Australia: Payroll tax grouping – common mistakes to avoid

There is currently a significant amount of payroll tax audit activity. Grouping is a common audit target. The difficulty for businesses and their advisers is that the grouping provisions are complex, and often counterintuitive.

Practically, whether there is a single payroll tax group affects:

  1. whether grouped entities have to be registered for payroll tax because their combined taxable wages exceed the registration threshold;
  2. the amount of payroll tax that must be paid – as deductions are only available per payroll tax group; and
  3. which entities are liable to pay the payroll tax – as every group member is jointly and severally liable to pay the group's payroll tax.

There are three tests for grouping:

  1. the 'related bodies corporate' test;
  2. the 'commonly controlled businesses' test; and
  3. the 'common employees' test.

Each test has a series of sub-tests that need to be considered in detail. We have set out below the most common mistakes.

COMMON MISTAKE #1 – MISSING 'SETS' OF INDIVIDUALS

The 'commonly controlled businesses' test looks at whether individuals have a controlling interest in a business. However, it also applies to 'sets' of individuals.

This is illustrated below.

image2

Firstly, looking only at shareholdings, and assuming each shareholder has 50% of the ordinary shares, Mr A does not have a controlling interest in either Alpha or Beta. 50% is not enough: the test is more than 50%.

The 'set' of Mr A and Ms B has a controlling interest in Alpha, but not Beta. The 'set' of Mr A and Dr C has a controlling interest in Beta but not Alpha.

There is a different result when a third company is introduced.

image2

Assuming that each shareholder has an equal interest in the ordinary shares of each company:

  • The 'set' of Mr A and Ms B have a controlling interest in Alpha (100%) and Gamma (66%). Alpha and Gamma are grouped.
  • The 'set' of Mr A and Dr C have a controlling interest in Beta (100%) and Gamma (66%). Beta and Gamma are grouped.

You would get a different result if there was an unrelated fourth shareholder in Gamma. In that case, there would be no 'set' with more than 50% (it would be exactly 50% – not more).

The same analysis needs to be done with directors. Complications arise when shares are held by trusts, and the controlling interest needs to be traced through the trust: see common mistake #4 below.

COMMON MISTAKE #2 – SMALLER GROUPS BEING SUBSUMED INTO A LARGER GROUP

There may be two separate groups based on the commonly controlled businesses test. For example:

image3

As Gamma is common to both groups, all of the entities form one larger payroll tax group.

If Alpha and Beta otherwise have no connection with Delta, Epsilon and Zeta, this can create commercial problems, as each entity will be jointly and severally liable for the payroll tax of businesses that they may have no knowledge about or control over.

COMMON MISTAKE #3 – ASSUMING ONLY TRADING BUSINESSES CAN BE GROUPED

'Business' is a defined term. Counterintuitively, it includes 'the carrying on of a trust, including a dormant trust'.

This means that businesses are deemed to include discretionary trusts holding passive investments and self-managed superannuation funds.

Discretionary trusts and self-managed superannuation funds may provide some of the best structures for asset protection against commercial risks. This will not be the case for payroll tax.

This is not a fanciful risk. The Commissioners have attacked discretionary trusts and self-managed superannuation funds for the payroll tax liabilities of other businesses: see Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594 and Commissioner of State Revenue v Can Barz Pty Ltd & Anor [2016] QCA 323.

COMMON MISTAKE #4 – A DISCRETIONARY BENEFICIARY IS DEEMED TO CONTROL A TRUST

Again counterintuitively, any person who 'may benefit from a discretionary trust' is deemed to have a controlling interest in that trust.

This person is not limited to the primary beneficiary, the default beneficiary or any person who has received a distribution in the past. It is any beneficiary who may benefit.

This provision produces an absurd result for many discretionary trusts. Charities are often tertiary beneficiaries. A charity who is a beneficiary is deemed to have a controlling interest in a trust – even if it has no knowledge that the trust exists.

In Smeaton Grange, the taxpayer tried to deal with this issue by having the relevant beneficiary disclaim his interest. Further details are here and here. We understand that Smeaton Grange has sought leave to appeal to the High Court.

COMMON MISTAKE #5 – NOT CHECKING FOR COMMON EMPLOYEES

The grouping analysis often focuses first on directors, shareholdings and trusts. This is because the OSRs can data-match most of this information. Working through this exercise is a necessary part of checking for commonly controlled businesses.

However, businesses also need to check for common employees. There are three sub-tests for common employees.

Again counterintuitively, a common employee includes an employee who performs duties in connection with a services agreement between their employer and their client.

image4

This test is extremely broad, and the cases have tried to limit its scope by asking whether the employee is subject to the direction of the client.

However, some sensible commercial structures can produce unintended payroll tax consequences. For example, consider:

image5

If Employee Z is a common employee between Alpha and each of its clients, there will be five small payroll tax groups. As Alpha is common to each of those groups, there will be one large payroll tax group.

This is a particular risk for locums, secondments, temporary staff or helping out businesses in the same franchise who have short-term staffing problems.

If Alpha Pty Ltd is providing administrative services, the nature of those services will need to be reviewed to see if Alpha's employees are common employees. This is because there is a distinction between:

  1. making an employee available to the general direction of a client; and
  2. an employee performing work on a client file but not at the client's general direction.

I AM WORRIED I HAVE GROUPING ISSUES. WHAT SHOULD I DO?

It depends.

  • If the OSR has started a review, you should review your circumstances in detail. There may be an opportunity to explain that no grouping issues arise (e.g. because an employee does not fall within the common employees test) or make a voluntary disclosure (e.g. because grouping issues have been missed).
  • If the OSR has not started a review, you should check whether there are grouping risks. If there are, you can look at how to manage those risks. How to manage the risk will depend on what has caused the grouping issue. For example:
    1. Contracts may need to be clear that employees are not at the general direction of a business' client.
    2. Discretionary beneficiaries may need to disclaim their interests or be excluded from the class of beneficiaries.
    3. The business may need to apply for an exclusion order from the OSR.

In any case, the issue will need to be managed carefully.

© Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.

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