URGENT — PAYROLL TAX ALERT FOR REAL ESTATE AGENCIES

A 3-minute read for real estate business owners

If your agency engages sales agents as contractors rather than employees, payroll tax should be on your radar right now. Revenue NSW has significantly stepped up audit activity across the real estate industry over the past year, specifically targeting how agencies treat commissions paid to “internal conjunction agents” — contractors who work routinely and often exclusively for a single agency.

Several agencies are currently going through this process, and the pattern in the findings is consistent. It’s worth understanding what’s changing and what you can do about it now, rather than waiting for a review letter to land.

What’s actually happening

Most agencies treat commissions paid to contract sales agents as exempt from payroll tax, on the basis that the agent is an independent contractor. Under the Payroll Tax Act 2007 (NSW) there are limited exemptions that exclude payments made to genuine contractors from being assessed for payroll tax. Revenue NSW, who administers and collects payroll tax, appears to have taken a more robust approach when it comes to auditing arrangements involving “internal conjunction agents”.

The payroll tax exemptions are intended to exclude bona fide contractors from the payroll tax net: typically agents holding a Class 1 licence running their own independent business who also happen to contract with a an agency. The payroll tax exemptions were never meant to cover someone who, in substance, works like an employee but is paid through a company or trust structure instead of through the agency’s payroll.

To qualify for the most commonly relied-upon exemption (2 or more person test – see below), a contractor needs to first satisfy Revenue NSW that they are genuinely “carrying on a business” — not just holding an ABN or issuing invoices, which Revenue NSW is explicit does not count. Auditors are looking for real indicators of independence: does the agent advertise under their own name or brand, do they hold their own trust account, do they pick up listings with other agencies, do they carry any commercial risk of their own? In practice, most internal conjunction arrangements struggle on several of these points at once — the agent works solely for one agency, operates under that agency’s brand and premises, and relies on the agency’s trust account and back-office systems to do the job.

Most real estate agencies engaging the services of an “independent” agent rely on the 2 or more person test exemption. . To satisfy this test, the independent contractor (usually structured as a company) engages another person, as an employee or contractor, to provide services of a real estate agent to the independent contractor. See the Example below.

Example:  

Sales person “Joe” sets up his own sales agent company “Joe Sales Co” of which Joe is the licensee. 

A real estate agency called “Best Agency” wishes to engage the services of Joe as an independent contractor sales agent. Best Agency does not want to pay payroll tax on commission payments earned by Joes Sales Co.   

To satisfy the 2 or more person payroll tax exemption, Joe must, according to Revenue NSW: 

1. have Joe Sales Co engage another person, either as an employee or contractor; 

2. that person must perform substantive real estate work as a qualified or near qualified real estate agent; 

3. that person must be remunerated commensurate to the commission earned by Joe Sales Co; 

4. that person must work for a substantial period of the year.     

Failing any of the above (1) to (4), Best Agency will likely be assessed for payroll tax based on the commission payments it makes to Joe Sales Co.  

It should also be noted, payroll tax is assessed on a yearly basis and so Joes Sales Co may qualify for the exemption in one year but fail the next.   

Revenue NSW has also flagged that it will apply anti-avoidance provisions where an arrangement looks like it was restructured mainly to access an exemption, without any real change to how the person actually works. 

Two other common trip points worth flagging: grouping and motor vehicle allowances. Related entities and trusts under common ownership or control are usually grouped for payroll tax, meaning only one tax-free threshold applies across the group — a mistake we still see regularly, particularly where a business operates through several trusts or related companies. On motor vehicle allowances, a fixed weekly allowance to a real estate salesperson is only exempt up to a set amount (based on 250km per week at the ATO’s cents-per-kilometre rate); anything paid above that is taxable unless you keep proper records of actual business kilometres. 

What you can do to reduce your risk moving forward 

A payroll tax audit typically looks back several years, so the cost of getting this wrong is cumulative — unpaid tax, interest, and potentially penalties. It is good commercial practice to review your current independent sales contractor arrangements in place to identify any potential payroll tax risk and corrective measures that need to be taken moving forward.  

Some practical steps worth taking now: 

• Keep clear records for any “two or more persons” exemption — licence details, engagement dates, amounts paid, and a description of the work each person actually does. The second person engaged must be performing a genuine sales role, not just administration. 

• Document in the contractor agreement that the contractor owns their own database (client and vendor contacts) — it is not the property of the agency or franchise. 

• Require contractors to run their own website and listings presence, in addition to the franchise site. Cost is no longer a barrier to this — a low-cost website can be built quickly using tools such as lovable.dev. 

• Ensure commissions paid to the contractor are drawn from the trust account, not the franchise’s general operating account. 

• Have the contractor invoice the vendor directly for their commission, rather than simply being paid a share through internal ledger entries. 

• Include a lease/licence term in the contractor agreement, clarifying that the contractor’s commission split includes their access to office space and facilities — rather than these being provided for free. 

• Have every contractor complete a Subcontractor Statement (Worker Compensation / Payroll Tax) (Revenue NSW form OPT011) annually. This should be renewed every financial year — now is a good time to get it done for the current year, for every contractor engaged. 

If a review identifies historical underpayments, a voluntary disclosure to Revenue NSW generally attracts significantly reduced penalties compared to amounts identified during an audit — so earlier is better than later. 

We’re actively helping clients work through this issue and are happy to review your current contracting arrangements and flag any exposure before it becomes a problem. If you need help, email us at tax@insightmp.com.au and we’ll take a look at your business.