• Payments under a voluntary agreement

    Usually you do not have to withhold amounts for payments you make to contractors. However, you and a contract worker (payee) can enter into a voluntary agreement to withhold an amount of tax from each payment you make to them. It is a good way to help independent contractors meet their tax obligations.

    Voluntary agreements cannot be used where the payment is already covered by another PAYG withholding category, such as payments to employees or under labour hire arrangements. A voluntary agreement can cover a specific task or apply to successive arrangements between you and the worker. Either you or the contractor can end a voluntary agreement at any time by notifying the other in writing.

    Find out about:

    How to make a voluntary agreement

    We have a Voluntary agreement for PAYG withholding form that you can use to make an agreement with a worker.

    Alternatively you can use any form of written agreement, including electronic, as long as all the information contained in the form is included, as well as:

    • a statement that the payments made under the arrangement are subject to a voluntary agreement under section 12-55 of Schedule 1, Part 2-5 of the Taxation Administration Act 1953
    • whether you are entitled to a full GST credit or not.

    If an electronic agreement is used (for example, an email), you must have adequate computer system controls in place to ensure the security and accuracy of the agreement.

    You don't need to send a copy of the voluntary agreement to us, however you and the worker should each keep a copy for your records for five years after the last payment is made under the agreement.

    Next step:

    How much to withhold

    The amount you must withhold under a voluntary agreement is either:

    • the contractor's PAYG instalment rate, called the Commissioner's instalment rate (CIR) , as notified by us
    • a flat rate of 20% (if the instalment rate is not known or is less than 20%).

    To work out how much to withhold, you subtract any goods and services tax (GST) charged from the invoiced amount payable and multiply the result by the withholding rate specified in the voluntary agreement.

    The payee is advised of their CIR after the lodgment of their most recent income tax return and they must disclose it to you or state that they don't have one.

    How long the voluntary agreement lasts

    A voluntary agreement can cover a specific task or apply to successive arrangements between you and the payee.

    When the payee is first advised of their CIR, or advised of a new CIR, you may need to enter into a new agreement after considering the withholding rate.

    You and the payee can each end a voluntary agreement at any time by notifying the other party in writing. We do not need to be notified of the cancellation of the agreement or any changes made to the voluntary agreement.

    GST

    If a payee is not registered for GST, they cannot include GST in the price of the goods or services they supply, nor are they entitled to GST credits.

    However, if the payee is registered for GST, they can claim GST credits for any GST paid on items they buy and use in performing the work under the voluntary agreement.

    The payee can only charge GST on any goods or services they supply under a voluntary agreement if the payer isn't entitled to a full GST credit. If the payer is normally entitled to a full GST credit, the payee can't charge GST.

    Example: Payer entitled to full GST credit

    Tony is a self-employed bricklayer, registered for GST. He wins a contract with Housebuilders Inc. to complete all of the bricklaying for them in relation to their current property development. Tony and Housebuilders Inc. agree to enter into a voluntary agreement so that Housebuilders Inc. withholds amounts from Tony's payments.

    As Housebuilders Inc. is entitled to a full GST credit, Tony:

    • can't include GST in the price he charges for the bricklaying services
    • can claim GST credits for any GST paid on goods or services he buys or uses in performing the work.

    Example: Payer not entitled to full GST credit

    Jim runs a computer programming business and contracts with Big Bank Inc. to help develop an internet banking program. Jim and Big Bank Inc. agree to enter into a voluntary agreement so that Big Bank Inc. withholds amounts from Jim's payments.

    As Big Bank Inc. makes financial supplies it is not entitled to claim GST credits for the things it buys, including Jim's services, that relate to the supply of financial services.

    Jim is registered for GST and:

    • must include GST in the price he charges Big Bank Inc
    • can claim GST credits for any GST paid on goods or services he buys or uses in performing the work.
    End of example
    Last modified: 05 Apr 2017QC 27073