Payroll Tax: Common Mistakes and the Grouping Net
5 mins reading time
Between nuances in state legislation, conflicting guidance from Revenue offices and ever-changing case law – payroll tax continues to be challenging. This is the case more than ever, with respective Revenue offices on the lookout for easy pickings given the number of businesses operating on common misconceptions. Misunderstandings give rise to these misconceptions, and as is with all tax-related matters, the devil is in the detail.
Here are some common errors we continue to see, along with our tips for traversing the payroll tax landscape.
Misclassifying employees and contractors
Whether the business believes someone is an employee or contractor is irrelevant for payroll tax purposes, as amounts paid to contractors are liable for payroll tax unless a prescribed exemption applies. Therefore, businesses need to identify the relevant exemption and retain evidence to substantiate its application.
MK tip: Seek professional advice to correctly classify contractor arrangements and document their terms. Remember that contractor payments are ‘in’ unless a legislative exemption applies.
Failing to include all taxable components
Payroll tax is not limited to ordinary salary amounts. In addition to contractor payments, taxable wages include (among other things), bonus payments, commissions, fringe benefits, superannuation and directors’ fees. Failing to include these components in calculations could result in underpayment and the application of interest and penalty tax of up to 75% on the shortfall.
MK tip: Stay up-to-date on regulatory changes and be mindful where entities employ in multiple states.
The grouping net
Put simply, where a business is related to or connected to another business, those businesses will be treated as a single business for payroll tax purposes – with the group’s payroll tax amount being calculated on the members’ combined Australian taxable wages.
There are multiple bases for grouping entities for payroll tax purposes as they are, by design, very broad. A common error is assuming that separate legal entities mean businesses are not grouped.
The grouping provisions are extremely wide and, quite often, businesses are caught by the rules even when they are genuinely independent businesses. Where this is the case, a business can make an application to the Commissioner for exclusion from a payroll tax group.
MK tip: It is better to operate on the basis that separate businesses are grouped (that is the starting position of Revenue offices). When you start to be at risk of breaching the thresholds, advice should be obtained to determine that separate businesses are not grouped and, if necessary, prepare an application to have a particular business excluded.
Missing ‘sets’ of persons
The test for common control looks at whether persons (individuals or entities) have a controlling interest in a business. However, it also applies to ‘sets’ of persons.
For example, two individuals will have a controlling interest in a company that operates a business where they each hold 50% of the shares on issue. While more than 50% interest is required for control, those companies will nevertheless be grouped by virtue of a ‘set’ of persons controlling both, if those persons also have respective 50% shareholdings in a different company that operate an entirely different business.
Importantly, the provisions capture both direct and indirect controlling interests.
MK tip: In conducting periodic internal reviews, undertake an analysis ‘common control’ provisions. Consider ‘sets’ of persons and whether ASIC records reflect the entity’s governing document.
Assuming only trading businesses can be grouped
A defined term within each State legislation is that ‘business’ includes the ‘carrying on of a trust, including a dormant trust’.
As a result, businesses are deemed to include family trusts holding passive investments, as well as self-managed superannuation funds. While this can produce an absurd result, it is by no means a fanciful risk. The Commissioners have attacked SMSFs for the payroll tax liabilities of other businesses (given that being ‘grouped’ means joint and several liability).
For payroll tax purposes, any person who ‘may benefit from a discretionary trust’ is deemed to have a controlling interest in that trust
MK tip: Where there are discretionary trusts in your structure, don’t underestimate the long reach of grouping provisions.
Self-excluding from a payroll tax group
While there are many opportunities to break up a single payroll tax group, it is not a self-exclusion regime for payroll tax, despite being a self-assessed tax. An application must be made to the Commissioner who will need to be satisfied that the applicant business is carried on independently of, and not in connection with, any other member of the group.
MK tip: Consider the application of the grouping provisions. Where a group is identified, seek advice as to whether there are grounds to escape the net.
Where historical shortfalls are identified, voluntary disclosure will be beneficial in reducing penalty tax and interest that would otherwise apply.
Inaccurate record keeping
Record-keeping is not only crucial for accurately calculating payroll tax liabilities, but also for the purpose of reviewing structures against the grouping provisions, determining (and being able to substantiate) whether the ‘relevant contract’ exemptions apply, and in making an application for exclusion from grouping. Having this information on hand will also make request for information response much more manageable.
MK tip: Implement a robust record-keeping system – conduct regular structure reviews and internal audits of employer entities.
As a result of the Commissioner’s data matching capabilities, we are continuing to see a surge in audit activity. In a similar vein, historical payroll tax compliance remains a headline item for acquirers in business purchases.
We’re here to help
Macpherson Kelley can assist in undertaking a detailed review of your structure and arrangements to get your house in order before Revenue comes knocking or the deal falls through. Reach out to our Taxation team for more information.
