A well written and informative article is provided today by HR Daily on some inherent risks associated with management of contractors, with specific reference to issues of payroll tax.
We feel its a must read for anyone managing contractors:
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Contractor management knowledge gaps pose financial risks
02 November 2009 8:28am (http://www.HRDaily.com.au)
Knowledge gaps in contractor management issues have the potential to expose medium-to-large companies to serious financial risks, says payroll tax specialist Stacey Nolan.
Payroll tax evasion – whether deliberate or a result of ignorance – is an ongoing target of state revenue authority investigations (especially in the current economic climate) but often employers don’t realise the full extent of their liability, says Nolan, of PayPartners.
Companies that engage contractors generally don’t manage their contingent staff in the same way as their permanent workforce, she says. “They’re usually under a different cost centre, and have less dedicated resources; it’s a very different process.”
These companies are proficient and competent in managing their employees, she says, but “due to the transactional nature of contracting, organisations do not put the same time and resources into contractor management”.
Whether organisations engage contractors directly, or through a recruitment or contractor management company, they face uncertainties in the areas where payroll tax, employment and other legislation overlap, she says. She estimates that around half of the companies she deals with have some gaps in their knowledge and aren’t fully aware of their obligations.
“Due to the nature of the contracting industry, even the most cautious and risk-averse organisations can be at risk.”
Contractors “fall between the cracks”
Geoff Mann, a partner in law firm Blake Dawson’s Melbourne office, agrees that among large corporates “there is a degree of uncertainty around how [payroll tax] provisions operate”, and “certainly it’s always an area of focus of state revenue authorities when they do payroll audits, to look at the contractor situation, because it can fall between the cracks”.
He says the main risk for employers is that at the time of entering a contract, they haven’t thought about whether they have a payroll tax liability. The second problem arises because assessing whether a payroll tax exemption applies often relies on information from the contractor, “and that’s sometimes difficult; it’s prying into the contractor’s business and it’s difficult to get that information”.
“You don’t necessarily know whether, for example, the contractor is off providing their services to the public generally. It’s putting an onus on you when you don’t really know the information.”
Contractors often don’t “come to light”, he says, because “they are run through accounts payable; they’re just paid like the purchase of stationery. No-one really looks at it that closely, it’s not run through payroll. Payroll departments are often responsible for payroll tax and if the contractors are not on the payroll they just don’t get looked at”.
Ignoring contractor obligations is “a real issue in times like the present”, he says, because so many companies have reduced their permanent workforces and engaged contractors instead.
Contractor clauses provide some safeguards
Mann points out that while the payroll tax laws of most states and territories (except WA, NT and Queensland until 1 July 2008) contain provisions that deem contractor payments to be wages for payroll tax purposes, in NSW the Payroll Tax Act gives employers a specific “out”.
The principal engaging a contractor can include in contracts a clause under which the contractor is required to pay any payroll tax which arises in respect of their engagement (similar to their workers’ compensation obligations). Mann recommends wording to the effect of:
For each invoice period, the contractor must issue to the principal a written statement with each invoice that states that the contractor has paid all payroll tax payable in respect of such remuneration (in the form required by Part 5 of Schedule 2 of the Payroll Tax Act 2007 (NSW)) during that invoice period.
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Posted by EntitySolutionsAdmin 
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