Businesses often use more than one labour hire provider to find specialist skills, manage regional placements or meet a client’s workforce needs. While the commercial arrangement may appear straightforward, a chain of on-hire can create payroll tax exposure if the parties do not clearly identify who is responsible for reporting the relevant wages.
The risk is not limited to traditional labour hire firms. Recruitment businesses, payroll providers, contractors and companies that source workers through other entities can all be affected. Getting the arrangement wrong may lead to unpaid payroll tax, interest, penalty tax, duplicated reporting and difficult recovery discussions between businesses in the chain.
What is a chain of on-hire?
A chain of on-hire generally exists where two or more employment agents sit between a worker and the ultimate client receiving the worker’s services.
A common structure looks like this:
- A business needs a worker or team of workers.
- It engages an agency or labour hire provider.
- That provider engages another agency or supplier to source the worker.
- The worker performs services for the end client.
For payroll tax purposes, this can create more than one employment agency contract. The relevant state or territory payroll tax rules may treat each employment agent as an employer, and the worker or service provider as that agent’s employee for payroll tax purposes.
This can apply even where the worker operates through a company or trust. The label used in the agreement, such as “contractor”, “consultant”, “subcontractor” or “payroll service”, does not by itself determine the payroll tax outcome.
The key question is what the parties are doing in substance. Is one business procuring the services of a person for another business’s client? If so, the employment agency provisions may need to be considered.
Why these arrangements create payroll tax risk
Employment agency provisions are designed to bring labour-hire-style arrangements within the payroll tax net. They can apply more broadly than many businesses expect.
In a standard employment agency arrangement, the employment agent may be treated as the employer for payroll tax purposes. Amounts paid in connection with the worker’s services can be treated as wages, which may include more than ordinary cash payments.
In a chain, a strict reading of the rules can appear to create payroll tax consequences at more than one point. For example, the agency closest to the end client may pay an upstream agency, while that upstream agency pays the worker or the worker’s entity.
Without an applicable administrative approach, declaration or other supporting evidence, both agencies may face questions about whether they should include payments in their payroll tax calculations.
This is why it is dangerous to assume that only the business that physically pays the worker has a payroll tax obligation. Equally, it is risky to assume that the agency nearest the client is always liable, regardless of the circumstances.
The outcome depends on the legislation and revenue authority practice in the relevant jurisdiction.
The “closest to the client” approach is not a universal rule
In several jurisdictions, revenue authorities recognise an administrative approach intended to prevent the same underlying labour from being taxed more than once in a genuine chain of on-hire.
Broadly, the employment agent closest to the ultimate client may be regarded as the party responsible for payroll tax on the arrangement. However, this is not a simple rule that can be copied into every contract and forgotten.
The exact treatment can differ depending on:
- the state or territory in which the wages are taxable;
- the wording of the relevant payroll tax legislation;
- whether the arrangement is genuinely an employment agency arrangement;
- whether the downstream or upstream agency is liable for payroll tax in that jurisdiction;
- whether the required declaration or evidence has been obtained;
- whether the arrangement involves exempt clients or exempt services; and
- whether there are anti-avoidance concerns.
For example, New South Wales guidance requires an upstream agent to obtain and retain a chain of on-hire declaration where the downstream agent, being the agent closest to the ultimate client, accepts responsibility for the payroll tax treatment. Queensland takes a different administrative approach and does not use a separate chain-of-on-hire form for this purpose.
This difference matters. A process that is adequate for a Queensland arrangement may not be sufficient for a New South Wales arrangement. Businesses operating across borders should not assume that one state’s forms, exemptions, thresholds or reporting practices apply elsewhere.
Where the closest agent is below the relevant payroll tax threshold or does not pay payroll tax, another agent in the chain may become liable. That means a smaller agency cannot safely assume that it has no exposure simply because it sits further away from the end client.
Do not confuse payroll tax responsibility with employment obligations
A chain of on-hire can involve several different legal relationships. Payroll tax is only one part of the compliance picture.
For federal tax purposes, a typical labour hire firm that contracts with and pays the worker is generally responsible for the worker’s pay as you go withholding, superannuation and fringe benefits tax obligations. The host business usually has a contract with the labour hire firm, not directly with the worker.
However, the practical arrangements and contracts still matter. A business described as a “payroll provider” may be doing more than payroll processing. It may be participating in the procurement and supply of labour, which can affect payroll tax analysis.
A contract cannot simply declare that another party has taken on every obligation and make the risk disappear. Indemnities can help allocate commercial risk between parties, but they do not necessarily determine who a revenue authority can assess under the applicable legislation.
Businesses should separately consider:
- Payroll tax: Who is the employment agent or deemed employer under the state or territory rules?
- PAYG withholding: Who makes payments to the worker and has the withholding obligation?
- Superannuation: Who has the obligation to make superannuation contributions for the worker?
- GST: Is GST correctly treated on agency fees and taxable supplies, and is it separately accounted for in BAS reporting?
- Fringe benefits tax: Is any non-cash benefit being provided to workers, and by which entity?
- Workers compensation and workplace laws: Who is the employer for insurance, safety and industrial purposes?
These questions may have different answers. The payroll tax outcome should not be used as a shortcut for every other employment-related obligation.
