NSW Payroll Tax: traps, tips & updates

Health check to get your payroll tax arrangements in order

• Will your Trust be grouped for Payroll Tax?

• Is your contractor exempt from Payroll Tax?

• Need help to get your last 5 years of payroll tax in order?

In 2020-21, Revenue NSW conducted 2267 payroll tax investigations, resulting in $183.6 million in revenue. Payroll taxes across all States was down due to COVID-19 payroll tax relief.[1] The NSW Government has announced further deferral payroll tax relief until 7 October 2021 including:

• 25% reduction in FY22 payroll tax for eligible businesses;

• Payroll tax payments deferred until 7 October 2021 for all businesses; and

• Interest free 12-month repayment plans for deferred payroll tax.

The lull in Revenue NSW’s payroll tax investigations gives opportunities for businesses to get their payroll tax arrangements in order.

Despite the commitment for payroll tax harmonisation between jurisdictions since 2010, each State and Territory has its own payroll tax legislation, with different rules, rates and thresholds.

What is Payroll Tax?

Broadly, an employer which pays wages in NSW and whose total Australian wages exceed the payroll tax threshold must register for and is liable to pay payroll tax.

The annual payroll tax threshold is $1.2 million and the payroll tax rate is 4.85% for the payroll tax years ending 30 June 2021 and 2022.

Traps

1. You carry on multiple businesses and may inadvertently be “grouped”

For many businesses, a typical wealth protection structure involves separating business operations in separate entities and protecting assets in another. This way, any risks involved with one business can be mitigated and quarantined from other businesses. Discretionary trusts usually hold the passive investment assets or interest in an entity.

For instance, you or your client may carry on one business through Company A and a second business through Company B.

Each company is legally a separate entity and an employer. However, under payroll tax laws, if you are a majority shareholder (eg. trusts) in Company A and in Company B, then the two companies would be “grouped” for payroll tax purposes by reason of the “common control” rule in section 72 PTA.

The effect of being grouped is that the companies will together share one payroll tax threshold, potentially leading to a joint liability for payroll tax.

2. A family member carries on another business

It is not uncommon to see spouses, parents, children or siblings carrying on their own separate businesses through their own companies.

The “tracing of interests” rule in section 73 PTA can operate broadly to treat certain relatives as a single entity. Operating together with the subsuming rule in section 74 PTA (which treats several groups with common members as a single group) there are circumstances in which the tracing of interests rule could operate to group your company with, say, the company of your spouse, parent, child or sibling.

The consequence would be that the grouped companies will together share one payroll tax threshold, potentially leading to a joint liability for payroll tax.

3. Someone connected with you carries on another business

Nor is the “tracing of interests” rule in section 73 PTA limited to treating certain relatives as a single entity. For instance, the rule is capable of applying to group your company with the company of someone only remotely connected with you: for instance, someone who happens to be a potential beneficiary under a trust of which you are also a beneficiary, regardless of whether either of you have actually received a benefit.

The strict application of these broad rules could potentially operate to group any two corporations – as White J in Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594 observed, at paragraph [108]: “There may be many discretionary trust deeds under which the whole world other than specifically excluded individuals are potential discretionary objects”.

4. Certain payments are treated as wages

A common assumption is that only wages paid to an employee are counted for payroll tax purposes. On the contrary, the concept of wages for payroll purposes is much broader.

For instance, wages include: director fees, grossed up fringe benefits and superannuation contributions (to name just a few commonly overlooked items).

Payments to contractors are deemed to be wages unless one of 7 “contractor exemptions” applies:

1. Services ancillary to the supply of goods

2. Services not ordinarily required by your business

3. Services required for 180 days or less in a financial year

4. Services provided for 90 days or less in a financial year

5. Services approved by the Commissioner as exempt

6. Services performed by two or more people

7. Services provided by an owner driver.

The application of the above contractor exemptions depends on review of each case.

In recent years, the business structure of medical, radiology and optometry centres has been under the spotlight of various State Revenue Commissioners: see Homefront Nursing Pty Ltd v Chief Commissioner of State Revenue [2019] NSWCATAD 145; Optical Superstores Pty Ltd v CSR [2018] VCAT 169; Winday International Pty Ltd v CCSR [2016] NSWCATAD 270.  In these cases, the respective Commissioners have sought to characterise as “wages” and impose payroll tax on payments made between parties engaged otherwise than as employers-employees (whether self-described as “independent contractors” or as “landlord-tenant”). The respective Commissioners have enjoyed varying degrees of success. Much depends on the particular facts and circumstances.

