9 NSW Payroll Tax Exemptions Sydney Builders Miss (2026)
The 7 NSW section 32 contractor exemptions plus 2 structural carve-outs Sydney builders miss in 2026 — and the exact documents Revenue NSW expects you to hold to prove each one.
NSW has 7 contractor exemptions in section 32 of the Payroll Tax Act 2007, plus 2 structural carve-outs:
- Ancillary to goods — labour incidental to supplying materials or plant
- 180-day — that service type not ordinarily needed 180+ days a year
- 90-day — same contractor, same service, no more than 90 days in the year
- Services not ordinarily required — contractor derives under 40% of gross trading income from you
- Services to the public generally — contractor genuinely serves multiple principals
- Two-or-more workers — contractor engages 2+ people to do the work
- Owner-driver — conveyance of goods in the contractor's own vehicle
- Apprentice/trainee rebate — a credit at lodgement, not an exemption
- Exempt-client declaration — s40(2), for agencies on-hiring to exempt clients
⚠️ These are self-assessed. Revenue NSW reviews them later and can reassess 5 years back at 5.45% plus penalty tax.
You do not apply for these and get approved. You claim them in your own return, and you carry the proof.Most Sydney builders pay payroll tax on contractor payments that aren't legally taxable. Others claim exemptions they cannot prove, which is worse.
Both mistakes treat an exemption as a box you tick. It isn't. It's a claim, and the file is what defends it.
Table of Contents
- How NSW Payroll Tax Actually Hits Builders
- Why Is Claiming an Exemption Not the Same as Getting It?
- What Are the 7 Contractor Exemptions Under Section 32?
- Which Two Structural Carve-Outs Do Builders Miss?
- Which Test Applies to On-Hired Labour, Section 32 or Section 37?
- How Do Grouping Provisions Catch Builder Groups?
- What Survives a Revenue NSW Audit?
- Get Started
- Frequently Asked Questions
How NSW Payroll Tax Actually Hits Builders
Payroll tax starts at $1,200,000 in annual Australian taxable wages for FY2026-27. The rate is 5.45% on every dollar above it, per Revenue NSW thresholds and rates.
The trap: "wages" is not just PAYG payslips. Under the Payroll Tax Act 2007 it also pulls in super, allowances, grossed-up fringe benefits, payments to certain contractors, and payments under employment agency contracts deemed wages under Division 8, sections 37 to 42.
The contractor inclusion runs through section 32: any "relevant contract" deems the principal to be the employer.
So the default is brutal. Every subbie invoice is wages unless an exemption applies and you can show why.
Most builders cross the line the year they take on a fourth or fifth full-time PAYG worker.
💡 From that point every contractor payment is in scope, and the exemptions are the only thing between you and a backdated bill.
Why Is Claiming an Exemption Not the Same as Getting It?
Read this before the list. It changes what the list is for.
There is no approval step. You self-assess the exemption in your own return, and Revenue NSW does not sign it off at lodgement. It checks later. Revenue NSW runs a standing audit and compliance programme including dedicated exemption reviews, and can reassess the current financial year plus the previous four under the Taxation Administration Act 1996.
Standard shortfall penalty tax is 25%, ranging 20% to 90% by culpability, plus interest (Revenue NSW CPN012, current 2026).
Revenue NSW's working position is simple: an exemption you cannot substantiate is treated as one that never applied.So an exemption is not a saving you booked. It is a claim you hold open for five years.
That is why every exemption below carries its own evidence list rather than a generic "keep good records" line.
What Are the 7 Contractor Exemptions Under Section 32?
Before the list: we are not payroll tax auditors and we are not tax agents.
Leap Labour runs labour hire. What follows is how the NSW rules read on the public record, plus a suggestion of what is worth keeping on file. It is not advice on your position.
Your accountant or registered tax agent confirms what applies to you, and Revenue NSW is the only body that settles it. Take the document lists below to them, not to your own judgement.
Revenue NSW's Contractor Exemptions Guide lists seven, and only seven. If one applies, every dollar paid to that contractor that year is exempt, not just the qualifying slice.
