Grouping entities for payroll tax can greatly impact each business' tax liability. While de-grouping is possible, it requires an active exercise of a discretion and an application initiated by the entities involved.
If you are part of a corporate group, a director or the controlling mind of more than one entity or have substantial equity interests in multiple entities, or have any interest in a discretionary trust, it is important to seek advice to determine whether those entities should be grouped for payroll tax purposes and if de-grouping could reduce payroll tax exposure.
Payroll tax grouping
Payroll tax is a state and territory tax on wages that employers pay employees. It is calculated based on the wages paid to employees Australia-wide. Payroll tax grouping – where two or more entities are grouped for payroll tax purposes – is a feature of the payroll tax regime in all states and territories.
The measures were designed to counter tax avoidance and the splitting of business activities among entities to stay under the relevant thresholds, which vary between states and territories. For example, the threshold is $700,000 in Victoria, $1.2 million in NSW and $2 million in the ACT. When entities are grouped, only one threshold applies and all amounts over that threshold are subject to payroll tax.
There are broadly three ways entities can be grouped:
1. Related body corporates
The entities are corporations which are related to each other by virtue of section 50 of the Corporations Act 2001 (Cth). The definition includes all holding companies and their subsidiaries (direct and indirect) where one entity is a subsidiary of a second entity if the second entity:
- can control the composition of the first entities board;
- is in a position to cast or control the casting of more than 50 per cent of votes in the first entity; or
- holds more than 50 per cent of the share capital in the first entity.
Entities grouped under this provision cannot be de-grouped.
2. Common employees
At least one employee of an entity performs any duties for or in connection with a business conducted by another entity or there is an agreement between two entities for the employee of one of them to perform duties in the business conducted by the other entity.
3. Common control and controlling interests
A person or set of persons (individual, corporation, partnership, trust or other entity type) together have a controlling interest in two or more entities. A controlling interest being where the person or set of persons:
- is or are the sole owner(s) of a business however constituted;
- is in a position to cast or control the casting of more than 50 per cent of votes in a corporation, holds more than 50 per cent of the capital in a partnership or is the beneficiary of more than 50 per cent of the interests in a trust (whether as trustee or beneficiary);
- holds more than 50 per cent of the share capital in a corporation or is entitled to more than 50 per cent of the profits from a partnership;
- constitute more than 50 per cent of the board or controlling organ of an entity or can control the composition of that controlling organ of an entity; or
- have authority that mean an entity is under an obligation whether formal or informal to act in accordance with the direction, instructions or wishes of that person or set of persons.
There are also tracing provisions to connect entities of the above classes through interconnections. Further, default beneficiaries of discretionary trusts are taken to have a beneficial interest in more than 50 per cent of the value of interests in the trust. This means that if a discretionary trust is part of a corporate group, it will almost always be part of a payroll tax group. The discretionary trust can be a link between many other entities in the group, causing them to also fall under the payroll tax group.
It is important to note that the term 'entities' in the explanation above can also refer to non-employing entities (companies without employees) and dormant entities (companies that are not actively trading). Both types of entities can serve as a link between other entities that are employers.
De-grouping
To avoid anomalies and unjust results from the strict and literal interpretation of the above rules and the frequent occurrence of payroll tax grouping, the Commissioner of State Revenue has a discretion to de-group entities. However, this discretion does not apply when the grouping results in entities being related bodies corporate.
The discretion must be actively exercised and documented in a written determination. Entities that wish to be de-grouped for payroll tax purposes are required to lodge a submission with the Commissioner of State Revenue explaining why they should not be grouped. While this application can be lodged retrospectively, it is advisable to submit it prospectively whenever possible.
To exercise the discretion the Commissioner of State Revenue must be satisfied that a business carried on by the person is independent of, and not connected with, the business carried on by any other member of that group.
In exercising the discretion, the Commissioner of State Revenue will consider:
- the nature and degree of ownership and control of the business
- the nature of the businesses
- any other relevant matters.
The Commissioner of State Revenue has published guidance on how the discretion will be exercised. This guidance states that all existing connections will be considered, specifically whether those connections are continuous in a business or commercial sense and whether the connections are more than casual, irregular or occasional. The guidance further provides that the following matters will be taken into account:
- the nature and extent of commercial transactions between the members, including the value and percentage of the member's total business conducted with other members of the group
- the extent to which resources are shared, including facilities, services, premises, staff, management, accounting services
- the extent a member controls managerial and day-to-day decisions of other members
- the extent to which there are financial interdependencies, such as intra-group loans, guarantees, common banking facilities, the terms and nature of agreements
- the connections between sales and purchases among the members of the group
- the connection between the nature of the businesses of the group members
- the connection between the ultimate owners and members of the group.
This exercise is a highly fact-intensive analysis that requires significant judgment. None of the above factors is determinative on its own. The fact that there are connections is not sufficient – the connections must be material connections.
Understanding how the discretion is exercised in practice is essential for making that judgment and forming a view as to whether an application is warranted in the circumstances or not, and whether changes in how corporate groups operate are likely to trigger payroll tax grouping changes. The evidentiary obligation is on payroll tax paying entities in all instances.
By way of an example, administrative service businesses set up solely to provide administrative services to professional practices are routinely grouped because there are common employees. In contrast, grouping is much less likely (even unlikely) to occur where several professional practices use the services of a single administrative business that is not overly dependent on any one of the professional practices for its income and the professional practices are not otherwise connected.
If you have any questions about this article or payroll tax more broadly, please get in touch with our team below.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.