Tips

1. Review your entity structure and payroll tax arrangements

The features of a payroll tax-effective business structure takes into consideration the following:

• The type of legal entity to carry on the business.

• Distributing control of the operating entity, at both management level and ownership level (e.g. for companies, at both the director level and shareholder level), including for instance having in place appropriate shareholders agreements or partnership agreements.

• Maintaining separate employees and engaging separate independent contractors for multiple businesses.

• Ensuring that there are no financial interdependencies between multiple businesses.

• Considering the form in which business profits should be paid.

2. Consider restructure to achieve aims of business succession or separation

Existing businesses may decide to restructure to achieve its objectives including to separate businesses or pass on family businesses through business succession. In such cases regard should be given to the operation of other laws and taxes such as income tax, Capital Gains Tax and stamp duties including various concessions and exemptions available.

3. Review historical payroll tax liabilities

Often an unwary business owner or investor may acquire an interest in an entity or directorship of a company, that may be grouped with other entities, that have historical payroll tax liabilities. It is important to review potential payroll tax liabilities of your existing entities and check that any future entities that you acquire do not have a connection with a company that has a joint payroll tax liability. The effect of grouping is that all members are jointly and severally liable for the unpaid payroll tax liabilities (which may be for the last 5 years). This exposure to liability extends to operating entities, passive investment trusts and those appointed as directors with more than 50% control can be personally liable.

4. Consider an application for degrouping

Depending on the circumstances (including where businesses operate independently or with separate control), an application for degrouping has the effect of excluding the entities from one another and is eligible for a separate payroll tax threshold. 

It may also be necessary to submit a voluntary disclosure, together with a request for remission of penalties and interest and payment plan.

Recent developments

Payroll tax laws are constantly changing. The  current COVID-19 lock down in NSW gives eligible businesses new payroll tax concessions. For instance, businesses which are considering a restructure or an expansion may  consider whether they qualify under the Jobs Plus program. Under the program, companies which create at least a net growth of 30 new full-time equivalent jobs as part of a business project in NSW before 30 June 2024 may be eligible for payroll tax exemption on wages paid in respect of the new jobs for 4 years.

Conversely, businesses with wages of $10 million or less and who suffer a 30% decline in turnover should be eligible for a 25% reduction of their payroll tax liability.

Further, a new public guidance setting out the Commissioner’s view on the application of new or complex payroll tax laws, including in relation to specific industries, is constantly being released. For instance, in just the first half of 2021, the 3 Commissioner Practice Notes (CPNs) which were relevant to payroll tax:

• In February 2021, the Commissioner issued CPN 016, explaining his view on the circumstances in which payments of commission or other forms of remuneration by entities that hold an Australian Financial Services Licence or an Australian Credit Licence to their authorised agents may be liable for payroll tax.

• In March 2021, the Commissioner issued CPN 005v2 (replacing CPN 005), clarifying his view on the circumstances in which businesses that procure the services of workers for other businesses will be taken to be employers under “employment agency contracts” and liable to payroll tax.

• In March 2021, the Commissioner issued CPN 020, explaining his view on the circumstances in which JobKeeper payments will be, in full or in part, exempt from payroll tax.

How we can help you and your clients?

Businesses and business owners must be ready for a payroll tax audit or investigation questionnaire issued by Revenue NSW.  To minimise the risk of additional payroll tax penalties and interest, contact Lisa To or Jeremy Tjeuw to undertake a health check of your compliance with NSW payroll tax including:

• review of your entity structure (trusts, companies and control) to ensure payroll tax grouping provisions do not operate.

• review your contractor arrangements to verify the payments to your contractors are not deemed wages and fall within the contractor exemptions.

• unregistered and/or discovered payroll tax liabilities in the last 5 years - we can assist with a voluntary disclosure to Revenue NSW and seek remission of penalties and interest under the Tax Administration Act 1996 (NSW).

• help you with your audit, objection, review or negotiation of your payroll tax liability to remit penalties and interest with Revenue NSW debt team.

• assistance with asset structuring and wealth protection to ensure your personal assets are not at risk if you are issued with a director’s penalty notice.

For a confidential discussion or health check of your payroll tax arrangements, please contact Lisa To on (02) 8281 7917 or lto@bartier.com.au

Authors: Lisa To & Jeremy Tjeuw

[1] reflecting tax relief and payroll refund policies, with the largest falls in New South Wales, Queensland and Victoria: https://www.abs.gov.au/statistics/economy/government/taxation-revenue-australia/latest-release with