There is no NSW sales-rep or performing-artist exemption. If you've read that elsewhere, you've read another state's list.
1. Ancillary to the Supply of Goods (s32(2)(a))
The labour is incidental to supplying materials, plant or equipment. A plant hire firm that sends an operator with the machine, or a formply supplier who unloads and stacks.
Keep on file:
- The supply contract or purchase order showing goods as the substance
- Invoices that separate goods from labour
- Delivery dockets
- The plant hire agreement
2. The 180-Day Exemption (s32(2)(b)(ii))
Exempt if your business ordinarily requires that type of service for fewer than 180 days in the financial year. Note the wording: the service type, not the individual contractor, counting days delivered by employees and contractors together (Ruling PTA020, current 2026).
A scaffolder you use for two jobs a year, yes. A concrete pumper on every pour, no.
Keep on file:
- A whole-of-year log of every day that service type was performed by anyone
- Job programmes showing the work is project-driven, not operational
- The prior year's log, proving the pattern is normal for you
3. The 90-Day Exemption (s32(2)(b)(iii))
Exempt if the same contractor provides the same or similar services on no more than 90 days in the financial year. Each calendar day on site counts as a full day, even one hour.
Cross 90 days and every dollar you paid that contractor that year, including the first 90 days, becomes taxable.That cliff is stated expressly in Ruling PTA035v2 (current 2026).
Keep on file:
- A dated day-count log, kept through the year rather than reconstructed
- Site sign-in or induction records that independently corroborate those days
- Invoices carrying the service dates
4. Services Not Ordinarily Required, Sold to the Public (s32(2)(b)(i) and (iv))
The contractor supplies services your business does not ordinarily require, and supplies them to the public generally. The contractor must derive less than 40% of gross trading income from you that financial year (Ruling PTA022, current 2026).
This is the one that catches specialist trades. A waterproofer working for thirty builders. A survey crew with its own client book.
Keep on file:
- A signed contractor declaration of the percentage of gross trading income derived from you that year
- Financial statements or a BAS summary supporting that percentage
- Evidence they market to the public
You're relying on someone else's books here, so get that declaration signed at engagement, not at audit.
5. Services Provided to the Public Generally (s32(2)(b)(iv))
A separate test with no fixed percentage: is the contractor genuinely in business serving multiple principals? Ruling PTA021v2 (effective 1 July 2021, current 2026) sets a safe harbour at an average of no more than 10 days a month for you, while also working for at least one other unrelated principal.
Keep on file:
- Month-by-month day counts measured against that 10-day average
- Proof of concurrent principals: their other contracts or invoices
- Their advertising, website or trade listings
6. The Two-Or-More Workers Exemption (s32(2)(c))
Exempt if the contractor engages two or more people to perform the services, one of whom can be the contractor. A husband-and-wife formwork outfit both on the tools, yes. A solo concreter who borrows a mate, generally not.
Revenue NSW CPN007 wants proof two people actually performed the work, not that two were authorised to.
Keep on file:
- Timesheets naming both workers on the same job
- The contractor's own payroll or subcontract records showing they engage the second worker
- Both ABNs
- Induction records for both
The contractor, not you, must be the second worker's legal employer. If you directed and paid them, you've just proved the opposite.
7. The Owner-Driver Exemption (s32(2)(d)(i))
Exempt where the main purpose of the contract is conveyance of goods in the contractor's own vehicle: you neither own nor lease it, you contribute nothing to its capital or running costs, and any other services are ancillary (Ruling PTA006, current 2026).
Tipper drivers, plant float operators, formwork delivery. Hand over a fuel card or put your decals on the truck and the exemption falls over.
Keep on file:
- Registration or finance papers in the contractor's name
- The contract naming conveyance of goods as the main purpose
- Delivery dockets
- An expense ledger showing no fuel card, toll tag or repairs paid by you
The pattern: each exemption is its own test with its own evidence, and they're independent. Only one needs to apply for all payments to that contractor that year to be exempt.
