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Offer to delay payroll tax changes not enough to save us, say IT firms

Date

Kirsten Lawson

ACT Treasurer Andrew Barr.

ACT Treasurer Andrew Barr. Photo: Jay Cronan

ACT treasurer Andrew Barr is considering delaying his budget changes to payroll tax by "a few months", but companies hit hard by the change say that's not enough.

Online89, a recruitment firm that bids for IT contracts with the federal government said it could be forced out of business by the new tax.

Another, IT placement agency Compas said it was locked into more than 150 contracts and could not afford the tax.

Mr Barr plans to bring recruitment agencies into the payroll tax net, so they will have to pay 6.5 per cent once their payroll reaches $1.85 million. To date, they have been exempt, with the consultants they employ treated as sub-contractors rather than employees.

But Online89 director Peter Legge-Wilkinson, who has 30 to 40 contractors on his books, said many of his contracts with the Commonwealth from July 1 were already negotiated so the prices were locked in.

Agencies were unwilling to change the contract to cover the new payroll tax, so the only alternatives were for contractors to take a pay cut, or for companies like his to absorb the cost. But Mr Legge-Wilkinson said his company worked on small margins and the extra cost could drive him out of business.

A three-month delay would not solve the problem because most contracts were for six or 12 months, and in some cases longer. He has called on the government to delay the change for a year and exclude existing contracts.

Compas partner John Vassallo said he had 110 IT contractors. He charged 6 per cent for organising contracts for them with government departments – a margin less than the 6.85 per cent payroll tax.

He had more than 150 contracts already in place, so was "between a rock and a hard place''. If the changes went ahead his only choice would be to terminate contracts with the departments.

Mr Vassallo said he was not opposed to bringing contractors into the payroll tax rules, but wanted existing contracts exempted.

He also pointed to a grim future for more than 300 payroll management companies in the territory, who would lose their business with the change.

Liberal treasury spokesman Brendan Smyth said he had received a dozen or more emails from firms worried about the survival of their businesses and upset at the lack of consultation and the suddenness of the change.

They had signed contracts in good faith with no hint of the payroll tax change. The contracts also contained penalties for failure to deliver, so anyone forced out of business by the change could also be hit with penalties, he said.

"At a time when doing business in the ACT is a bit tough to put another impediment in the way of a very large sector in the ACT is very, very questionable," he said.

Mr Barr estimates 1000 contractors, mainly in IT, could be affected. He said the government was considering delaying implementation by a few months in response to concerns about the limited time to adjust. He also pointed out that the ACT charged one of the lowest rates of payroll tax in the country. 

18 comments

  • Get this, a small agency under the cap (say 5 contractors) will still be exempt.
    If by employing a 6th contractor it is now over the cap, it pays the Payroll Tax only on the monies over the limit.
    So, which of his contractors does the agent pass the new Tax liability on to.
    The new contractor on the portion of his/her wages that has exceeded the cap, or shared equally by all the contractors on his books.
    Then what happens if one contractor only works a 6 month contract within the year. That would mean that the liability (based on an annual cap) would not be liable.

    There are a million and one ways that this desperate last second money grab is wrong.

    It would be nice to see the Canberra Times investigate a few of the obvious flaws.

    Either the exemption goes completely, or the new liability is applied universally to all 3rd party contractors at a fixed rate.

    It then comes down to status determination from a tax basis and I know tax authorities have a very difficult time defining and maintaining clear definitions of individual and group statuses. The Inland Revenue in the UK tried desperately to claw in individual 3rd party contractors to claim more taxable earnings on their invoiced rate with IR35. Another desperate money grab and ultimately open to failure.

    If the ACT persists, all you will find happen is large agencies will break up into smaller agencies all part of a group. Payroll managers will be out of work as the role of agency and payroll manager is merged. Each agency will be under the existing cap and the government will earn NOTHING from these changes. Adapt or die, so the market will adapt.

