Australia: Payroll tax considerations for restructuring and insolvency professionals

WHO SHOULD READ THIS

  • Restructuring and insolvency professionals.

THINGS YOU NEED TO KNOW

  • Understanding liabilities from a payroll tax perspective can be complex, particularly due to the broad nature of the grouping provisions.
  • Unless care is taken situations may arise where restructuring and insolvency professionals will be grouped with client entities, potentially exposing personal entities to joint and several liability for client entity debts.

WHAT YOU NEED TO DO

  • When providing advice and acting for clients, consider the potential application of the payroll tax grouping provisions and seek advice as necessary to manage any potential exposure to understating liabilities and/or being jointly and severally liable for client entity debts.

The State revenue authorities are becoming savvier in identifying tax shortfalls, whilst simultaneously improving the effectiveness of their debt recovery processes. In recent years, this has involved enforcing the joint and several liability provisions to try and ensure recovery of unpaid liabilities from group members.

In this alert we set out some of the important considerations that restructuring and insolvency professionals need to be aware of from a payroll tax grouping perspective.

Background

Payroll tax is a State based tax, levied on an employer's taxable wages. In Queensland payroll tax is paid at a rate of 4.75% once taxable wages exceed $1.1 million. The tax free threshold however is a diminishing threshold, meaning the effective rate of tax will not be 4.75% unless taxable wages are in excess of $5.5 million.

Businesses will automatically be grouped for payroll tax purposes for a variety of reasons. If businesses are grouped then only one entity within the group is eligible for the tax free threshold, with all other group members being liable for payroll tax at 4.75% of any taxable wages paid to workers.

This poses particular issues for restructuring and insolvency professionals when trying to ascertain liabilities of clients.

When are the grouping provisions triggered?

In identifying groups, it is irrelevant whether an entity or person engages workers, given 'business' is defined for the purposes of the grouping provisions as including the carrying on of a trust, including a dormant trust. Accordingly passive investment trusts, superannuation funds and custodian trusts are all potentially grouped for payroll tax purposes.

The payroll tax grouping provisions are harmonised in all Australian jurisdictions, with five grounds that may trigger grouping:

  • related corporations
  • common employees
  • common control
  • tracing of interests in corporations, and
  • smaller groups subsumed into larger groups.

Corporations will be grouped where a parent company/subsidiary relationship exists. For instance, this means that various businesses conducted by separate subsidiaries under a common holding company would be grouped.

Grouping on the basis of common employees can be triggered where one or more employees perform duties in connection with one or more businesses carried on by their employer and other persons. This is particularly so if a particular employee is employed solely or mainly to perform duties for another business, or in connection with an employer's obligation to provide particular services under an arrangement. Examples of grouping on the basis of common employees include where an entity provides accounting and administrative services to other businesses – for instance in the context of professionals operating from the same premises, but using a common provider to provide reception, administrative and other support services. Similarly family groups with one entity employing administrative and or support staff servicing a range of family businesses would also be captured.

Common ownership and/or common control will also trigger grouping where a person, or set of persons has more than 50% control of an entity. For corporations this is determined by who controls voting power at a director and/or a shareholder level. The provisions also contemplate nominee directors by ensuring that if directors with more than 50% of voting power are under an 'obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes' of a person or set of persons, then it will be that person who will be regarded as having control.

It is often overlooked that a set of persons will together have more than 50% control of multiple entities. For instance where 2 of 3 business partners have interests in multiple businesses, then notwithstanding each partner may have less than a 50% interest in each business, together the 2 partners would have a combined interest greater than 50% that would trigger grouping. Further, it is not very well understood that in the context of businesses carried on by discretionary trusts, any potential beneficiary of a trust is deemed to control the trust.

Where a person or entity is a member of two or more groups then the members of the smaller groups will merge to form one large group.