Build the file at engagement, tagged to the exemption you're claiming. Reconstructing it two years later is how builders lose.
Which Two Structural Carve-Outs Do Builders Miss?
Beyond section 32, two more relief mechanisms save builders real money. Almost nobody claims them cleanly.
8. Apprentice and Trainee Wages
Most builders have this backwards. Wages paid to approved apprentices and new-entrant trainees are taxable wages you must still declare, and you then claim a payroll tax rebate that offsets the tax at lodgement (Revenue NSW, apprentice and trainee wages, current 2026).
Existing workers relabelled as "trainees" do not qualify. New entrants do. Apprentices employed through an approved non-profit group training organisation are exempt under a separate mechanism, so check which route yours came through first.
Keep on file:
- The training contract registered with Training Services NSW
- Evidence of new-entrant status at commencement
- Apprentice wages identified separately in payroll
- The GTO's approval status, if that is your route
Keep all of it for five years.
9. Exempt-Client Declaration (s40(2))
On-hiring workers to a public benevolent institution, religious institution, charity, public hospital or local council? That client can give you a written declaration under Ruling PTA026v2 (current 2026), and the wages component of that contract is then exempt.
This matters on council jobs, public hospital fit-outs and charity housing.
Keep on file:
- The client's signed written declaration
- Revenue NSW form OPT006 or equivalent, dated before you lodge that period's return
- Evidence of the client's exempt status
⚠️ Timing is the whole game on this one. A declaration obtained after lodgement does not retrospectively fix the return you already filed.
Which Test Applies to On-Hired Labour, Section 32 or Section 37?
The question that decides everything above it, and the one most builders never get asked.
The contractor exemptions turn on a prior question: is the arrangement an employment agency contract under section 37, or is it not?Get that wrong and the whole evidence file you just built is defending the wrong test.
What section 37 actually says
Section 37(1) of the Payroll Tax Act 2007 (NSW) catches a contract under which one person procures the services of another person for a client.
Section 32(3) of the same Act then settles the consequence in a line: an employment agency contract is not a relevant contract.
So where section 37 applies, the section 32 exemptions are not on the table at all. Revenue NSW puts it the same way on its contractors page: the contractor provisions, "including the contractor exemptions, do not apply" to a party to an employment agency contract (current 2026).
Note the conditional. The fight is never whether the exemptions survive section 37. It is whether you are in section 37.
What the test turns on
The courts have loaded the weight onto three words: for a client.
In UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852, that was read as procuring workers to work in and for the conduct of the client's business, in much the same way the client would use an employee.
The Court of Appeal declined to depart from that construction in Chief Commissioner of State Revenue v E Group Security Pty Ltd [2022] NSWCA 115. It is settled NSW law, not a taxpayer's argument.
Revenue NSW writes the flip side into its own guidance. Under CPN 005v2 (issued 1 March 2021, current 2026), a contract is not an employment agency contract where the worker performs services for the client's benefit but does not work in and for the conduct of the client's business in a similar way to an employee.
So the label is not what decides it
CPN 005v2 is blunt on this. A contract can be an employment agency contract even where the supplier "is not an employment agent or labour hire firm as those terms are commonly understood".
That cuts both ways. Calling the arrangement labour hire does not place it inside section 37 by itself either.
Most construction on-hire does sit inside it. You ring an agency, a carpenter turns up, works to your programme under your site supervision alongside your own crew. Textbook section 37.
Where a provider instead delivers a complete service or outcome and directs its own workers to produce it, the arrangement can fall outside section 37, and the relevant contract provisions with their exemptions can be the ones in play.
That is a real limit, not an easy out. Revenue NSW lists "result-based contracts are not employment agency contracts" as a misconception in CPN 005v2. And in SKG Cleaning Services Pty Ltd v Chief Commissioner of State Revenue [2026] NSWCA 122 (30 June 2026), cleaners performing outcome-based client contracts through their own subcontractors were still held to be parties to employment agency contracts.
