Payroll tax obligations for construction businesses in WA

Why do construction businesses often attract increased scrutiny from the Office of State Revenue?

Construction businesses have the same payroll tax obligations as other businesses in Western Australia. They follow the same rules, rates, and thresholds specified in the Pay-roll Tax Act 2002 and Pay-roll Tax Assessment Act 2002. However, construction businesses often come under scrutiny from the Office of State Revenue (OSR) regarding payroll tax compliance. This is due to the industry's unique labour practices, reliance on contractors, and complex payment structures.

What do construction businesses need to know about payroll tax?

We created this guide to help construction businesses navigate payroll tax and stay compliant. It covers:

• An overview of WA payroll tax thresholds and rates
• Taxable wages and contractor payments
• Grouping provisions and their impact
• Compliance tips and common pitfalls

Payroll tax threshold in WA

Payroll tax thresholds vary state by state. In WA, businesses become liable for payroll tax when they have paid more than $1m in wages. This counts the total sum of Australian taxable wages, not just those paid in WA. The $1m threshold is an annual threshold, which comes to $83,333 per month. A diminishing threshold applies if annual taxable wages fall between $1m and $7.5m. This means the tax-free portion reduces progressively as wages increase within this range. If a construction business operates solely in WA and pays less than $1m in taxable wages annually, it is exempt from payroll tax.

Payroll tax rate

In Western Australia, the standard payroll tax rate is 5.5%, applied to taxable wages above the threshold. Businesses that pay between $1m and $7.5m in wages apply the tax rate only to a portion of their total wages after accounting for the diminishing threshold. However, businesses that pay more than $7.5m in wages apply the full tax rate of 5.5% without any adjustments.

Registration and payment

If your business pays wages that are above the threshold, you must register for payroll tax. Each month, make sure to check your total wages. If they exceed the monthly limit, you have seven days after the month ends to register. Right now, that monthly limit is $83,333.

You need to submit your monthly reports and payments by the 7th of the following month. For example, if you paid wages in March, you have until April 7 to take care of those reports and payments. 

Registered employers must also lodge an annual reconciliation return. You will need to lodge this by July 21. This is where you would make any adjustments to correct overpayments or underpayments.

Taxable wages in construction

Figuring out what constitutes a taxable wage can get tricky for construction businesses . Taxable wages include salaries, wages, allowances, bonuses, commissions, superannuation contributions, and certain contractor payments. If you directly employ labourers, carpenters, electricians and site managers, then what you pay them gets included. However, things become less clear-cut when it comes to paying contractors. 

Payroll tax and contractor payments in WA

Unlike most other Australian states, WA has not fully harmonised its contractor provisions with the national framework. In WA, payments to contractors are subject to payroll tax if the relationship is deemed "akin to an employee/employer relationship" under common law principles. This might be the case if the contractor works exclusively for one business, must follow strict instructions, or uses tools and equipment provided by the company.

On the other hand, if the contractor is truly independent, like someone who works for several clients and brings their own tools, then the payments they receive usually won’t be taxed. This distinction is especially important in the construction industry, where it's common to use subcontractors. The difference in rules in WA compared to other states also adds complexity.

Grouping provisions

Sometimes, businesses try to avoid payroll tax by fragmenting their operations into separate entities. Each entity would fall below the threshold and so not have to pay the tax. Grouping provisions exist to prevent people from doing this. 

Businesses are grouped for payroll tax purposes if any of the following criteria are met:

• Related Bodies Corporate: Businesses are considered related if they fall under the same corporate structure, like a parent company and its subsidiaries. This falls under section 50 of the Corporations Act 2001.
• Common Controlling Interest: If the same person or persons have a controlling interest in at least two businesses.
• Direct, Indirect, or Aggregate Control: If an entity has a controlling interest in another company through different ownership structures.
• Subsuming Groups: Smaller groups may be combined into a larger group.

When businesses are grouped, their taxable wages are added together to see if they exceed the $1m threshold. Only one member, the designated group employer (DGE), can claim the threshold deduction throughout the financial year. If no DGE is nominated, Revenue WA may appoint one, usually the member with the highest proportion of WA wages.

How do grouping provisions apply to construction companies?

