When a business pays a contractor for services they normally provide to the general public, those payments may be exempt from payroll tax.
Under section 32(2)(b)(iv) of the Payroll Tax Act 2007 (the Act), a contract for services is not a relevant contract if we are satisfied that services rendered under that contract are rendered by a contractor who ordinarily renders such services to the general public in a financial year.
Employers can apply for this exemption through a private ruling. Details on how to apply for a private ruling are set out in Revenue Ruling GEN-009v3.
Key considerations
For this exclusion to apply, we must be satisfied that the contractor who performs services under a relevant contract ordinarily performs such services to the general public in the same financial year.
Generally, this exemption applies when the contractor:
- provided the same services to more than one principal (not members of a group) in the financial year
- worked for a principal an average of 10 or less days per month (excluding months when no services were provided) across the financial year.
If you meet these conditions, you do not need to include payments to the contractor in your payroll tax returns apply for the exemption.
We will consider the following factors about the contractor when deciding whether to exclude payments:
- Extent and nature of advertising.
- Range of clients.
- Equipment provided.
- Use of staff or sub-contractors.
- Entrepreneurial risk.
We will also look at:
- the nature of contracts (e.g. are they formal, long-term contracts or informal, rolled-over contracts)
- how the contractor won the contract
- whether the contractor works on different contracts at the same time
- whether the contractor bears the cost and responsibility for faulty materials or workmanship
- whether the contractor quotes competitively for jobs on an all-inclusive basis (all labour and materials)
- whether the contractor just charges an hourly rate for services and adds on the cost of materials.
This is not an exhaustive list of factors, and none of these factors is conclusive on its own.
Example 1
Shelly is a computer programmer. During the financial year, she provided services to 2 businesses: Blue Real Estate and Red Property Management.
Under her contract with Blue Real Estate, she worked:
- July – 5 days
- August – 3 days
- September – 7 days
- October – 5 days
- November – 16 days
- December – 9 days
- January – 13 days
- February – 4 days
- March – 8 days
- April – 5 days
- May – 14 days
- June – 11 days
Shelly worked for Blue Real Estate a total of 100 days in the financial year – an average of 8.3 days per month.
Because Shelly provided the same services to 2 principals, and worked for Blue Real Estate an average of 10 days or less per month, Blue Real Estate’s payments to her are exempt from payroll tax.
Example 2
Michael is a commercial cleaner. During the financial year, he provided services to ABC Plaza and High Street Shopping Centre.
Under his contract with ABC Plaza, he worked:
- July – 11 days
- August – 16 days
- September, October and November – zero days
- December – 22 days
- January – 21 days
- February – 20 days
- March and April – zero days
- May – 10 days
- June – 5 days
Michael worked for ABC Plaza a total of 105 days in the financial year.
To calculate the average, only the months when services were provided are counted (7).
This means Michael worked an average of 15 days per month (105 ÷ 7).
Because Michael worked for ABC Plaza an average of more than 10 days per month, excluding months when he provided no services, ABC Plaza’s payments to him are liable for payroll tax.
If you are unsure whether this exemption applies to you, you can refer to PTA-021v2 or request a private ruling.
