Dynamic Business

Payments to contractors
While a contractor is not ordinarily considered to be an employee, most states deem contractors to be employees where a ‘service’ contract exists between the person supplying the services (contractor) and the end-user (employer).
Such a contract is usually identified as one relating to the performance of work by a person in the course of carrying on a business. However, only the amount of the payment that relates to labour is liable to PRT, not the cost of equipment and materials that may be incurred by the contractor.
Each state also provides for specific exclusions from its contractor provisions such that contracts will be exempted in certain circumstances:
* the labour component of the contract is ancillary to the supply of materials or equipment (e.g., where the cost of the latter exceeds 65 percent of the contract amount)
* the services provided are not normally required by the business receiving the services and/or the person supplying those services provides them to the general public
* services under the contract are provided by two or more persons supplied by the contractor
* payment of consideration under the contract is greater than $800,000 (NSW) or $500,000 (Tas) – the exemption no longer applies in Vic, and
* the services are those of an owner/driver (NSW, Vic, SA), insurance agent (NSW, Vic and SA) or a direct selling agent (NSW, Vic and SA).
There are no contractor provisions in WA, Qld or NT so that liability for PRT in these jurisdictions will generally only arise on the deeming of the employer/employee relationship where the intention of the relevant contract is to reduce or avoid liability to payroll tax.

Payroll tax grouping rules
All jurisdictions require ‘grouping’ of associated/related businesses so that, where two or more businesses are grouped, their wages are aggregated in order to determine whether a liability exists. However, each employer in the group remains primarily responsible for the payment of PRT on its own wages.
The main circumstances in which businesses are grouped in the various jurisdictions are:
* where companies are related under the Commonwealth’s Corporations Act (i.e., holding/subsidiary relationship)
* where employees of one business perform duties solely or mainly for the benefit of another business
* where there is an agreement between two businesses relating to the performance of duties by employees of one, for the benefit of the other
* where the same person(s) has a controlling interest in two or more businesses, and
* where a business exercises managerial control over a branch or agency (Qld and WA).
Determining whether a group exists largely hinges on the opinion of the relevant commissioner in each state, having regard to the circumstances of each particular case. Generally, other than in respect to companies related under the corporations law, the commissioner has a discretion to exclude an employer from the operation of the grouping provisions. The discretion may be exercised where it can be demonstrated that the grouped businesses are substantially independent and unconnected, and that the relationship is not designed to reduce or avoid PRT.
Generally, where employers are grouped, one group member claims the exemption threshold and the remaining members must pay a flat rate of PRT.

Inter-jurisdictional payroll tax issues
Each state/territory prescribes the circumstances in which wages are liable to PRT in that jurisdiction with the broad criteria for establishing liability being:
* the wages are paid or payable in a particular state, unless the wages relate to services rendered wholly in another state
* the wages are paid outside a state (but within Australia) but all the services to which the wages relate were rendered in that particular state, and
* the wages are paid outside Australia in respect to services rendered mainly in a particular state.

Capital Gains Tax (CGT) issues
Recent changes to the small business CGT concessions have significantly enhanced the benefit of these concessions for eligible small business taxpayers (i.e., those with an annual turnover of less than $2 million or with net CGT assets of not more than $6 million).

CGT concessions
The four CGT concessions available are:
1. Fifty percent active asset reduction—where the basic conditions are met the amount of any capital gain will be automatically reduced by 50 percent.

2. Small business 15-year exemption: this concession fully exempts any gain from CGT if the basic conditions are met, the asset has been continuously held for at least 15 years just before the CGT event, and the individual is either 55 and retired or is permanently incapacitated.

3. The $500,000 retirement exemption provides a once in a lifetime $500,000 CGT exemption where the basic conditions are met, and an individual is either aged over 55, or is under 55 and rolls over the gain as an eligible termination payment to a complying superannuation fund.

4. Small business rollover: this concession is available where the basic conditions are met, and the amount of the gain is used to either purchase a replacement active asset or improve an existing active asset either one year before the sale of the original CGT asset or two years after. Where this concession applies, tax on any gain is deferred until the replacement asset or improved asset is on- sold.

Where a taxpayer does not satisfy the 15-year exemption, he or she may use a combination of the 50 percent active asset reduction, $500,000 retirement exemption, and the small business rollover to reduce any capital gain. With careful tax planning a taxpayer may also be able to use these concessions in combination with the 50 percent CGT discount to further reduce a potential capital gains tax liability.
You should consult your CPA accountant for more detailed advice regarding your particular circumstances.

—Garry Addison is senior tax counsel for CPA Australia www.cpaaustralia.com.au