About labour-hire firms
You operate a labour-hire firm if:
- you arrange for workers to perform work or services directly for clients
- the client pays you for this service
- you pay the worker for the performed work or services provided to the client
- the worker isn't an employee of the client
- you may or may not employ the worker.
Labour-hire can be called different names, including:
- on-hire
- employment agent or agency
- contract management
- recruitment services
- group training organisations (where your business is referred to as the host employer).
Regardless of how the activity is described, if you supply workers to another business or individual, you must withhold from payments you make to individual workers.
Amount to withhold
It's important to remember that you need to withhold tax from individual workers under a labour-hire arrangement whether they are an employee or independent contractor.
All your workers need to provide you with their tax file number (TFN), regardless of whether they also have an Australian business number (ABN) (which they may have because of other unrelated activities) or an instalment rate to vary the rate of tax. You can use our tax calculator or tables to work out how much to withhold, which will depend on whether your worker provides you with their TFN. Any requests from your worker to vary the withholding rate will need to be lodged with us.
Withholding provisions for payment types
There are priority rules for working out which withholding provisions you apply to a certain payment:
- payments for work or services (for example payment of salary or wages to an employee)will take priority over payments under a labour-hire arrangement
- retirement payments, employment termination payments (ETPs) or annuities will take priority over payments under a labour-hire arrangement
- payments under a labour-hire arrangement will take priority over payments under a voluntary withholding agreement.
Employee or independent contractor
You must withhold an amount from payments made to individual workers who perform work or services directly for your clients, regardless of whether the individual worker is an:
- employee
- independent contractor.
To determine the correct classification of your worker for tax and super purposes, we have provided some helpful information on our Employee or independent contractor page. If you withhold from withholding payments, you must provide payment summaries to workers and lodge annual withholding reports to us.
Employees
If your worker is an employee, you must withhold tax from salary and wages payments, and pay the withheld amounts to us.
Independent contractor
If your worker is an independent contractor, you withhold tax from payments if your business wholly or partially involves arranging people to perform work or services for your clients.
Workers who are independent contractors:
- don't need to quote an ABN
- aren't entitled to register for GST as they do not meet the definition of enterprise.
You don't report the payments you made to independent contractors in the Taxable payments annual report.
Example: labour-hire arrangement subject to withholding
Staffprovider Ltd keeps a database of skilled people willing to provide their services to third parties. Corporate Pty Ltd asks Staffprovider for a computer programmer. Staffprovider contracts Jane to provide her services to Corporate.
Staffprovider contracts Corporate to provide programming staff (Jane).
There is no contract between Jane and Corporate. Staffprovider pays and withholds tax from Jane's payments for her services to Corporate.
End of exampleExample: activities incidental to your other business activities not subject to withholding
A solicitor arranging for a barrister to perform work for the solicitor's client would be incidental to the solicitor's other business activities. Withholding would not be required in relation to the payments the solicitor makes to the barrister.
End of exampleExample: payments by a primary contractor to a subcontractor not subject to withholding under the labour-hire provisions
Paul is a builder and contracts with Susan to build her a house. Paul has contracted to perform the work for Susan and to produce a finished house – he hasn't contracted to provide her with the services or the labour of others.
Paul subcontracts Bruce to do the plumbing work on Susan's house.
No withholding is required unless Bruce doesn't provide an ABN.
It's not a labour-hire arrangement as Paul has contracted to do the work for Susan, not just to provide her with the services or labour of others.
End of exampleWorker contracts through an interposed entity
An interposed entity is a third-party (individual, company, partnership or trust) that contracts with the labour-hire firm on behalf of the worker.
If your work contracts through a third-party, you don't need to withhold tax, unless they don't quote an ABN on an invoice or other documents relating to the supply of work or service.
If the interposed entity is registered for GST, they will charge GST on taxable supplies made to you.
Voluntary agreements
Workers aren't able to enter into voluntary agreements when working under labour-hire arrangements. Withholding under voluntary agreements only applies if there are no withholding provisions.
Personal services income
Personal services income (PSI) rules don't affect your obligation to withhold from payments to individual workers. However, they do affect how a worker reports their income in their own tax returns and the deductions they can claim.