The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.
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Payroll Tax: Common Mistakes and the Grouping Net
Between nuances in state legislation, conflicting guidance from Revenue offices and ever-changing case law – payroll tax continues to be challenging. This is the case more than ever, with respective Revenue offices on the lookout for easy pickings given the number of businesses operating on common misconceptions. Misunderstandings give rise to these misconceptions, and as is with all tax-related matters, the devil is in the detail.
Here are some common errors we continue to see, along with our tips for traversing the payroll tax landscape.
Misclassifying employees and contractors
Whether the business believes someone is an employee or contractor is irrelevant for payroll tax purposes, as amounts paid to contractors are liable for payroll tax unless a prescribed exemption applies. Therefore, businesses need to identify the relevant exemption and retain evidence to substantiate its application.
MK tip: Seek professional advice to correctly classify contractor arrangements and document their terms. Remember that contractor payments are ‘in’ unless a legislative exemption applies.
Failing to include all taxable components
Payroll tax is not limited to ordinary salary amounts. In addition to contractor payments, taxable wages include (among other things), bonus payments, commissions, fringe benefits, superannuation and directors’ fees. Failing to include these components in calculations could result in underpayment and the application of interest and penalty tax of up to 75% on the shortfall.
MK tip: Stay up-to-date on regulatory changes and be mindful where entities employ in multiple states.
The grouping net
Put simply, where a business is related to or connected to another business, those businesses will be treated as a single business for payroll tax purposes – with the group’s payroll tax amount being calculated on the members’ combined Australian taxable wages.
There are multiple bases for grouping entities for payroll tax purposes as they are, by design, very broad. A common error is assuming that separate legal entities mean businesses are not grouped.
The grouping provisions are extremely wide and, quite often, businesses are caught by the rules even when they are genuinely independent businesses. Where this is the case, a business can make an application to the Commissioner for exclusion from a payroll tax group.
MK tip: It is better to operate on the basis that separate businesses are grouped (that is the starting position of Revenue offices). When you start to be at risk of breaching the thresholds, advice should be obtained to determine that separate businesses are not grouped and, if necessary, prepare an application to have a particular business excluded.
Missing ‘sets’ of persons
The test for common control looks at whether persons (individuals or entities) have a controlling interest in a business. However, it also applies to ‘sets’ of persons.
For example, two individuals will have a controlling interest in a company that operates a business where they each hold 50% of the shares on issue. While more than 50% interest is required for control, those companies will nevertheless be grouped by virtue of a ‘set’ of persons controlling both, if those persons also have respective 50% shareholdings in a different company that operate an entirely different business.
Importantly, the provisions capture both direct and indirect controlling interests.
MK tip: In conducting periodic internal reviews, undertake an analysis ‘common control’ provisions. Consider ‘sets’ of persons and whether ASIC records reflect the entity’s governing document.
Assuming only trading businesses can be grouped
A defined term within each State legislation is that ‘business’ includes the ‘carrying on of a trust, including a dormant trust’.
As a result, businesses are deemed to include family trusts holding passive investments, as well as self-managed superannuation funds. While this can produce an absurd result, it is by no means a fanciful risk. The Commissioners have attacked SMSFs for the payroll tax liabilities of other businesses (given that being ‘grouped’ means joint and several liability).
For payroll tax purposes, any person who ‘may benefit from a discretionary trust’ is deemed to have a controlling interest in that trust
MK tip: Where there are discretionary trusts in your structure, don’t underestimate the long reach of grouping provisions.
Self-excluding from a payroll tax group
While there are many opportunities to break up a single payroll tax group, it is not a self-exclusion regime for payroll tax, despite being a self-assessed tax. An application must be made to the Commissioner who will need to be satisfied that the applicant business is carried on independently of, and not in connection with, any other member of the group.
MK tip: Consider the application of the grouping provisions. Where a group is identified, seek advice as to whether there are grounds to escape the net.
Where historical shortfalls are identified, voluntary disclosure will be beneficial in reducing penalty tax and interest that would otherwise apply.
Inaccurate record keeping
Record-keeping is not only crucial for accurately calculating payroll tax liabilities, but also for the purpose of reviewing structures against the grouping provisions, determining (and being able to substantiate) whether the ‘relevant contract’ exemptions apply, and in making an application for exclusion from grouping. Having this information on hand will also make request for information response much more manageable.
MK tip: Implement a robust record-keeping system – conduct regular structure reviews and internal audits of employer entities.
As a result of the Commissioner’s data matching capabilities, we are continuing to see a surge in audit activity. In a similar vein, historical payroll tax compliance remains a headline item for acquirers in business purchases.
We’re here to help
Macpherson Kelley can assist in undertaking a detailed review of your structure and arrangements to get your house in order before Revenue comes knocking or the deal falls through. Reach out to our Taxation team for more information.