Australia: Payroll tax: Breaking up is hard to do

Last Updated: 14 September 2016
Article by Justin Byrne

This is no romance story, rather a cautionary tale about the payroll tax implications for companies grouped together by the Payroll Tax Acts.1

In this alert, Partner Justin Byrne, and Law Clerk Felicity Dunstone comment on the implications of the recent decision of the New South Wales Civil and Administrative Tribunal (the Tribunal) in Namoi Tyreright Pty Ltd v Chief Commissioner of State Revenue.2

Importantly, the decision may have implications for franchise arrangements.

Grouping for Payroll Tax Purposes

When companies are grouped for payroll tax by the Commissioner of State Revenue, they are viewed as one entity under Part 5, Division 2 of the Payroll Tax Act 2007 (NSW) (the Act) for the purposes of payroll tax liabilities. Employers that have a wages bill equal to or in excess of $750 000 annually (NSW Threshold from 1 July 2016) are required to remit payroll tax to the State. "Wages" is widely defined in the Act to include all forms of direct and indirect rewards offered by the employer.3

When two companies become joined at the hip, so to speak, a smaller company with a wages liability less than the NSW Threshold, that may not have otherwise paid payroll tax, may subsequently have to do so. Payroll tax is paid in New South Wales at a rate of 5.45% (from 1 July 2016) and, practically, this could leave a small to medium enterprise with a large tax bill as a result of "grouping" by the Commissioner. For example, a business that pays $600,000 in wages annually, would have to contribute approximately $32,700 in payroll tax (FY16/17) if it were grouped with another company and the joint wages liability was in excess of the NSW Threshold.

The Commissioner of State Revenue may exercise his or her discretion to "de-group" companies for payroll tax purposes,4 and this is what the taxpayer unsuccessfully attempted to argue in this case.

The Facts

Namoi Tyreright Pty Ltd (Tyreright) was a tyre retailer owned partly by Tyres4U (T4U). The companies entered into a non-exclusive dealership arrangement, where Tyreright as the retailer would offer for public sale the products developed by T4U and other businesses with which it had similar supply contracts. The Commissioner issued Tyreright with Notices of Assessment for payroll tax for the income years 2012 to 2014 inclusive that grouped Tyreright and T4U. Tyreright exercised its right to challenge the Commissioner's assessments on the basis the Commissioner should have exercised his discretion under section 79 to "de-group" the companies. Tyreright bore the onus of proof on the balance of probabilities in this case as the Applicant.5

The Judgment

In his judgment, Senior Member N S Isenberg gave greater weight to factors that suggested T4U exercised a sufficient degree of control over Tyreright, causing the companies to operate as one group. The following factors among others were, in the Senior Member's opinion, persuasive that a relationship of control, rather than independence, existed:

  • an offer of employment was made for a managerial role at Tyreright on a Tyreright letterhead, but signed off by the CEO of T4U;
  • a loan was made to Tyreright from T4U on commercial terms to assist with start-up costs;
  • support was provided from T4U to Tyreright for phone and internet set-up, as well as guidance by T4U as to their preferred banking institution;
  • the territories for operation of Tyreright's stores were stipulated by T4U in consultation with Tyreright;
  • consent was required from T4U before Tyreright entered into supply arrangements with other dealers, but Tyreright was in no way powerless to do so; and
  • T4U was required to set-up and maintain a website that promoted Tyreright's business.

The Tribunal's identification of the above factors is terms similar to those found in many franchisee-franchisor, or general commercial agreements between entities. Contractual arrangements on equivalent terms allow parties to set conditions of their relationship, and quality-control the outcomes.

On the other hand, Senior Member N S Isenberg also identified the following factors among others that tend to suggest a greater level of independence of Tyreright:

  • T4U was not the exclusive provider of tyres to Tyreright;
  • private business matters (including financials) were discussed between T4U and Tyreright at the end of each financial year;
  • Tyreright was free to decide whether it ordered stock from T4U, but if it did a certain minimum value order was required;
  • almost all decisions of Tyreright did not require T4U's prior written or verbal approval;
  • Tyreright had entered into arrangements it described as being on similar terms with two other tyre suppliers and had not been grouped with those businesses for payroll tax purposes.

Senior Member N S Isenberg ultimately found that even though Tyreright may have had day-to-day managerial control of its business, the fact it conducted its business in compliance with comprehensive standards and requirements in the dealership agreement, established that Tyreright's business was not carried on independently. The Senior Member confirmed the Commissioner's decision not to exercise his discretion under section 79 of the Act to de-group the businesses. This resulted in significant payroll tax liability for Tyreright that would not otherwise have been payable if the companies were "de-grouped".

What can your business do to ensure commercial relationships do not result in being grouped for payroll tax purposes?

This case suggests that risk areas include commercial relationships entered into between entities where they are dealing on exclusive or non-exclusive terms, or franchisee-franchisor relationships. The decision is indicative of the fine line your business may be walking when it chooses to enter into an ongoing relationship with another business. We suggest the following tips to ensure your business is structured in the most tax efficient manner:

  • Contracting with employees should be transparent to ensure the terms of their engagement and the entity responsible for the management and care of the employee is certain. This is a beneficial practice from a human resources, as well as legal perspective.
  • Small to medium enterprises should be cognisant of their payroll tax liabilities, and ensure any business partnerships/relationships are appropriately structured to reduce unnecessary tax liability.
  • Small to medium enterprise should ensure loans are entered into on commercial terms.
  • The terms governing any existing relationships should be evaluated to identify the control exercised by the parties to the arrangement.
  • Identify the projected growth of your business and how we can assist in managing that from a contractual, tax and employment perspective.
  • If you have not done so recently, you may wish to seek legal advice on your business' payroll tax structure and commercial relationships.

HopgoodGanim Lawyers' Private Enterprise team are able to advise your company on all aspects of payroll and other tax related issues, as well as business structuring.

Footnotes

1 Payroll Tax Act 2011 (ACT), Payroll Tax Act 2007 (NSW), Payroll Tax Act 2009 (NT), Payroll Tax Act 1971 (Qld), Payroll Tax Act 2009 (SA), Payroll Tax Act 2008 (Tas), Payroll Tax Act 2007 (Vic), Payroll Tax Act 2002 (WA).

2 [2016] NSWCATAD 88.

3 Payroll Tax Act 2007 (NSW) s 13.

4 Payroll Tax Act 2007 (NSW)s 79.

5 B&L Linings Pty Ltd v Commissioner of State Revenue (2008) 74 NSWLR 481.

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