As a HR Consultant I work exclusively with clients who have employees and don’t provide advice to businesses who wish to engage contractors.

While I work with businesses on strategies for transitioning contractors to an employment model, I understand that some businesses in the allied health sector still seek to engage contractors.

I also don’t provide advice on superannuation and payroll tax, however I wanted to provide some general information to raise awareness.

What am I worried about?  

Many people engage contractors because “that’s the way it’s always been done” and they perceive it will help them to avoid additional costs like superannuation and payroll tax.

But even if the contracting model is appropriate and legal for your business, a contracted practitioner may still be deemed an employee in certain situations. It’s possible to be classified as an employee for specific obligations like superannuation or payroll tax while still being a contractor rather than an employee.

Unfortunately, I have heard clients who have told me their accountant informed them they were not required to pay superannuation for their contracted practitioners, but the ATO would very likely disagree.

I have also spoken with clients who had considered switching to employment, but as they were over the payroll tax threshold, they were worried about the additional cost to the business if they switched from contractors. Though it was likely they already were required to remit payroll tax, yet their accountant had clearly not raised this as a concern with them.

This complexity is where things can become problematic, each situation is highly fact-dependent and determined by numerous indicators and tests.

When is superannuation payable?  

As outlined by the ATO a contractor may be a “deemed employee”, thus requiring you to pay their superannuation, under subsection 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) if you pay them:

• under a contract that is mainly for their labour (more than half the dollar value of the contract is for their labour)
• for their personal labour and skills (payment isn’t dependent on achieving a specified result)
• to perform the contract work (work cannot be delegated to someone else).

This applies when engaging a person (ie a sole trader). If you are engaging an entity (ie a partnership, trust or company) you do not have to pay super for the person they employ to do the work.

You have an obligation to pay superannuation to their superannuation fund; you cannot simply pay the practitioner the value directly.

When are you liable for payroll tax?  

Payroll tax is a state-based tax that applies to wages, and in some cases, contractor fees paid by businesses. Each state and territory in Australia administers its own payroll tax system, but most jurisdictions follow similar principles.

You are liable for payroll tax once the total wages or contractor fees you pay exceed the threshold set by your state’s payroll tax legislation. For example in New South Wales the threshold in FY2023-2024 is $1.2m.

If you engage contractors, their fees may also be considered “wages” for payroll tax purposes, depending on how your business is structured. This is a critical area to assess, as some business owners mistakenly believe contractor payments are exempt from payroll tax.

A landmark case, Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023], highlighted how medical practices can be liable for payroll tax if contractors are deemed to have a ‘relevant contract’ under the Payroll Tax Act 2007 (NSW). They received an $800,000 bill for payroll tax!

The ruling emphasized that contractors may still be subject to payroll tax if the practice has significant control over their work or if payments are routed through the practice rather than directly from the patient to the contractor.

Some states may allow retrospective amnesties or relief for businesses in specific sectors like healthcare, particularly for businesses that meet certain criteria (e.g., bulk billing thresholds). Other states may take a stricter approach, assessing each situation on a case-by-case basis.

For most small allied health practices, payroll tax won’t apply unless your wages and contractor payments exceed the threshold. But if you are planning to scale your business and take on more employees or contractors, it’s important to factor payroll tax into your financial planning.

Where should you go from here?

If you want to explore transitioning your contractors to an employment model I’d love to chat with you.

If you have independent contractors, service agreements, facility management agreements or room rental agreements then I’d highly suggest you get legal advice to make sure that your agreements are legally compliant and minimise risk to your business. This includes understanding whether you have superannuation or payroll tax obligations.

I would recommend you speak with Sarah from You Legal – her firm has been in business for 11 years and has been focussing specifically on medical and allied health professionals for the past 8 years.  This is a passion area for her as she comes from a family of doctors and allied health professionals.