Major risk areas flagged for agents with independent contractors

Types of arrangements

Mr Wilcox said there are two main types of arrangements that real estate firms tend to have with independent contractors, with one type typically more problematic than the other.

The first type, called external conjunction arrangements, involves agents from unrelated real estate businesses working together to sell a property.

“The vendor of the property usually enters into an agency agreement and pays commission to one agent. The listing agent enters into a separate sub-agency or conjunction agreement with another agent. The agreement covers the transfer of rights to sell the property and how commissions are split,” he explained.

This type of arrangement is a temporary commercial relationship between two businesses, he said.

“There’s no ongoing or regular relationship between the parties. Once the property is sold, the agents split the commission and the conjunction arrangement ends,” he said.

“Generally, there are no payroll tax consequences for the commission paid under an external conjunction arrangement.”

The other type of arrangement, called an internal conjunction, is between a real estate business and a licensed sale agent who is an independent contractor who routinely works for that business.

There’s often a formal contract between the business and the sales agent setting out the terms of an ongoing arrangement. The main objective is for the real estate business to use the services of the sales agent, Mr Wilcox explained.

“In agency agreements with vendors, both the real estate business and the sales agent are usually listed together as agent. All statutory requirements including the handling of trust monies are managed by the real estate business. The real estate business pays commission to the sales agent at a pre-determined rate,” he said.

“In an internal conjunction arrangement, there’s often little or no distinction between the business and the sales agent, with the sales agent usually working or represented under the brand name of the real estate business. Both the business and sales agent are highly dependent on each other when it comes to their core income-producing activities.”

Traps with exemptions

Mr Wilcox warned that there can be significant payroll tax consequences if an internal conjunction arrangement is treated incorrectly.

“Many real estate businesses exclude internal conjunction arrangements from the calculation of payroll tax, relying on one or more of the exemptions allowed for under the Payroll Tax Act 2007 (NSW), but when audited by Revenue NSW, many of these internal conjunction arrangements are found not to meet the required exemption criteria,” he cautioned.

“In these cases, it’s been found that the commissions paid to the sales agent should have been assessed and declared as taxable wages in the payroll tax returns of the real estate business.”

According to Revenue NSW, some of the common mistakes being made in this area are due to a misunderstanding of what’s required to claim a particular exemption, claiming the wrong exemption for payments made under the arrangement or none of the exemptions are applicable, but at least one is claimed in any case.

Real estate firms, Mr Wilcox said, will often claim a contractor exemption under Ruling PTA 020 which is where a business requires the services of sales agent (contractor) for less than 180 days in the year.

However, this exemption doesn’t actually apply to internal conjunction arrangements, he warned, because selling property on behalf of vendors is essential for real estate businesses to continue operations.

“The services provided by a sales agent (the contractor) would therefore be ordinarily required throughout the year,” he said.

Another exemption that’s often claimed is Ruling PTA 035 V2 where a sales agent provides services for 90 days or less during the year.

“This exemption can only be claimed if the real estate business can show that a sales agent worked for no more than 90 days in a year. Any type of work performed by a sales agent counts as a day worked, including taking a call from a prospective buyer, attending a property inspection or meeting with a vendor to sign an agency agreement,” he clarified.

“Most real estate businesses don’t actively monitor or keep records of the hours/days worked by sales agents engaged under internal conjunction arrangements. In such cases, this exemption would not be available.”

Another common exemption which is claimed is Ruling PTA 021 where the sales agent (contractor) ordinarily performs the same kind of services for other businesses.

Given that most real estate businesses don’t actively monitor or keep records of the hours/days worked by sales agents engaged under internal conjunction arrangements, he said, this exemption, would not be available.

“This exemption can only be claimed if the sales agent sells property on behalf of vendors for more than one real estate business during the year. The real estate businesses need to be independent and unrelated for the exemption to apply,” he stressed.

“It’s common industry practice for internal conjunction agents to work predominately or exclusively for one real estate business. In such cases, this exemption would not be available.”

The other common exemption which is claimed is where a contractor entity engages two or more employees to perform the services.

“This exemption can only be claimed if the contractor entity employs two or more employees to assist in the selling of property under an internal conjunction arrangement,” he said.

“To qualify for the exemption, each employee must have been engaged and paid directly by the internal conjunction agent and have performed real estate services to the hiring real estate business on behalf of the internal conjunction agent.”

Mr Wilcox stressed that payroll tax exemptions were intended for contracts between independent businesses, not arrangements within one business.

“Real estate businesses should therefore be extremely cautious when claiming a contractor exemption for payments made under any internal conjunction arrangements,” Mr Wilcox said.

This email address is being protected from spambots. You need JavaScript enabled to view it.