A practical example
Imagine an engineering business needs a project coordinator for a fixed-term assignment.
The engineering business engages Agency B. Agency B does not have a suitable worker available, so it engages Agency A. Agency A contracts with the project coordinator and pays the coordinator for the work performed at the engineering business.
Commercially, the arrangement may involve three invoices or payments:
- the engineering business pays Agency B;
- Agency B pays Agency A; and
- Agency A pays the coordinator.
For payroll tax purposes, both Agency A and Agency B may be part of employment agency arrangements. Depending on the relevant jurisdiction, the revenue authority may generally regard Agency B as the liable party because it is closest to the engineering business, the ultimate client.
But this result should not be assumed. Agency A may need a completed declaration or other evidence from Agency B. If Agency B is not liable for payroll tax, does not report the wages, or gives inaccurate information, Agency A may still have exposure.
The agencies should document the arrangement before payments commence, rather than trying to reconstruct the chain after an audit begins.
Common mistakes businesses should avoid
The same issues regularly arise in labour hire, construction, healthcare, cleaning, security, logistics, food processing and professional services. The following mistakes can turn an administrative oversight into a significant tax problem.
Assuming only traditional labour hire businesses are affected
Employment agency rules can apply to a range of arrangements, including those described as managed services, outsourced labour, project services or contractor supply.
A fixed-price contract or results-based agreement does not automatically prevent an arrangement from being treated as an employment agency contract. The actual services, relationships and commercial substance need to be reviewed.
Looking only at the worker’s employment status
A business may focus on whether a worker is an employee or independent contractor at common law. That is important for some obligations, but payroll tax employment agency provisions can operate independently of that analysis.
A worker supplied through a company or trust may still be relevant to payroll tax calculations under an employment agency arrangement.
Treating all payments as the agency’s margin-free pass-through
Payroll tax is not necessarily calculated only on the amount ultimately received by the worker. Depending on the jurisdiction and structure, the amount paid between agencies may be relevant.
At the same time, agency fees and GST components may receive different treatment from amounts treated as taxable wages. Each payment stream should be identified and reconciled carefully.
Relying on an indemnity instead of evidence
An indemnity may give a business contractual rights against another party, but it is not a substitute for a valid declaration, payroll tax registration status, return records or proof of payment.
If a revenue authority asks why an amount was excluded from taxable wages, the business should be able to produce contemporaneous documents supporting its position.
Ignoring the end client’s status
Some employment agency arrangements may involve clients whose wages would be exempt if they directly employed the worker. The availability of an exemption can depend on the nature of the client, the work performed and the required declaration.
Government, charitable and public-sector engagements require particular care. The treatment may differ depending on the level of government and the jurisdiction in which the services are performed.
Assuming interstate arrangements have one answer
Payroll tax is imposed and administered by states and territories. A business with workers in more than one jurisdiction may need to deal with different thresholds, rates, exemptions, grouping rules, forms, return processes and revenue authority guidance.
The location of the client, worker, agency offices and work performed can all be relevant. Do not default to the rules of the state where the head office is located.
A compliance process that reduces the risk
A disciplined onboarding process is the most effective way to manage chain-of-on-hire risk. It is far easier to map the relationship before the first invoice is issued than after several years of payroll tax returns have been lodged.
Consider the following steps.
Map the full supply chain. Identify the ultimate client, every agency or intermediary, the worker or service provider, and the entity that pays each party.
Review the contracts together. Look beyond the contract title. Check who procures the worker, who directs the work, who invoices whom, and whether the worker becomes an employee of the end client.
Identify the relevant jurisdiction or jurisdictions. Payroll tax treatment is not nationally uniform. Confirm where the wages are taxable before relying on a particular state’s guidance.
Determine the intended reporting party. Establish which agent is expected to include the relevant taxable wages in its payroll tax returns, and why.
Obtain required declarations before relying on an exclusion. Where the jurisdiction requires a chain-of-on-hire declaration or an exempt-client declaration, obtain it promptly and check that it is complete.
Keep supporting records. Retain agreements, invoices, payroll reports, correspondence, declarations, exemption evidence and reconciliations. In New South Wales, chain-of-on-hire declarations must be retained for a specified period and be readily available if requested.
Review the arrangement when circumstances change. A change in client, worker type, state of work, agency role or payroll tax status can change the outcome. An annual review is sensible for ongoing arrangements.
If an error is identified, early advice and voluntary disclosure may help limit the consequences compared with waiting for an audit or investigation.
The key takeaway
A chain of on-hire is not merely a commercial arrangement between labour suppliers. It can create payroll tax obligations for more than one party unless the relevant state or territory rules, declarations and reporting responsibilities are properly addressed.
The safest approach is to identify the full labour supply chain, confirm the applicable jurisdiction, document which entity is responsible for payroll tax reporting, and keep evidence that supports the position taken. This should be done alongside, not instead of, reviewing PAYG withholding, superannuation, GST and other employer obligations.
This article is general information only and is not personal financial or tax advice. Every labour supply arrangement is different, and state and territory payroll tax rules can change. Speak with a registered tax agent or accountant, such as, for advice tailored to your business structure and circumstances.