Construction companies often have complex organisational structures, including multiple subsidiaries, joint ventures, or partnerships, which can trigger grouping under the above criteria. The key impact is the loss of individual threshold deductions, potentially pushing them into tax liability. 

For instance:

A construction company might have a parent company and several subsidiaries handling different aspects, such as construction, design, and material procurement. If these are related bodies corporate, they will be grouped, and their wages combined for tax purposes.

Common employees, such as project managers working across different entities, could lead to grouping under the common employee provision.

Shared ownership through trusts or other entities might result in grouping based on controlling interest, especially in joint ventures common in large construction projects.

Grouping provision examples

To illustrate, consider BuildWA1 Ltd, a construction company with the following structure:

• BuildWA1 Ltd (parent company)
  • BuildWA1 Construction Pty Ltd (wholly owned subsidiary for construction)
  • BuildWA1 Design Pty Ltd (wholly owned subsidiary for design services)
  • BuildWA1 Materials Pty Ltd (wholly owned subsidiary for materials procurement)

All are related corporate entities, so they form a group. Their combined taxable wages determine if they exceed the $1m threshold, and only one DGE can claim the deduction. If their total wages are $1.5m, with $1.2m paid in WA, they pay 5.5% on $200,000 ($1.2m - $1m), equating to $11,000 in payroll tax.

Another scenario: BuildWA1 Ltd owns 60% of BuildWA1 Construction Pty Ltd and has a 40% interest in a partnership with BuildPartner1 Ltd, for a specific project. BuildWA1 Ltd and BuildWA1 Construction Pty Ltd are grouped due to the controlling interest, but the partnership's inclusion depends on the specifics of control and ownership, potentially requiring professional advice to determine.

Construction-specific considerations

1. Mixed labour and materials contracts: If a construction business engages contractors and the contract includes both labour and materials (e.g., supply and installation), only the labour component is potentially taxable. The business must separate these components, excluding GST, to determine the taxable amount. If not specified, a reasonable estimate of the labour portion may be required.
2. Interstate operations: If a WA construction business employs workers in other states or territories, the total Australian taxable wages (across all jurisdictions) determine liability. However, tax is only paid on wages attributable to WA work. This is relevant for firms working on projects near state borders (e.g., WA and Northern Territory). For further information regarding payroll tax harmonisation rules across Australia, have a look at this article: Managing payroll tax risks for contractors | RSM Australia
3. Exemptions: Small construction businesses with annual taxable wages below $1m are exempt. Wages paid to apprentices or trainees under approved training contracts may be exempt, which is significant for construction firms investing in workforce development.
4. Compliance risks: Construction businesses often face scrutiny over contractor classifications. Misclassifying employees as contractors to avoid payroll tax can lead to audits, penalties, and interest. The WA Office of State Revenue may review contracts, work patterns, and control levels to determine if a contractor should be treated as an employee.

Examples of construction business issues 

Below are examples of situations where construction businesses might face scrutiny, focusing on real-world scenarios that highlight common areas of investigation:

Misclassification of employees as contractors

Scenario: A construction firm hires a group of carpenters and labourers to work full-time on a residential development project. The workers are paid via invoices as "independent contractors" rather than through payroll as employees. They use the company’s tools, follow a fixed schedule set by the site manager, and work exclusively for this business for six months.
Scrutiny: The OSR audits the business and determines that these workers are employees under common law principles (control, integration into the business, lack of independence). The firm failed to include its payments in taxable wages, leading to underreported payroll tax.
Outcome: The business is liable for back taxes on the unreported wages, plus penalties (up to 100% of the tax shortfall) and interest (currently around 7-8% per annum). The OSR may also demand payroll records going back several years (typically up to 5 years under the Pay-roll Tax Assessment Act 2002).

Contractor payments without a clear labour breakdown

Scenario: A construction company subcontracts plumbing and electrical work for a commercial building. The subcontractor submits a single invoice of $200,000 for "supply and installation," covering both labour and materials. The construction firm does not separate the labour component and excludes the entire amount from taxable wages, assuming it’s exempt as a "mixed contract."
Scrutiny: During an audit, the OSR requests evidence of the labour vs. materials split. Without documentation, the OSR applies a default apportionment (e.g., 50% labour, based on industry norms) and deems $100,000 as taxable wages. The entire labour portion could be taxable if the contractor’s relationship also resembles employment (e.g., exclusive work for the firm).
Outcome: The business owes payroll tax on the assessed labour amount (e.g., $100,000 × 5.5% = $5,500), plus penalties for failing to self-assess correctly.

