Payroll tax may apply to personal services income paid by a personal services entity to an individual.
A personal services entity is a company or trust conducting a business that derives income mainly from the personal skill or effort of an individual. This income is known as personal services income (PSI).
PSI may be attributed to the individual for income tax purposes under certain circumstances. The personal services entity must attribute PSI to the individual who performed the services (minus any deductions), and the individual must declare the PSI in their individual tax return.
This means the income tax liability shifts from the personal services entity to the individual who performed the work.
To learn more about PSI, visit the Australian Taxation Office website.
For detailed PSI rules, refer to Part 2-42, Division 84-86 of the Income Tax Assessment Act 1997 (Cth).
Payroll tax
The Payroll Tax Act 2007 (the Act) does not contain specific provisions for the treatment of PSI, so ordinary payroll tax rules apply.
Payments made by a personal services entity to the individual who performed the services may be considered taxable wages for payroll tax purposes. This applies if the payments meet the definition of wages, under either common law (i.e. an amount in respect of an employment relationship) or another provision of the Act (such as the contractor or employment agency provisions).
Employment agents
If an employment agent procures the services of a personal services entity for a client, this may create an employment agency contract as defined in s37 of the Act.
If there is an employment agency contract:
- the employment agent is the employer
- the individual(s) performing the work are the employees of the employment agent
- payments to the personal services entity by the employment agent are wages subject to payroll tax.
The payment made by the personal services entity to the individual(s) who performed the services under the employment agency contract is not subject to payroll tax under s41 of the Act (the double taxation provision).
Example 1
No employment agency contract
Erica’s business, Industrial Consulting Pty Ltd, is a personal services entity deriving $100,000 from conducting a business. Assuming the PSI rules apply, she must declare the payment of $100,000 as PSI in her income tax return.
Industrial Consulting Pty Ltd employs Erica and pays her $60,000 in wages, which are taxable wages for payroll tax purposes. This is different from the PSI of $100,000 received by Erica via Industrial Consulting Pty Ltd under the PSI rules.
Example 2
Employment agency contract
If a contract between Agency A and Industrial Consulting Pty Ltd (a personal services entity) is an employment agency contract, the payments made by Agency A to Industrial Consulting Pty Ltd ($100,000) are subject to payroll tax (assuming none of the clients are exempt from payroll tax).
Agency A is liable for payroll tax on these payments and may recover the payroll tax from any non-exempt clients.
Erica receives $60,000 in director fees from Industrial Consulting Pty Ltd. But Industrial Consulting Pty Ltd does not pay tax on the $60,000 as s41 of the Act prevents payroll tax being imposed on these payments.
