It is often assumed that payroll tax grouping only applies in the context of related parties. While this may serve as a starting point in considering grouping matters, recent court decisions have shown how easily companies and trusts which are not commonly owned can be grouped for payroll tax purposes. The implications of this can be quite significant, including the denial of payroll tax thresholds for some entities and the imposition of penalties where the grouping rules have been incorrectly applied.
What is grouping?
Payroll tax grouping laws seek to aggregate multiple entities for the purpose of determining their payroll tax liability. Entities that are grouped for payroll tax can only claim one tax free threshold between them and are jointly and severally liable for any outstanding payroll tax.
A group can be formed under NSW payroll tax laws in any one of five ways:
- Related companies (as defined under the Corporations Act);
- Common control (generally a greater than 50% interest in different entities);
- Tracing of interests in corporations;
- Subsuming rules (larger groups formed out of smaller groups); or
- Use of common employees.
In the context of related parties, often the related companies or common control provisions are most relevant. However, the broadness of the payroll tax grouping provisions has been highlighted in a number of recent cases where the Commissioner has been successful in grouping entities via the common employee provision. One alarming aspect of the common employee provisions is that there is no minimum level of ownership or control required in order to form a group – two arm’s length parties could be grouped under this provision.
What are the common employee grouping rules?
While the specific wording can vary across different states, grouping of two entities under the common employee rules can broadly apply in the following circumstances:
- If an employee performs duties for (or in connection with) a business carried on by their employer and another party, the employer and the other party will constitute a group; or
- If an employee of one entity is employed solely or mainly to perform duties for (or in connection with) a business carried on by another party, the employer and the other party will be grouped; or
- If an employee of one business performs duties for (or in connection with) a different entity under an arrangement for the provision of services, the employer and the other entity will be grouped.
The last of the situations outlined above is extremely broad and can catch not only formal, written arrangements but also unwritten, informal or implied arrangements.
The aspect that is often misunderstood is the significance of the third situation outlined above. Because the provision is to be interpreted so broadly, the default position will often be that two or more unrelated entities end up being grouped for payroll tax purposes. It is then up to the respective entity to argue out of the grouping provisions.
What exclusions from grouping are available?
Where two or more entities would ordinarily be grouped, the Chief Commissioner has the power to exclude one (or more) of the entities from a particular group. While a number of conditions will need to be met in order for the exclusion to be granted, a key aspect often relates to the businesses being carried on independently of, and not connected with the carrying on of, the businesses of other members of that group. This will be based on the Chief Commissioner having regard to:
- The nature and degree of ownership and control of the businesses,
- The nature of the businesses; and
- Any other matters the Chief Commissioner considers relevant.
In the recent Lombard Farms case, the Judicial Member construed the ‘independently of’ and ‘not connected with’ aspects of the test to require no connection at all and a complete independence between group businesses.
However, on appeal, the Tribunal Members felt that this interpretation was too strict and that the test is a matter of judgment, or degree, rather than requiring no connection and complete independence. Accordingly, the Tribunal Members have remitted the case back to the court to rule on Lombard Farms’ circumstances based on a less strict interpretation of the ‘independence’ and ‘connection’ aspects.
How does a business demonstrate independence?
Whether two or more businesses are significantly independent and not connected is a matter of fact. The Chief Commissioner has indicated that the following matters will generally be taken into account when considering whether to exercise his discretion to exclude two or more entities from the grouping provisions:
- The nature and extent of any commercial transactions between the members, including the value and percentage of the entity’s total business which is conducted with other members of the group;
- The extent to which group members share resources, facilities or services (such as premises, staff, management and accounting services);
- The extent to which the entity controls, or is involved in managerial decisions and day to day administration of the other members (and vice-versa);
- The extent to which there are financial interdependencies, including intra-group loans or guarantees and common banking facilities, and the terms and conditions attached to such agreements;
- The degree to which there is a connection between the entity and other members of the group in the purchase or sales of goods and services;
- The extent to which there is a connection between the nature of the businesses of the entity and other members of the group; and
- The extent to which there is a connection between the ultimate owners of the entity and other members of the group.
It should be noted that de-grouping relief is generally not available where the grouping has occurred due to direct common control of over 50%.
Beware the Contractor Rules
Even if it is possible to demonstrate that an entity carries on its business independently of, and not connected with, other group members (and hence the entities shouldn’t be grouped), it is still possible that the contractor provisions can apply to include for payroll tax purposes any inter-entity transactions.
Separate contractor related rules and exemptions are available which would need to be considered on an entity by entity basis.
If you have a query regarding the above or need further information, please contact one of our tax accountants on (02) 9223 9166 to discuss. Alternatively, you can submit an online enquiry form.