Interstate wage allocation errors

Scenario: A WA-based construction firm wins a contract to build a road spanning the WA-NT border. It employs workers who spend 60% of their time in WA and 40% in the Northern Territory (NT), with total Australian wages of $2m. The firm only reports and pays tax on $1.2m (60%) to WA, assuming the NT portion is exempt from WA tax.
Scrutiny: The OSR finds that some workers’ wages were incorrectly apportioned—e.g., a supervisor spent 80% of their time in WA, but only 60% was reported. Additionally, the firm failed to consider nexus rules (e.g., where the worker is based or paid from). The OSR reassesses the WA taxable wages upward.
Outcome: Additional tax is levied on the underreported portion (e.g., $200,000 × 5.5% = $11,000), with interest applied for late payment.

Sham arrangements to avoid tax

Scenario: A large construction company sets up a ‘labour hire’ subsidiary to supply workers to its projects. The subsidiary pays wages of $3m annually but claims its workers are exempt from payroll tax under a supposed ‘training exemption.’ In reality, the workers are not apprentices or trainees - just regular employees shifted to the subsidiary to reduce the parent company’s taxable wages.
Scrutiny: The OSR investigates and finds the subsidiary is a sham entity under common control, designed to evade tax. The training exemption is disallowed, and the wages are grouped with the parent company’s payroll.
Outcome: The full $3m is taxed at 5.5% (e.g., $165,000 annually), with significant penalties (potentially 75-100% of the tax evaded) and a risk of criminal prosecution for deliberate tax avoidance.

Underreported superannuation or allowances

Scenario: A construction business pays its site workers a base wage plus a ‘tool allowance’ and ‘site allowance’ totalling $1.2m annually. It reports only the base wage ($900,000) as taxable, arguing the allowances are exempt. Superannuation contributions are also excluded from the payroll tax calculation.
Scrutiny: The OSR audits and finds the allowances are taxable (as they’re part of remuneration for work performed) and that superannuation contributions (mandated or voluntary) are included under WA law unless specifically exempt (e.g., for apprentices). The taxable wages should be $1.2m plus super (e.g., $1.32m total).
Outcome: Tax is recalculated on the higher amount (e.g., $320,000 excess × 5.5% = $17,600), with penalties for underreporting.

Common triggers for scrutiny

High contractor usage: Construction’s reliance on subcontractors often prompts OSR reviews to ensure proper classification.

Rapid growth: Firms scaling up payroll quickly may miss threshold crossings or fail to register on time.

Inconsistent reporting: discrepancies between payroll tax returns, BAS statements, or workers’ compensation data can flag audits.

Industry risk profile: Construction is a known high-risk sector for payroll tax non-compliance due to its complex labour arrangements.

How scrutiny unfolds

Audit process: The OSR may request contracts, timesheets, invoices, bank statements, and worker interviews to verify wage reporting.

Penalties: Range from 25% (unintentional errors) to 100% (deliberate evasion), plus interest on unpaid tax.

Retrospective reach: Audits can cover up to 5 years, amplifying liabilities.

Practical tips for construction businesses

• Record keeping: Maintain detailed records of wages, contractor agreements, and project-specific payments to substantiate claims during audits.
• Review contracts: Ensure contractor agreements clearly establish independence (e.g., contractor supplies own tools, works for multiple clients) to minimise tax liability.
• Identify group members: Assess organisational structure to determine if entities are grouped based on the criteria.
• Nominate a DGE: If grouped, nominate a DGE to claim the threshold deduction, ensuring administrative efficiency.
• Consult experts: Given the complexity, especially with contractors, consider seeking advice from an RSM tax professional familiar with WA payroll tax laws.
• Regular reviews: Periodically review group status, especially with changes in ownership, structure, or operations, to maintain compliance.
• Voluntary disclosure: Self-reporting errors before an audit can reduce penalties significantly.

These examples illustrate how construction businesses in WA can inadvertently—or intentionally—fall afoul of payroll tax rules, leading to costly consequences. Staying compliant requires vigilance, especially given the OSR’s focus on this sector. For tailored advice, businesses should consult an RSM tax specialist.

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