The grouping of entities for payroll tax purposes is one of the least understood areas of Australian tax law, yet its implications can be significant. Failing to adequately understand the legislation in your jurisdiction can result in the denial of payroll tax thresholds for some entities and the imposition of penalties where the grouping rules have been incorrectly applied.
What is payroll tax grouping?
Payroll tax grouping laws seek to combine multiple entities for the purpose of determining their payroll tax liability. Where two or more entities are grouped, their wages are aggregated in order to determine whether a liability exists. Each employer in the group remains primarily responsible for the payment of payroll tax on its own wages. However, all group members are jointly and severally liable for payroll tax debts.
The grouping provisions ensure that employers do not ‘artificially’ maintain their wages bill below the payroll tax threshold by splitting their businesses into separate employing entities.
Each state of Australia has its own similar grouping rules and advice should be sought from your William Buck advisor in relation to the provisions in your jurisdiction. This article focuses on NSW law as an example.
How is a group determined?
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)
- Use of common employees
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, consequently 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
- 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
- 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 significance of the third situation outlined above is often misunderstood. 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 provide evidence that the grouping provisions do not apply.
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 is the entities’ ability to prove that it is being carried on independently of, and not in connection with, any other members of the group. There are a number of factors considered in determining the independence of a business. The burden of proof is on the taxpayer to prove that they satisfy the independent business requirements. Should independence be in question, the entity should seek professional advice from their William Buck advisor.
Beware the contractor rules
Even if it is possible to demonstrate that an entity carries on its business independently of other group members, it is still possible that the contractor provisions can apply to include any inter-entity transactions for payroll tax purposes. Separate contractor related rules and exemptions are available which would need to be considered on an entity by entity basis.
Should you require further information in relation to payroll tax matters, please contact your local William Buck advisor.