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.
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.
- 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
- 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?
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.
- 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).
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.
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
- the client has given the employment agent a declaration to that effect.
Wages 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
- municipal councils (but not including wages paid or payable for the non-exempt activities referred to in section 60 of the Act).
Recruitment Solutions Agency on-hired Anil to the Northern Region Shire Council. Anil performed work for the Northern Region Shire Council in connection with the supply of electricity (which is a non-exempt activity under section 60 of the Act).
Had Anil been paid directly by the Northern Region Shire Council as an employee, the wages would not be exempt under the Act. As such, Recruitment Solutions Agency is not entitled to the exemption under section 40(2) of the Act in respect of the Anil’s wages.
TempStaff Agency on-hired Samantha to the Southern Benevolent Foundation, a public benevolent institution. Samantha performed work for the Southern Benevolent Foundation in respect of its benevolent services.
Had Samantha been paid directly by the Southern Benevolent Foundation as an employee, her wages would be exempt. As such, TempStaff Agency is entitled to the exemption under section 40(2) of the Act (provided it obtains a declaration from the Southern Benevolent Foundation for Samantha).
In order to claim this exemption, the employment agent must obtain a declaration from their client. The declaration must:
- be in writing, and
- state that the wages paid or payable to or in relation to the service provider for the provision of services in connection with the employment agency contract would be exempt from payroll tax under Part 4 of the Act had the service provider been paid by the client as an employee.
Using Example 2 above, TempStaff Agency would have to obtain a declaration from Southern Benevolent Foundation stating that the wages paid or payable to or in relation to Samantha in connection with the contract with TempStaff Agency would be exempt from payroll tax under Part 4 of the Act had Samantha been paid by the client as an employee.
Payroll Tax SmartForm PTA Form 03 (Employment Agency Contracts - Declaration by Client) is available for these purposes.
Incomplete or incorrect declarations
If you, as the employment agent, are provided with an incomplete declaration or a declaration that does not meet the requirements set out above, you are liable for any payroll tax liability. For this reason, you should ensure your exempt clients have completed the declaration in full.
If your client has provided a declaration which is later found to be incorrect (eg because the wages paid to or in relation to the service provider would not have been exempt under Part 4 of the Act had the service provider been paid by the client as an employee), you will be liable to pay payroll tax on the amounts paid to the on-hired workers provided to your client.
If you wish to confirm that a declaration from your client is correct, you can contact us. The secrecy provisions within the Taxation Administration Act 1997 prevent us from divulging information about the client to you unless you get your client’s written consent to enable us to provide information about its payroll tax status.
Number of declarations
You are required to provide a separate declaration for each employment agency contract you enter into with your client(s). However, as this may be impractical and onerous, the Commissioner will be satisfied if you obtain one declaration from each of your exempt clients for a financial year where the type of work performed by all persons on-hired by you to that client is similar.
In November 2020, TempPeople Agency on-hires three nurses to the Eastern Public Hospital for 3 months. TempPeople Agency is entitled to the exemption under section 40(2) of the Act as the wages would be exempt under the Act had the three nurses been paid directly by the Eastern Public Hospital as employees.
In March 2021, TempPeople Agency on-hires two accounts payable workers to the Eastern Public Hospital for 2 months. TempPeople Agency is entitled to the exemption under the Act as the wages would be exempt had the two on-hired workers been paid directly by the Eastern Public Hospital as employees.
In this case, TempPeople Agency must obtain two declarations from the Eastern Public Hospital for 2020-21 - one in respect of the provision of the nurses and another in respect of the provision of the two accounts payable workers. This is because the accounts payable work is not similar to the nursing services
Additionally, if a contract for the provision of a worker straddles more than one financial year, you need only provide one declaration but it must be obtained in the first financial year the worker is provided.
ABC Personnel Agency on-hired six workers to the Western Public Hospital from 1 September 2020 to 28 February 2022. All six workers performed accounts payable work for Western Public Hospital for the whole period.
ABC Personnel Agency is entitled to the exemption under section 40(2) of the Act as the wages would have been exempt had the on-hired workers been paid directly by the Western Public Hospital as employees.
To claim the exemption for the 2020-21, ABC Personnel Agency must obtain a declaration from the Western Public Hospital by 30 June 2021 for the six workers. It will not be required to obtain another declaration in respect of the six workers in 2021-22.
Timing of declarations
Declarations for a financial year must be obtained before the end of that particular financial year.
Using Example 3, TempPeople Agency must obtain both declarations from the Eastern Public Hospital for 2020-21 by 30 June 2021.
Using Example 4, ABC Personnel Agency must obtain a declaration from the Western Public Hospital by 30 June 2021. This will be sufficient to cover the six workers for both the 2020-21 and 2021-22 years.
If ABC Personnel Agency does not obtain a declaration by 30 June 2021, it can still obtain a declaration by 30 June 2022, but this will only cover the workers in 2021-22.
Record keeping by employment agents
You must keep all declarations for five years and be able to produce them if the Commissioner requests them.
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.
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.
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
- determine that any payment made in respect of the contract is deemed to be wages under the Act.