Effects of grouping

If businesses are grouped for payroll tax purposes, then only one member of the group is entitled to a tax free threshold, with all other members of the group liable for payroll tax at a flat rate of 4.75% on all taxable payments to workers (i.e. not just employees, but also contractors unless payments to contractors are eligible for an exemption). Accordingly, if a group has not been appropriately identified, then each group member engaging workers is likely to have tax shortfalls if they have incorrectly assumed they are each entitled to a tax free threshold in their own right.

The other effect of grouping is that since 1 July 2008 all members are jointly and severally liable for unpaid payroll tax liabilities (not just annual amounts, but also monthly instalments, penalties and interest) of all other group members. This exposure to liability extends not just to entities that trade, but also to passive investment trusts.

Exclusion orders

Where businesses are grouped (other than related corporations) then it is possible to write to the Commissioner to seek an exclusion order to issue to a particular member (or members) of a group. For the Commissioner to issue an exclusion order, she must be satisfied that the business for which an exclusion order is being sought is carried on substantially independently of, and substantially not connected with, the carrying on of businesses by any other grouped members.

In exercising her discretion, the Commissioner must have regard to the nature and degree of ownership and control of the relevant businesses and those of other grouped members, the nature of the businesses and any other relevant factors. Other relevant factors include:

  • the nature and extent of commercial transactions between group members
  • the extent to which group members share resources, facilities or services
  • who is involved in making managerial decisions regarding the various businesses
  • any financial interdependencies between group members, including common guarantors
  • any common suppliers and purchasing power – for instance group insurance policies
  • the nature of the businesses conducted by the various members and possible connections, and
  • any connections between ultimate owners of the businesses.

The Queensland Supreme Court decision in Scott and Bird & Ors v Commissioner of State Revenue [2016] QSC 132 is an example of the broadness of the grouping provisions being able to capture passive investment trusts (which in that case was a superannuation fund and two custodian trusts) and the difficulties in being able to obtain exclusion orders.

In that case the Commissioner had issued payroll tax assessments in excess of $2.6 million to trading entities, at the same time advising that the trading entities were grouped with various other entities including the self managed superannuation fund and the two custodian trusts. The Commissioner then took steps to obtain payment of the primary tax assessments, including by issuing garnishee notices to one of the custodian trusts which was in the process of selling a property it held on trust.

Exclusion orders were then sought on behalf of the superannuation fund and the custodian trusts, which the Commissioner refused to grant having regard to various factors including:

  • the ultimate individual owners/controllers of all entities, including those seeking exclusion, being the same
  • the persons having ultimate responsibility for managerial decisions of all entities being the same
  • the same person being responsible for day to day administration of group members, including those seeking exclusion
  • lease agreements between the superannuation fund and other group members did not appear to be on commercial terms due to the Commissioner regarding the rent payable under the leases being in excess of market rent, and
  • the Commissioner forming a view that loans between the superannuation fund and other group members were not on an arms' length basis or on commercial terms.

An application for judicial review of the Commissioner's decision to refuse to issue exclusion orders was then made, but was dismissed by the Court.

Potential issues for restructuring and insolvency professionals

The payroll tax grouping provisions pose particular issues for restructuring and insolvency professionals, including;

  • ensuring all liabilities are identified – having regard to the possibility that no tax free threshold will be available if a business is grouped with other businesses, and
  • the potential for the personal entities of 'hands on' restructuring professionals (including passive investment entities) to be grouped with client entities, because restructuring professionals have been appointed as directors of the client business and have more than 50% control of voting power at a board level.

What can be done?

To manage any risk, it is important for restructuring and insolvency practitioners to understand the potential broadness of the grouping provisions given their impact on the quantum of unpaid liabilities and the potential exposure to joint and several liability of group members.

If it is intended that distinct and independent businesses are to be operated, then ideally the entities would be structured so that grouping is not triggered in the first place. If this is not possible, then consideration needs to be given to the possibility of successfully seeking exclusion orders.

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