Fixed pricing does not settle it. Neither does supplying your own equipment, your own supervision, or working after hours.
Each of those has been run as the distinguishing factor. Each has failed as a standalone test.
Which leaves the unsatisfying but honest answer: it is fact-specific, assessed arrangement by arrangement, and it is your tax agent's call. Not ours, and not a blog's.
Hire a five-day formworker direct on an ABN and you are either claiming the 90-day exemption and holding the log to prove it, or paying 5.45% on the lot.
Book that same formworker through an agent whose arrangement is assessed under section 37 and the wages component is the agent's liability, not yours.
Direct subbies: you carry the exemption claim and the evidence file. Where section 37 applies, the agent carries the wages liability.
A "cheap" agency that hasn't crossed the $1.2M threshold yet won't have payroll tax in its rate. Competitive on day one. The day it crosses, the rate moves or the agency doesn't. Either way, you lose your crew mid-project.
We're a properly licensed Sydney labour hire agency, with payroll tax, super, workers comp and award rates all inside a single all-in hourly rate, not shown as line items.
The honest section: we're a labour hire company
Leap Labour is a licensed NSW labour hire provider, so when we say "use an agency for short crews", yes, we benefit.
The reasoning still holds. A direct contractor costs you nothing in payroll tax if the file is complete and survives review. An agency invoice carries a service margin, and no exemption file for you to substantiate.
For ongoing specialist relationships, claim the exemptions yourself and build the file properly. For short bursts, that file is rarely worth the audit risk. See our labour hire cost breakdown for what sits inside an hourly rate.
How Do Grouping Provisions Catch Builder Groups?
Same logic as the exemptions: your structure is a claim you have to substantiate.
Grouping means Revenue NSW treats linked entities as one taxpayer. One threshold for the whole group, claimed by the designated group employer, with every other member getting a nil deduction.
Three triggers: common control such as a shared director or majority shareholder, shared employees between entities, or tracing of interests through ownership.
Two companies at $900,000 of wages each are not two businesses under the threshold. They're one group $600,000 over it.
📋 The construction pattern Revenue NSW knows well: a build entity and a "labour" entity with the same director, the same office and the same admin staff, each assuming its own $1.2M threshold.
You can apply to the Chief Commissioner for exclusion, but the test is substantive: the business must be carried on substantially independently of, and not substantially connected with, the other members. Related corporations under the Corporations Act 2001 cannot apply at all.
Keep on file:
- Separate premises leases
- Separate bank accounts
- Separate customer lists and invoices
- Separate staff and payroll records
- Management records showing independent decisions
Structure on paper without separation in practice is the most common reason a builder group cops a backdated assessment.
What Survives a Revenue NSW Audit?
Revenue NSW can reassess the current financial year plus the previous four, so contemporaneous documentation is the difference between an exemption and a shortfall.
Not "we'll dig it out when they call". Dated, signed, filed at engagement.
Common triggers: benchmarking against what a builder your size normally pays as contractor wages, payments between companies sharing a director, a subbie company dissolved and reborn under the same director, and icare data showing a "contractor" claiming workers comp through you.
An audit opens with a letter requesting payroll registers, contractor ledgers, signed agreements, ABNs and super records. Then the questions, and they're all evidence questions:
- "Walk us through how you decide if someone is a subbie or an employee."
- "Show us the day-count log for the formworker who invoiced 14 times last year."
- "Who paid the second worker on that two-person contract?"
Missing documents are read against you. Most builders settle at the position-paper stage, because the file either holds or it doesn't.
The audit is won or lost at file-setup time, not on audit day.The claw-back runs both ways. If you've paid tax on payments that did qualify, you can object within 60 days of an assessment, or request reassessment across the same five-year window. Refunds happen. They're just not advertised.
Our host employer compliance guide covers the SafeWork and icare side. Payroll tax, workers comp and WHS reviews often land back-to-back once one agency flags you.
Get Started
Treat exemption review as an annual fixed cost, same as your PI renewal. One hour per contractor at engagement beats a week of reconstruction under an audit deadline.
