Payroll tax for wages paid by or to third parties
Read the definition of wages paid by or to third parties, view examples, and learn how to correctly declare these wages in your payroll tax returns.
What are wages paid by or to third parties?
These are monies, or other valuable consideration, for:
- the appointment of a director to a company, or
- services provided by:
- an employee to an employer, or
- a director of a company to the company (employer)
that are paid or given by:
- someone other than the employer to an employee or director
- the employer to someone other than an employee or director, or
- someone other than the employer to someone other than an employee or director.
Employers liable for wages paid by or to third parties
Section 46 of the Payroll Tax Act 2007 (PTA) provides that monies or other valuable consideration that would be wages under section 13 of the PTA continue to be the wages of the employer, regardless of who pays, or receives, the wages.
Section 46 has two components – one that addresses employee wages (including deemed employee wages) and one that addresses director wages.
Employee and deemed employee wages
Section 46(1) of the PTA focuses on any monies or other valuable consideration paid or given (or to be paid or given) for services provided by an employee to his or her employer. These monies or other valuable consideration form part of the employer’s wages, even if paid or given by:
- someone other than the employer to the employee
- the employer to someone other than the employee, or
- someone other than the employer to someone other than the employee.
The reference to an employee in section 46(1) encompasses a reference to a deemed employee under the PTA.
A deemed employee is a worker who undertakes work in connection with a “relevant contract” or an “employment agency contract”.
A “relevant contract” arises under section 32 of the PTA and an “employment agency contract” arises under section 37(1) of the PTA.
Dandelion Pty Ltd, a parent company based in the United States (US), transfers an employee, Ahmed, to Australia to lead its Asia-Pacific marketing division.
Dandelion Ltd continues paying superannuation contributions into Ahmed’s US superannuation account while he is in Australia. While in Australia, Ahmed is employed by Banksia Pty Ltd, an Australian subsidiary of Dandelion Ltd.
Banksia Ltd must declare the superannuation contributions for payroll tax because they would have been wages of Banksia Pty Ltd if paid by Banksia Pty Ltd.
See sections 13(1), 13(1)(e), and 46(1)(c) of the PTA.
Julie, an employee of Accordion Pty Ltd, informs the business of her intention to leave and start a business under Xylophone Pty Ltd.
Accordion Pty Ltd asks Julie to stay on for the duration of a contract it tendered for and unexpectedly won. Julie agrees to stay as an employee and perform the same duties as before.
Julie requests that payment for her services be partly paid to her as an employee with the balance to be paid to Xylophone Pty Ltd.
Accordion Pty Ltd must declare the payments to Xylophone Pty Ltd for payroll tax because the payments would have been wages of Accordion Pty Ltd if paid directly to Julie.
See sections 13(1), 13(1)(e) and 46(1)(c) of the PTA.
Director wages
Section 46(2) of the PTA focuses on monies or other valuable consideration paid or given (or to be paid or given) for the appointment or services of the director to the company. These monies or other valuable consideration form part of the employer’s wages, even if paid or given by:
- someone other than the company to the director
- the company to someone other than the director, or
- someone other than the company to someone other than the director.
Section 46(2) can apply to monies paid by a company for services provided to the company by a director of the company.
Tim is a director of Kale Pty Ltd.
Management fees are regularly paid by Kale Pty Ltd to Tim’s family trust for research and development advice provided by Tim to the company.
Tim’s services are solely provided to Kale Pty Ltd. The payments to the family trust are paid at Tim’s request as director of the company.
Kale Pty Ltd must declare the payments to the family trust for payroll tax because they would have been wages of Kale Pty Ltd if paid directly to Tim.
See sections 13(1)(c), 13(1)(e) and 46(2)(b) of the PTA.
Section 46 (2) of the PTA can also apply to monies paid by a trust business to someone other than a director of the trustee company for services provided by the director to the trust.
Ann is a director of Able Pty Ltd ATF Able Family Trust trading as Able Consultancy Services.
Consultancy fees are regularly paid by Able Pty Ltd ATF Able Family Trust to Ann’s personal company for work she undertakes in the day-to-day operations of Able Consultancy Services.
Able Pty Ltd ATF Able Family Trust must declare the payments to Ann’s personal company for payroll tax because they would have been wages of the trust if paid directly to Ann.
See sections 13(1)(c), 13(1)(e) and 46(2)(b) of the PTA.
Contractor provisions
Payments may be wages under more than one taxing provision in the PTA.
If section 46 of the PTA and contractor provisions of the PTA apply to an arrangement, the Chief Commissioner will consider whether either or both should be applied.
The Chief Commission will consider:
- the facts of the arrangement, and
- any other matters the Chief Commissioner considers relevant.
The Chief Commissioner is more likely to apply the contractor provisions to an arrangement where a director of a company provides the same services to the company as those provided by contractors of the company.
David is a director of Forensic Accounting Services Pty Ltd (FAS).
Payments for specialised forensic accounting services provided by David to FAS are paid by FAS to a partnership of which David is a partner.
FAS engages forensic accounting specialists consisting of independent contractors and David to assist with the provision of forensic accounting services to clients.
The independent contractors and David provide the same specialised accounting services which are renumerated in the same way using the daily contractor rates plus goods and services tax (GST).
The arrangement which David provides specialised forensic accounting services should be considered under the contractor provisions because the same specialised forensic accounting services are provided by independent contractors engaged by FAS.
How to declare these wages in your returns
Employers are responsible for paying payroll tax on wages paid by or to third parties. As such, they must be declared in the “Salaries and wages” field in your monthly and/or annual payroll tax returns.
Why accuracy is important
Errors may result in the underpayment of payroll tax, which is known as a tax default.
Interest will be imposed on any underpayments. Your business may also be liable for penalty tax. Read the interest and penalty tax page for more details.
Always maintain relevant records and working papers showing how your figures were calculated. Records must be:
- retained for at least 5 years
- sufficient for a payroll tax liability to be properly assessed
- in English, or a form easily translated to English, and
- readily available to us if requested, for example as part of a payroll tax audit.
Common errors with wages paid by or to third parties
Payroll tax audits have found employers often fail to declare the following in their payroll tax returns:
- Amounts paid to a director’s personal entity when section 46(2) of the PTA applies.
- Amounts paid by an overseas-based parent company into an overseas superannuation account of an employee of an Australian subsidiary.