The increasing use of labour supplied through labour hire firms or employment agencies under a labour hire/employment agency contract has led to a considerable number of challenges for the Government and regulatory authorities including the Australian Taxation Office and State Revenue Offices.
Just to be clear, a labour hire/employment agency contract involves a contract between two parties where one of the parties (the labour hire firm/employment agent) procures the services of a person (the worker) for a client (the end user/client). The terminology varies – with the use of ‘labour hire firms’ in the context of licensing, which is discussed below and ’employment agent’ in context of the subsequent discussion of payroll tax (PRT). For simplicity, this article refers to ‘labour hire firms’.
Unfortunately, many of the challenges are due to unscrupulous operators choosing to ignore taxation and other workplace related laws.
Other challenges relate to revenue laws being ‘tested’ as to how workers are treated for payroll tax purposes given, for example, the end user of the services may be payroll tax exempt while the labour hire firm is not.
In this article, we focus on a few recent changes which are designed to ensure greater integrity in the labour hire industry and to clarify how the payroll tax rules apply where the end user of the services may be payroll tax exempt.
This article is particularly relevant to Victorian-based TaxEd members but there are parallels to members in other States.
Labour hire licensing
Victoria’s new labour hire licencing rules take effect from 1 October 2019.
Victoria follows South Australia and Queensland, which have previously introduced similar rules.
The rules in Victoria require:
- labour hire operators to be licensed, which in turn involves:
- a registration process, which requires provision of significant detail prior to registration;
- a fit and proper person test for individuals who are officers of a labour hire operator entity;
- acknowledgement of compliance with a variety of workplace and taxation laws and;
- annual reporting obligations;
- a user of workers supplied through a labour hire operator (referred to as a ‘host’) must only deal with a licenced operators and penalties (of up to $500,000) can be imposed on a host that deals with an unlicensed labour hire operator.
The key point for subscribers that use labour hire operators is to ensure the operator is licensed.
Whilst most operators will be proactive and advise clients of their registration details, it is critical (given the potential penalties) that the status of an operator be determined prior to workers being procured through the operator.
For Queensland, more information can be obtained at Labour Hire Licencing Queensland.
For South Australia information is available at the Consumer and Business website. Interestingly, there are proposals in South Australia to scale back the operation of the system to labour hire operators servicing certain industries where workers are ‘at a greater risk of exploitation’.
PRT – opportunities and issues where a payroll tax exempt ‘end user ‘ procures workers through labour hire firms
How the PRT concession operates
By way of a simple example of an employment agency contract, Council A (being the end user/client) requires ‘labourers’ (i.e. workers) at a community festival. Council A approaches a local labour hire operator [employment agent] who procures ten workers who will provide labour to Council (under guidance of Council employees) in relation to the set-up, conduct and packing-up of the festival.
Most State and Territory PRT legislation provides that where a worker is supplied under an ’employment agency contract ‘ to (certain) end user clients where PRT exemption would have applied had the end user employed the worker directly, the employment agent is also entitled to exemption on wages.
For Victorian PRT purposes, the PRT law (s. 40(1)) deems certain amounts and benefits that are paid/provided to a worker in connection with an employment agency contract to be wages paid by the labour hire firm under that contract. Section 40(2) provides that s. 40(1):
‘…does not apply to an employment agency contract to the extent that an amount, benefit or payment referred to in that subsection would be exempt from payroll tax under Part 4 (other than under Division 4 or 5 of that Part, section 50 or clause 16 or 16A of Schedule 2) had the service provider been paid by the client as an employee, if the client has given a declaration to that effect, in the form approved by the Commissioner, to the employment agent.’
Only certain types of organisations are exempted from PRT under Part 4 (notably local councils, charities, health care service providers and certain educational providers). In the case of Victoria, basically, s. 40(2) allows an employment agent to treat wages paid to a worker supplied to such an end user as being PRT exempt.
There is an expectation that an end user within the scope of s. 40(2) would provide a declaration that it was PRT exempt when entering an arrangement to procure a worker. In practical terms, this does not happen.
Key considerations for TaxEd members are:
- Where a member’s PRT exempt status may ‘flow’ through to a labour hire firm, any commercial negotiations should ensure the ‘benefit’ of the PRT saving is passed on to the member by way of lower rates payable in relation to the on-supplied workers.
- Although a labour hire firm may not have initially factored the PRT exemption into pricing, it may subsequently be utilised either by way of the labour hire firm claiming a refund (from a State Revenue Office) or prospectively ceasing to pay PRT on impacted wages. In either scenario, there should be an adjustment to rates charged for on-supplied workers and/or any PRT refund being passed-on to the PRT exempt body. However, the Victorian PRT law does not confer any entitlement on end user to a lower rate or to the recouped PRT and, in the absence of a re-negotiated arrangement, it would be necessary to consider the terms on which the PRT exempt body originally contracted with the labour hire firm.
TaxEd members that are PRT exempt (under section 40(2) in Victoria or the equivalent provision in other jurisdictions) should also be mindful of the implications of providing a declaration confirming PRT exemption. Generally, and especially following adoption of the SRO’s revised requirements noted below, these would include the significance of when the declaration is provided and the dates recorded in the declaration as to when it was signed and to which year it relates.
Generally State Revenue Offices have been lenient as to when declarations confirming PRT exemption need to be obtained (meaning they may have been obtained after the event).
Recently, the Victorian State Revenue Office has advised that declarations relating to a financial year must be provided before the end of the financial year otherwise they are of no effect (see Vic SRO website under ‘Timing of Declarations’ heading). Some other jurisdictions have a similar requirement and members should specifically check their own jurisdiction’s requirements.
This means (in Victoria) that if PRT has not been paid on wages without a declaration being in force by the end of the financial (PRT) year in which the wages were paid, the wages are taxable. It is also no longer possible to claim a refund where wages initially were subjected to PRT (and no declaration was provided) but it is later identified that a section 40(2) type exemption was available.
PRT concession action points
Action points for TaxEd members are:
- where a member is entitled to PRT exemption and procures workers through labour hire providers, any ‘flow on’ PRT exemption should be considered in the pricing;
- declarations should be put in place when pricing is agreed preferably, but certainly no later than, the end of the relevant year (as this in now critical it appears in Victoria, at least); and
- care should be taken to ensure that where a declaration confirming PRT exempt status is requested, the staff member signing should be aware of or seek guidance as to its implications. – this would include the significance of when the declaration is provided and the dates recorded on the declaration as to when it was signed and to which year it relates.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.