Payroll tax is a state and territory tax on wages and, in labour hire arrangements, it sits primarily with the provider as the employing entity. But the interaction between payroll tax, contractor provisions and on-hire arrangements is complex enough that both providers and host employers benefit from understanding how it works — and where the risks are.
This guide covers how payroll tax applies in labour hire, the contractor provisions that can pull host employers into scope, and what both parties should understand about their obligations.
Need a compliant managed workforce solution? Explore managed skilled workforce solutions.
Key takeaways
- Payroll tax is levied on wages paid by the employer — in a standard labour hire arrangement, the provider is the employer and the payroll tax liability sits with them, not the host.
- State and territory contractor provisions can deem certain payments to contractors (including labour hire fees) as wages for payroll tax purposes — this is where host employers can be drawn into scope.
- Thresholds, rates and exemptions vary significantly by state and territory — what applies in one jurisdiction may not apply in another.
How payroll tax works in a standard labour hire arrangement
In a genuine labour hire arrangement, the provider employs the worker and pays their wages. Payroll tax is assessed on those wages — the provider is the taxpayer, and the wages paid to labour hire workers are included in the provider’s payroll tax calculation alongside any other employees.
For the host employer, the labour hire invoice represents a cost of services — not wages — and is not directly subject to payroll tax in the host’s hands in a standard arrangement. The host pays the provider’s invoice; the provider pays the worker’s wages and the associated payroll tax. This is the standard position, and it is why labour hire is sometimes used as part of a workforce cost management strategy. However, the picture becomes more complex when contractor provisions apply.
Contractor provisions — the key risk area for host employers
All Australian states and territories have payroll tax contractor provisions that can deem payments made to contractors — including payments to labour hire providers — as wages for payroll tax purposes. The intent of these provisions is to prevent employers from avoiding payroll tax by structuring what is effectively an employment relationship as a service arrangement.
The provisions generally apply where the contractor (in this context, the labour hire provider) supplies services that are ordinarily the kind of work performed by the host’s own employees, and where the arrangement is for labour rather than a specific deliverable. Whether a particular labour hire arrangement is caught by the contractor provisions depends on the specific legislation in the relevant state and how the arrangement is structured.
Most states provide a specific exemption for licensed labour hire arrangements — recognising that where a genuine employment relationship exists between the provider and the worker, the payroll tax liability correctly sits with the provider. However, this exemption is not automatic in all jurisdictions and the conditions attached to it vary. Host employers with significant labour hire spend should obtain advice on whether the contractor provisions apply to their arrangements in each state where they operate.
State and territory variation — what employers need to know
Payroll tax is not a federal tax — it is administered separately by each state and territory revenue authority. The rates, thresholds and legislative detail differ, which creates complexity for employers operating across multiple jurisdictions.
- Thresholds: the annual wages threshold below which payroll tax does not apply varies by state — it ranges from around $700,000 in some states to over $1.2 million in others. For a labour hire provider with a large workforce, the threshold is typically exceeded, making payroll tax a real cost in every state of operation.
- Rates: current rates range from approximately 4.75% to 6.85% depending on the state and the total Australian wages. Rates are subject to change — check with the relevant revenue authority for current figures.
- Grouping provisions: where related entities are grouped for payroll tax purposes, the combined wages of the group are assessed against a single threshold. For corporate structures that include both a labour hire entity and related operating entities, the grouping rules can affect the effective threshold available to each entity.
- Interstate employees: for workers who perform duties in multiple states, specific rules determine which state’s payroll tax applies — generally based on where the worker is based and the proportion of work performed in each state.
What labour hire providers need to manage
For a labour hire provider operating at scale, payroll tax is a significant cost item and a compliance obligation that requires active management across every state of operation. The key obligations are:
- Registration with each state revenue authority where the wages threshold is exceeded.
- Monthly or annual returns (depending on the jurisdiction and wages level) declaring taxable wages and calculating the liability.
- Correct treatment of allowances, fringe benefits and other non-cash remuneration — these may be included in the wages calculation depending on the state.
- Managing the grouping provisions where the provider is part of a corporate group — the group’s combined wages may affect threshold calculations.
What host employers need to understand
Host employers are not passive in the payroll tax picture — particularly where their labour hire spend is significant. Practical steps for host employers:
- Understand whether your labour hire arrangements fall within the contractor provisions in each state where you use labour hire. If they do, confirm whether the relevant exemption applies and what conditions attach to it.
- In states where the exemption depends on the provider holding a labour hire licence, confirm your provider’s licence status. An unlicensed provider may not meet the exemption conditions — which could create a payroll tax exposure for the host. For more on licensing requirements, see labour hire licensing in Australia.
- Where labour hire fees are material, obtain advice from a tax professional on the payroll tax treatment in each relevant jurisdiction before assuming the standard position applies.
For the broader compliance picture around award rates and employment entitlements in labour hire, see understanding award rates in labour hire.
Related reading
For a closely related guide, read Understanding Award Rates in Labour Hire: What Employers Need to Check.
Related services
FAQ
Does the host employer pay payroll tax on labour hire invoices?
In a standard, correctly structured labour hire arrangement, no — the payroll tax liability sits with the provider. However, contractor provisions in some states can bring labour hire fees within scope of the host’s payroll tax calculation. Whether this applies depends on the state and how the arrangement is structured — obtain state-specific advice where the amounts are material.
Is superannuation included in the payroll tax calculation?
Generally yes — employer superannuation contributions are included in taxable wages for payroll tax purposes in most states. The specific treatment varies by jurisdiction — check with the relevant revenue authority or a tax adviser for confirmation in each state where you operate.
What happens if a labour hire provider is not registered for payroll tax when they should be?
State revenue authorities can assess back taxes, apply penalties and charge interest on unpaid payroll tax. Voluntary disclosure typically results in better outcomes than an audit-triggered assessment. Providers operating at or above the threshold in any state should confirm their registration status with the relevant authority.
Are there payroll tax exemptions specifically for labour hire?
Some states provide specific exemptions from contractor provisions for arrangements that qualify as genuine labour hire — typically where the provider holds a labour hire licence and the employment relationship is genuine. The conditions and scope of these exemptions vary by state and are subject to legislative change. Obtain current advice from the relevant state revenue authority or a tax adviser.
Next step
If you want a workforce partner with transparent cost structures and compliant employment practices, explore managed skilled workforce solutions.
General information only: This article is for general informational purposes only and does not constitute legal advice. Legislation varies by state and territory — consult a qualified employment lawyer or tax adviser for guidance specific to your situation.
