provisions do not apply. In this situation, the client is liable for any payroll tax in respect of wages paid or payable to the nurse, notwithstanding that the payment is made to the nurse via the employment agent.

If the nurse is not an employee of the client, or has not been engaged by the client under a relevant contract, then the payroll tax liability shall remain with the employment agent.

Anti-avoidance provisions

The Act (s42) provides that if the effect of an employment agency contract is to reduce or avoid payroll tax liability of any party to the contract, the Commissioner may:

  • Disregard the contract, 
  • Determine that any party to the contract is deemed to be an employer under the Act, and
  • Determine that any payment made in respect of the contract is deemed to be wages under the Act.