Understanding Contractor Payments and Payroll Tax Exemptions in New South Wales

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Understanding Contractor Payments and Payroll Tax Exemptions in New South Wales

Payroll tax and contractor payments is a topic that confuses many business owners. In New South Wales, payments to contractors can fall under payroll tax rules, but there are seven key exemptions that often apply. Knowing how these exemptions work will help you stay compliant while avoiding unnecessary tax liabilities.

This article explains each exemption in detail, how it applies in practice, and what you need to document as proof. Whether you run a small business, a growing company, or you operate in sectors like construction, trades, healthcare, or hospitality, these exemptions can significantly impact your payroll tax obligations.

Why Payroll Tax Applies to Contractors

Payroll tax is a state-based tax imposed on wages paid by employers when their total wages exceed the annual threshold. In NSW, payments made to contractors can be deemed wages for payroll tax purposes.

The challenge is that contractors are often used as part of day-to-day operations, and without careful planning, their payments may inadvertently push a business into payroll tax liability. To reduce this risk, NSW legislation outlines seven contractor exemptions that remove certain payments from payroll tax.

The Seven Contractor Exemptions Explained

1. Services Ancillary to the Supply of Goods

This exemption applies when the primary purpose of the contract is the supply of goods, and the services provided are incidental.

Example:

• A restaurant contracts a supplier to provide kitchen equipment. The supplier delivers and installs the equipment.
• The main contract is for goods (kitchen equipment), while the installation is incidental.
• The installation work by the contractor is exempt from payroll tax.

Key point: The supply of goods must be the dominant part of the contract.

2. Services Not Ordinarily Required by the Business

This exemption applies when a business hires a contractor for services not part of its core operations.

Example:

• An accounting practice hires a plumber to repair a blocked toilet.
• Accounting firms do not provide plumbing services to clients, so plumbing is not ordinarily required by the business.
• The payment to the plumber is exempt from payroll tax.

To qualify, the contractor must also provide those services to the general public, not exclusively to your business.

3. Services Performed for 180 Days or Less in a Financial Year

If a contractor provides services to your business for 180 days or fewer within a financial year, the payments are exempt.

Example:

• A retail business hires additional contractors for stocktake and Christmas trading over 90 days.
• Since the engagement is under 180 days, payments are exempt.

Important: The 180-day test applies per contractor, per financial year. Keep accurate records of days worked.

4. Services Performed for 90 Days or Less in a Financial Year

This exemption is stricter than the 180-day test. If a contractor works 90 days or fewer in a financial year, their payments are exempt.

Example:

• An events company hires a sound technician for a few festivals across the year, totalling 65 days.
• Payments are exempt under the 90-day rule.

This exemption is critical for industries that use seasonal labour. Many businesses rely on it to avoid payroll tax on short-term contractors.

5. Services Provided to the Public

Payments are exempt if the contractor provides services to multiple clients in the public, not just your business.

Example:

• A graphic designer operates their own design business and provides services to five different companies.
• If you engage this designer for your marketing, their payments are exempt because they work for the public, not exclusively for you.

Evidence required: Contractors should show invoices, websites, or other proof of work for multiple clients.

6. Services Performed by Two or More People in the Contractor’s Business

This exemption applies when services are carried out by two or more individuals in the contractor’s business.

Example:

• A cleaning company sends a team of three cleaners to your office.
• Because multiple people perform the service, the contractor payment qualifies for exemption.

Special note: If the contractor is a company or trust, at least two people must actively provide the contracted services.

7. Services for the Conveyance of Goods by an Owner-Driver

This exemption applies when a contractor provides delivery services using their own vehicle.

Example:

• A courier uses their own van to deliver goods for your e-commerce business.
• The payments fall under the owner-driver exemption and are not subject to payroll tax.

This is common in transport and logistics businesses.

Common Industries Impacted by Contractor Payroll Tax

Construction and Trades

• Builders frequently hire subcontractors for specific projects.
• Many arrangements fall under the 180-day or 90-day exemptions.

Hospitality and Retail

• Seasonal staff like entertainers, kitchen hands, and casual contractors often qualify under short-term exemptions.

Healthcare

• Practices hiring locums, nurses, or temporary contractors need to carefully review if exemptions apply.

Professional Services

• Accountants, lawyers, and consultants often hire IT contractors, office fit-out specialists, or marketing consultants, many of whom qualify for the "not ordinarily required" exemption.

Record-Keeping Requirements

To claim these exemptions, businesses must keep thorough records, including:

• Copies of contractor agreements.
• Invoices issued by contractors.
• Evidence that contractors provide services to the public.
• Logs of days worked to verify 90-day and 180-day exemptions.
• Proof of multiple workers in contractor’s business (rosters, staff lists).

Without proper records, exemptions may be denied in an audit.

Mistakes Businesses Make

• Assuming all contractor payments are exempt without documentation.
• Not tracking days worked under the 90-day or 180-day tests.
• Hiring contractors that only work for them and assuming exemption applies.
• Ignoring the difference between employees and contractors.

These errors often result in unexpected payroll tax liabilities, penalties, and interest.

How Trinity Accounting Practice Helps

At Trinity Accounting Practice, we specialise in helping businesses across NSW manage payroll tax and contractor obligations. Our services include:

• Reviewing contractor arrangements.
• Identifying exemptions that apply.
• Preparing documentation for compliance.
• Advising on payroll tax thresholds and groupings.
• Representing clients in audits and disputes with Revenue NSW.

We work with industries including construction, healthcare, trades, childcare, and retail, ensuring clients avoid unnecessary tax burdens.

Practical Steps for Businesses

1. Review every contractor arrangement annually.
2. Document the exemption you believe applies.
3. Maintain contractor registers with invoices, days worked, and evidence of public services.
4. Seek professional advice to avoid errors.

Final Thoughts

Payroll tax on contractor payments is complex, but the seven exemptions in NSW provide clear opportunities to reduce liabilities. Businesses that understand and apply these exemptions properly save money and avoid compliance risks.

Trinity Accounting Practice has been helping businesses since 2003, and our expertise ensures you stay compliant while keeping your tax obligations under control.

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☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
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