Beware the Payroll Tax Grouping Rules: Losing the Tax-Free Threshold and Joint & Several Liability

Payroll tax is a State and Territory based tax that is imposed on ‘taxable wages’ (broadly, wages that are taxable in the particular jurisdiction) above a certain tax-free threshold. The payroll tax rules are largely harmonised across all jurisdictions, with the grouping rules being broadly the same across all jurisdictions.  

In Victoria, the tax-free threshold is currently $1,000,000 per annum (for annual lodgers) and $83,333 per month (for monthly lodgers) for employers and groups with total annual taxable Australian wages below $3 million. In NSW, the tax-free threshold is currently $1,200,000 per annum (for annual lodgers) and between $92,055 and $101,918 per month depending on the number of days in the month (for monthly lodgers).

Payroll Tax Grouping

The payroll tax grouping rules were introduced in all jurisdictions to prevent the splitting of what is, in reality, one business across several structures so as to multiply the benefit of the tax-free threshold.  

The rules operate by grouping businesses for payroll tax purposes in the following circumstances:

• where there is common control;

• where there is common use of employees; and

• where the businesses are related bodies corporate (e.g. a parent company and a subsidiary company).

Where a business is a member of more than one group, the smaller group is ‘subsumed’ by the larger group (so all members of all groups form a group).

While the grouping rules are designed to prevent the inappropriate multiplication of the tax-free threshold, the rules cast the net wide in terms of the circumstances in which businesses will be grouped. In doing so, genuinely independent businesses can be caught by the rules. For example, two unrelated businesses may share a receptionist, in which case the businesses would technically be grouped because they both share an employee.

De-grouping Discretion

In recognition of the fact that the payroll tax grouping rules cast the net wide and the significant adverse consequences of grouping (discussed below), the rules give the Commissioner a discretion to exclude a business from a group (referred to as ‘de-grouping’ the business). However, this discretion is not available if the grouping arises because two or more companies are related bodies corporate.

The discretion is available if the Commissioner is satisfied, having regard to:

• the nature and degree of ownership and control of the businesses;

• the nature of the businesses; and

• any other matters the Commissioner considers relevant,

that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group.

A nuanced analysis taking into account the specific factors listed above as well as several other factors as discussed in cases and rulings (e.g. the nature and extent of any commercial transactions, sharing of resources and financial interdependencies between the businesses) will be undertaken by the Commissioner in determining whether to exercise the de-grouping discretion.

What Does Grouping Mean for Payroll Tax?

Where businesses are grouped, they are, in effect, treated as single entity for payroll tax purposes.  

This works as follows:

• one of the members of the group (called the ‘designated group employer’ or ‘DGE’) is responsible for lodging the payroll tax returns for the group and for paying the payroll tax liabilities on behalf of the group;

• the payroll tax liability of the group is calculated by aggregating the taxable wages of all members of the group and applying the tax-free threshold only once (for the group); and

• if the DGE fails to meet its payroll tax liability, all members of the group are jointly and severally liable for the payroll tax liabilities of the group.

Takeaways for Grouped Businesses

Businesses that may be grouped for payroll tax purposes should be proactive in managing their historic and future exposures. This may involve:

• reviewing their historical position to ascertain the quantum of their historic exposure to payroll tax and penalties;

• ascertaining the prospect of obtaining a successful exercise of the Commissioner’s de-grouping discretion;

• making a ‘voluntary disclosure’ to the Commissioner disclosing the errors made, potentially combined with an application for de-grouping requesting de-grouping from an earlier date. The voluntary disclosure will typically result in lower penalties and interest being imposed. The disclosure can be made during the course of an audit, though the extent of any penalty and interest reductions will be lower than if the disclosure had been made before the audit; and

• if the prospects of de-grouping from an earlier date are low, restructuring arrangements with the other businesses and then making a de-grouping application requesting de-grouping on a go-forward basis.

In addition, entrepreneurs looking to establish multiple businesses (but have not yet done so) should be conscious of the prospect of grouping and, if commercially feasible, structure their businesses appropriately from the outset to avoid falling foul of the grouping rules.

If you think your business might be grouped for payroll tax purposes or are looking at setting up multiple businesses and would like assistance from a payroll tax grouping perspective, please contact Archana Manapakkam.