Simplify payroll tax laws to ‘resolve ambiguity’, says Tax Institute

The Tax Institute has outlined the significant compliance issues and administrative burdens stemming from the Payroll Tax Act 2007 (NSW) in a recent submission to the NSW Legislative Council.

The NSW Legislative Council commenced an inquiry in late November into the application of the contractor and employment agent provisions in the Payroll Tax Act 2007.

The Tax Institute noted that the contractor provisions and employment agency provisions have remained static for over a decade, "raising concerns about their relevance in today's on-demand and gig economy landscape".

It also outlined that the courts have adopted a broad interpretation of these provisions in recent years, which is arguably inconsistent with what was intended by Parliament.

Recent court decisions, for example, have led to the classification of general practitioners (GPs) and optometrists as contractors, and the classification of cleaners and security guards as subject to the employment agency provisions, necessitating payroll tax payments.

This includes decisions such as Commissioner of State Revenue v The Optical Superstore Pty Ltd and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue.

While most Australian states have introduced amnesties to protect some GPs from payroll tax, similar protections are not available to non-bulk billing GPs and other specialist medical practitioners who operate on a similar basis.

"Nor have similar concessions been made available for other sectors," the submission said.

The provisions have also spurred compliance issues and administrative burdens on taxpayers including the need to keep detailed records of contractors and their working days.

"The broadened interpretation of the contractor and employment agency rules has exposed taxpayers to substantial and unexpected payroll tax and interest liabilities, even where they have taken reasonable care and relied on court decisions that were current at the time of preparing their payroll tax returns," the submission said.

The Tax Institute said the lack of clear guidance and the inconsistent application of the law, exacerbated by inconsistent judicial interpretations of the legislative provisions and the regulator’s approach, highlight the need for legislative amendments to resolve ambiguity.

The submission said the provisions must be better aligned with parliament's original intent of identifying contractors who functionally resemble employees.

"In our view, it is evident that the contractor provisions and employment agency provisions were drafted broadly on the basis that they are specific anti-avoidance measures," it said.

"This breadth has meant that the application of the provisions is beholden to their interpretation within the judicial system, coupled with the interpretation by Revenue NSW."

The Tax Institute said it would like to see the legislative language of the Payroll Tax Act simplified and clarified so that the objectives of the Act are applied to address today’s on-demand and gig economy landscape.

It also wants to see the NSW government review the provisions of the Payroll Tax Act following feedback from stakeholders as part of a consultation.

"We also recommend that Revenue NSW provide more timely and balanced guidance that considers real-world business scenarios," the institute said.

"This should be prioritised over strict and literal interpretations of the law. Such guidance should be practical and supportive of genuine business activities, ensuring compliance is achievable and aligned with the original intent of the provisions."