    Commenter
    Contractor
    Location
    ACT
    Date and time
    June 18, 2014, 8:27AM
    • So what is the impact on existing contracts? If the payroll tax is implemented, would it be legal for the recruitment companies to reduce contractors' rates by 6.85% mid way through a contract? Surely, that would be a breach of the contract?
      Or, would new contracts be needed?

      Commenter
      Question
      Date and time
      June 18, 2014, 10:19AM
      • New one's will be needed.

        Commenter
        dramas
        Date and time
        June 18, 2014, 4:33PM
    • Ahh.. Andrew Barr, the ACT's rate is 6.85%. That's the highest marginal rate in the country. It only takes a payroll of $6.2m for a business to have to pay more tax in the ACT than in NSW. No wonder all the big companies don't choose to operate here.

      Commenter
      James Daniels
      Location
      Canberra
      Date and time
      June 18, 2014, 11:18AM
      • "He also pointed out that the ACT charged one of the lowest rates of payroll tax in the country."

        Why aren't any journalists reporting the facts? The ACT has the highest payroll tax rate in the country.

        http://www.payrolltax.gov.au/harmonisation/payroll-tax-rates-and-thresholds

        Commenter
        fred
        Date and time
        June 18, 2014, 12:34PM
        • I think Mr Baah will find the ACT charges one of the highest rates of payroll tax. In any event, it is not the amount, but the way in which this is being implemented, even the dodgy deficit tax will only come into effect next financial year.

          As an IT contractor I am very upset at the prospect of a 6.85% pay cut and my agency potentially being forced out of business. Destroying 21 Century Industry of the future with a tax of the past. Way to go Australia.

          Liberals are the destroyers of jobs in the ACT, while Labour are the destroyers of business. Only option: Vote PUP.

          Maybe we can all go and get a job on the (light) railroad.

          Commenter
          Lara
          Location
          kingston
          Date and time
          June 18, 2014, 12:41PM
          • 1)
            "Mr Barr ... also pointed out that the ACT charged one of the lowest rates of payroll tax in the country."

            The above statement is oh so wrong. Is it what Barr said or is it Kirsten Lawson, the author of this article, stated it?

            It is right on the contrary the highest payroll tax in the country!
            www.payrolltax.gov.au/harmonisation/payroll-tax-rates-and-thresholds

            2)
            "... so they will have to pay 6.5 per cent ..."

            It is actually 6.85%, Kirsten.

            Commenter
            Tom
            Location
            Canberra
            Date and time
            June 18, 2014, 12:52PM
            • The ACT payroll tax rate is actually the highest in the country at 6.85%.

              Commenter
              Giulia
              Date and time
              June 18, 2014, 1:23PM
              • The income difference between IT contractors in ACT and their APS counterparts are narrowing significantly in recent years. I was on $60/hour as a junior contractor 15 years ago at that time EL1 (SITOC then) was on $50K. Now a junior contractor is probably still earns $60/hour but EL1 is on $100K.

                This tax change will probably the last straw. If IT contractors either go ahead and join APS or leave Canberra, Poor Andrew Barr will have much smaller base to collect tax, a lot of small businesses will close the shops so he probably won't see any net gain for ACT.

                Worse still for Andrew, most IT contractors used to be die hard labor voters. If he looses next election and becomes a contractor, wonder who is going to feel sorry for him. Since he lied blatantly (Hey, Canberra has the highest payroll tax in the country, Andrew), he will have no sympathy from me.

                Commenter
                Ian
                Date and time
                June 18, 2014, 1:59PM
                • It's also worthy noting that the contractor's rate will drop by more than 6.85%. The payroll tax is paid by the recruitment agency on the service contract. The recruitment agency will pay the the payroll company 6.85% less than what they are paying them now. This includes the payroll company's cut, insurance and workers comp fees, and then the contractor's wage and superannuation.
                  So the contractor will actually see a much higher cut in wages than reported. The lower the contractor's current rate, the higher percentage cut they'll get.
                  For an IT tester getting about $40/hour now, they'll be now looking at something like $35/hour.

                  Commenter
                  fred
                  Date and time
                  June 18, 2014, 2:09PM

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