🔍 Start with the contractors you've used longest. They sit closest to the 90-day cliff.
The simpler move on short-burst crews: skip the exemption file and book through a licensed NSW labour hire agency. On a section 37 arrangement the wages component is the agent's payroll tax obligation, not yours.
Need crews this week at a transparent all-in rate? Get a quote in your inbox in minutes
General information only. We are not payroll tax auditors or registered tax agents, and nothing here is advice on your position. Confirm it with your accountant or directly with Revenue NSW before you rely on any exemption or characterisation.
Frequently Asked Questions
What is the NSW payroll tax rate and threshold for 2026?+
The NSW payroll tax rate is 5.45% on Australian taxable wages above an annual threshold of $1,200,000 for FY2026-27. Grouped entities share one threshold, claimed by the designated group employer or group single lodger. Source: Revenue NSW thresholds and rates.
Does claiming a payroll tax exemption mean Revenue NSW has approved it?+
No. Contractor exemptions are self-assessed in your own return. Revenue NSW does not approve them at lodgement. It reviews them later through its audit programme and can reassess the current financial year plus the previous four under the Taxation Administration Act 1996. If you cannot substantiate the exemption, it is treated as never having applied.
What documents do I need to prove the 90-day contractor exemption?+
A dated day-count log for that contractor covering the whole financial year, site sign-in or induction records that corroborate it, and invoices showing the service dates. Each calendar day counts as one day regardless of hours. Ruling PTA035v2 states that crossing 90 days makes the entire year's payments taxable, including the first 90 days.
Does the 180-day exemption apply to construction labour hire?+
It depends how the arrangement is characterised, and that question is settled before you reach the exemption. Section 32(3) of the Payroll Tax Act 2007 (NSW) provides that an employment agency contract is not a relevant contract, so where section 37 applies the section 32 contractor exemptions, including the 180-day exemption, are not available. Section 37(1) covers a contract under which one person procures the services of another for a client. The courts read that as working in and for the conduct of the client's business in much the same way as an employee: UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852, which the Court of Appeal declined to depart from in Chief Commissioner of State Revenue v E Group Security Pty Ltd [2022] NSWCA 115. Revenue NSW CPN 005v2 accepts that where a worker performs services for a client's benefit but does not work in and for the conduct of that client's business, the contract is not an employment agency contract and the contractor provisions may apply instead. Most construction on-hire sits inside section 37. The label does not decide it, and neither does fixed pricing or supplying your own supervision or equipment. Have your own arrangement characterised by your accountant or registered tax agent.
Can owner-drivers be exempt from NSW payroll tax?+
Yes, under section 32(2)(d)(i) of the Payroll Tax Act 2007. The vehicle must not be owned or leased by the principal, the principal must make no contribution to capital or running costs, and the main purpose of the contract must be conveyance of goods. To prove it, hold the vehicle registration or finance documents in the contractor's name and records showing you supplied no fuel card or toll tag. Source: Ruling PTA006.
What is the two-or-more workers exemption and what evidence does it need?+
Payments are exempt if the contractor engages two or more people to perform the services, one of whom can be the contractor. Revenue NSW expects documents proving at least two people actually performed the work, not merely that two were authorised. Hold timesheets naming both, the contractor's own payroll or subcontract records, and induction records. Source: Revenue NSW CPN007.
Are apprentice wages exempt from NSW payroll tax?+
Not exempt. Apprentice and new-entrant trainee wages are taxable wages that must be declared, and the employer then claims a payroll tax rebate offsetting the tax. The training contract must be registered with Training Services NSW and records kept for five years. Apprentices employed through an approved non-profit group training organisation are exempt under a separate mechanism.
How far back can Revenue NSW reassess a payroll tax exemption?+
The current financial year plus the previous four, a five-year window under the Taxation Administration Act 1996. Standard shortfall penalty tax is 25%, and can range from 20% to 90% depending on culpability, plus interest. You have 60 days from service of an assessment to lodge an objection.
