Payroll Tax – Who is an employee?

payroll tax who is an employee business lawyers corporate governance legal services brisbane

Posted by: | Date: 7 March 2014

In the recent decision of Freelance Global Ltd v Chief Commissioner of State Revenue, the Supreme Court of New South Wales ruled that Freelance Global Ltd (“Freelance”), a company which described itself as a specialist in facilitating work for independent contractors, was an “employment agent” for the purposes of payroll tax.

The case highlights the importance of understanding who is an employee for payroll tax purposes as the consequences can be significant if you get it wrong.

How does the Freelance system operate?

In simple terms, Freelance would enter into a contract with a client company, and Freelance would arrange an independent contractor to perform services for that client company. The services performed by the independent contractor for the client company would be as Freelance’s delegate, and the contractors were the beneficiary of a trust that Freelance set up

Were the individual’s contractors or employees for payroll tax purposes?

Freelance designed an in house criterion to assess whether individuals were independent contractors. One of the factors in this criterion included whether the independent contractor functioned through a company. Those accepted as independent contractors by Freelance would be invited to become a beneficiary of a trust.

When an independent contractor would perform services for a client company, as Freelance’s delegate, Freelance would invoice the client company for those services. The Freeland Trust No. 1 would then distribute the amount of the invoice to the independent contractor, less Freelance’s fee, as an advance of the Trust.  It was this distribution that was characterised by the Court as “taxable wages”, and thus subject to payroll tax.

The Judgement is very long and traverses a number of technical areas, which I will not descend into.

This case highlights the importance of ensuring that your business is taking into consideration all “taxable wages” for the purposes of payroll tax. Taxable wages are generally those wages that are paid to an employee.  However, in many instances “contractors” can also be deemed employees under the relevant state Payroll Tax Legislation, which is often very complicated.

This case highlights the importance of considering all aspects of the legislation when determining whether a worker is an employee or an independent contractor. The Court states clearly that simply because a worker retains his or her own corporate structure does not mean they are independent contractors. Unfortunately, there is no hard and fast rule for determining whether a worker is an employee or an independent contractor.

If you are unsure as to whether you are engaging employees or independent contractors please do not hesitate to contact me. It is essential to get it right, as getting wrong can be very costly.


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