Tax Insight: Payroll tax grouping – Are you at risk of being grouped?

29 November 2019

Generally, where the wages paid by an employer exceeds the minimum wages threshold of a particular state, payroll tax is payable in that state.

Where one of more entities or employers are grouped for payroll tax purposes, the minimum wages threshold is applied to the total wages paid all of the entities that are part of the group to determine whether a payroll tax liability exists.

Practically, this means that where, for instance, two stand-alone entities or employers may not be subject to payroll tax by virtue of falling below minimum wages threshold individually, once grouped these same entities or employers could be subject to a payroll tax liability as their combined wages now exceed the minimum wages threshold of a particular state.

What is grouping?

Although payroll tax is administered at a state level, as a result of the harmonised payroll tax rules, all states and territories in Australia have similar payroll tax grouping provisions, which seek to ensure that employers are not able to decentralise operations through multiple entities and avoid paying payroll tax by falling under the relevant state minimum wages threshold.

The tests applied in determining grouping are quite broad and therefore entities or employers with independent and distinct operations could be deemed a group, subject to potentially being excluded at the commissioner’s discretion.

Therefore it is critical that employers are aware of any potential risks of being grouped with other entities or employers in order to mitigate the risk of being issued with a penalty assessment notice for a large outstanding payroll tax liability with accrued interest and penalties.

Who’s at risk?

Broadly, the main circumstances which could result in employers or entities being grouped for payroll tax purposes include:

  1. Companies that are related for the purposes of the Corporations Act 2001 (Cth), for example, a parent and subsidiary companies or companies in a corporate group with the same head entity;
  2. Employees that perform duties for or in connection with one or more businesses; and
  3. Where a person or persons have a controlling interest in two or more businesses. The concept of controlling interest in this context is quite broad. For example, a general beneficiary of a family trust will be regarded as having a controlling interest even though he/she has never received a distribution from that trust or was even aware that they were a beneficiary. This provision could therefore automatically group family members that operate separate businesses through their own family trusts by virtue of a standard clause in the family trust deed that allows for, for example, parents, brothers, sisters, spouses, widows, widowers etc to potentially be general beneficiaries.

Consequences of grouping

Where one or more businesses are deemed a group for payroll tax purposes, a single threshold deduction will be applied to the group, as opposed to being individually applied to each entity.

Another consequence of grouping is that the entities become jointly and severally liable for the group’s payroll tax liabilities. This is because the entities are effectively seen as one entity for payroll tax purposes.

Should one of the state revenue offices decide to group one or more employers or entities for payroll tax purposes, this can be applied retrospectively. Consequently, this could result in the relevant state revenue office issuing a payroll tax assessment notice, which could include a large outstanding tax payable, together interest, penalty tax and interest on the penalty tax.

Prevention and what to do if grouped

Review the legal structure in which you or your clients operate and conduct their business operations. Consider whether any of the grouping provisions could potentially apply to you or your clients’ current structure and business operations. For instance, does the business operate through a trust? If so, who are the nominated and potential general beneficiaries? Do these beneficiaries also operate separate businesses? Is there any agreement in place which allows for an employee of the business to carry out or perform duties for another business?

In the event that the relevant state revenue office deems one or more employers or entities a group for payroll tax purposes, in certain circumstances an application for exclusion from grouping can be submitted to the relevant state revenue office requesting the relevant chief commissioner of state revenue to exercise a discretionary power to allow an exclusion from grouping. Where submitted, the following factors will be generally considered in determining whether to grant the exclusion from grouping:

  • Commonly controlled businesses;
  • Use of employees;
  • Nature and degree of ownership;
  • Nature and degree of control;
  • Nature of businesses;
  • Conducting business together;
  • Sharing of resources; and
  • Financial relationships/dependencies.

This article was written by Nima Sedaghat, Partner and Alina Sedmak, Senior Associate.

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