Are you caught by Payroll Tax Grouping and don’t even know it?
The payroll tax laws in each state and territory deem certain entities to be “grouped” as though they were one entity for payroll tax purposes.
This can lead to many business groups, especially those growing quickly and with an increasing wages bill, unknowingly exceeding the payroll tax threshold and becoming liable for payroll tax. This can happen over a number of years, with the group then facing a large payroll tax bill, penalties and interest.
The grouping provisions are extremely broad in their operation, although exclusions from grouping are available. Penalties and interest can also be reduced in certain circumstances.
This article alerts business owners to the often “hidden” issue of payroll tax grouping and what can be done to overcome its harsh effects.
The principles set out below apply broadly in every state and territory (with some minor variations).
When are businesses “grouped” for payroll tax?
For the purpose of determining whether the threshold amount is exceeded and group registration, the taxable wages of a payroll tax group are considered.
Grouping arises by automatic operation of the payroll tax law according to the structure of the relevant businesses and not by any determination made by the relevant state or territory revenue office.
Businesses are “grouped” together as though they were one business for payroll tax purposes when:
(a) the same person or persons together have a “controlling interest” in them (i.e. common control); or
(b) the businesses share the use of one or more employees.
Grouping of companies
In relation to a company, a “controlling interest” exists when the same person or persons together:
(a) control more than half the voting shares of a company; and/or
(b) hold more than half of the director positions on the board of a company; and/or
(c) can control the composition of the board of directors (or at least the majority of director positions).
Example of grouping:
Two people are the only shareholders and/or directors of business A and business B. Those two people are deemed to have a “controlling interest” in both business A and business B through the shareholding and majority directorship. Businesses A and B are therefore grouped together as if they were one business for payroll tax purposes. The wages paid by these two businesses are combined and if they exceed the relevant threshold, both businesses would need to register for payroll tax.
Grouping of other businesses
In relation to other business structures:
(a) A business carried on by an individual sole trader is of course controlled by that individual person and will be grouped with any other business(es) in which that individual has a controlling interest (for example, as a sole director or sole shareholder of a company, or trustee, or sole or majority beneficiary of a trust).
(b) A business carried on through a trust is grouped with another business when the trustee or trustees together have a controlling interest of any type in the other business.
(c) The controlling interest in a business carried on through a partnership is held by the person or persons together who are entitled to:
● more than half the property of the partnership; and/or
● more than half the income of the partnership.
(d) The controlling interest in a business carried on under a trust is held by:
● the trustee, both trustees together (when there are two), or the majority of trustees (when there are three or more); or
● the sole beneficiary, or, where there are two or more beneficiaries, any combination of beneficiaries that are entitled to more than half the income and/or assets of the trust; and
● in the case of a discretionary trust (such as most family trusts) every beneficiary, individually and together with any other combination of beneficiaries, is deemed to control 100% of the business carried on under the trust (i.e. he, she or they have a “controlling interest” in the trust).
Group members who do not pay wages
An entity does not need to actually pay wages to be part of a payroll tax group. The only requirement is that the entity is carrying on a “business”. “Business” includes:
● a profession or trade;
● any other activity carried on for fee, gain or reward;
● the activity of employing 1 or more persons who perform duties for or in connection with another business;
● the carrying on of a trust (including a dormant trust); and
● the activity of holding any money or property used for or in connection with another business, whether carried on by 1 person or 2 or more persons together.
Implications of being a group member
Group members are jointly and severally liable for the payroll tax liability of the group.
Group members must each register for payroll tax.
Exclusion from grouping
In some circumstances, upon application by a taxpayer, the relevant state or territory revenue
Commissioner may (but does not have to) exercise a discretion to exclude a business from a group, even though technically, the business is grouped by virtue of controlling interests or shared employees.
This discretion is in recognition of the extremely broad scope of the grouping provisions that can operate harshly or produce unintended consequences in some situations.
However, the discretion is not available where the business seeking to be excluded is a subsidiary or controlled entity of another entity under the Corporations Law. Such businesses will remain grouped and are ineligible for exclusion from grouping.
Process to obtain exclusion from payroll tax grouping
In order to obtain exclusion from grouping by the exercise of the Commissioner’s discretion, the following process is followed:
● An application for exclusion is made on the relevant approved form.
● The onus is on the applicant to provide evidence and arguments as to why it should be excluded from the group.
● Pending a decision, the applicant will be treated as if it were a part of the group and must meet any payroll tax liability arising from grouping.
Applying for exclusion from payroll tax grouping
Applications for exclusion should have regard to the appropriate revenue office policy rulings on exclusion from grouping. In this regard, the following factors are examined when considering an application for exclusion:
● the nature and degree of ownership and control of the business carried on by the applicant and other members of the group
● business dealings between group members
● any sharing of staff, premises, equipment and facilities (including banking)
● how business decisions are made and who makes them
● the extent of financial interdependence between group members, including intra-group loans and the interest rate charged
● whether there are common customers of group members
● purchases made by one group member from another
● whether goods or services are purchased by one group member for sharing between group members
● economies of scale generated by the cooperative activities of the group members
● the nature and types of businesses conducted by each group member and the extent to which they are complementary
● the connection(s) between the ultimate owners of each group member.
For the Commissioner to favourably exercise the discretion to exclude a business from a group, having regard to the above matters, he or she must be satisfied that:
● a business carried on by the applicant is carried on independently of a business carried on by any other group members; and
● a business carried on by the applicant is not connected with the carrying of a business carried on by any other group member.
Not sure of your payroll tax grouping liabilities?
If you are struggling with understanding your payroll tax obligations or are under review or audit (or
know someone who is), we would be pleased to discuss the options that might be available to you
and the strategies that could be implemented to resolve your payroll tax problem.
Payroll tax case studies – how we’ve helped clients with payroll tax issues
1. NT Restaurant group
We took over the entire management of a large payroll tax audit involving over 12 entities.
Following our comprehensive submissions and applications for exclusion, we achieved the following for our clients:
● entities completely excluded from the group
● entities excluded or partially excluded from the group during the review period
● car fringe benefits excluded from taxable wages
● payroll tax savings in excess of $200,000 over the review period
● penalties and interest reduced by over $100,000
● payroll tax savings going forward exceeding $100,000 p.a.
“Thank you for your excellent efforts and hard work in assisting the group with achieving a
reasonable outcome under the circumstances.”
2. NT Café group
We prepared submissions in response to the revenue authority position paper for our client which resulted in:
● a reduction in payroll tax of over $30,000
● exclusion of one entity from the group
● penalties reduced by over $15,000
● interest reduced by over $6,600
“Thanks. It’s a better outcome for sure.”
3. Qld retailer/wholesaler/manufacturer
After our client unsuccessfully applied for exclusion from the payroll tax group, we objected to that decision resulting in:
● acceptance of submissions
● reduction in penalties of over $9,000
● reduction in interest of over $1,900
Not sure if you are eligible for an exclusion?
We can advise you on whether you are eligible for an exclusion from grouping which would reduce your payroll tax liability.
If you are eligible to be excluded from grouping, we can prepare an application for exclusion together with legal submissions and lodge it with the relevant state or territory revenue office.
Other payroll tax services
Other payroll tax issues we assist business clients with and provide payroll tax advice on include:
● Payroll tax reviews and audits
● Voluntary disclosures for under payment or overpayment of payroll tax
● Objections to payroll tax assessments
● Claiming payroll tax exemptions
● Payroll tax disputes and litigation
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.