Payroll Tax Grouping Provisions: Unbelievable Far-Reaching Effects

I have chosen my words carefully for this heading because most people who come to me for advice after they’ve been caught out by the grouping provisions can’t believe the grouping provisions’ far-reaching and alarming effects.

Where two or more companies are grouped only one of them is entitled to the benefit of the threshold amount. 

When the Payroll Tax Act was first introduced with thresholds for businesses the obvious way around paying payroll tax was to register multiple companies to employ workers. That meant each company enjoyed the threshold and as long as you kept your wages below the threshold for each company no payroll tax was payable. So you might run a business but the workers were employed by several different companies in the business.

Grouping Provisions Tightened

When the Payroll Tax Office woke up to what was happening, Parliament introduced the grouping provisions in the mid-1970s. The provisions were tightened up again around 2008.

Some of the more obvious ways companies can be grouped for payroll tax are where:

  • one company is a subsidiary of the other;
  • one or more persons control the board of directors of more than 1 company; or
  • one or more persons control the voting rights of shareholders of more than 1 company.

What often happens is:

  • Where 2 people are directors of one company and decide to expand their operations with another person.
  • A second company is formed and three directors sit on the board of the second company.
  • The second company is managed by the third person and the business is entirely different to the existing company’s business.

None of that matters. Under the Payroll Tax Act the 2 companies can be grouped because the same 2 people control the board of directors of the first company and the second company.

Shareholder & Family Trust Implications

A similar situation applies to shareholders.

If one or more persons control the voting rights of shareholders of one company and take a majority interest in a second company then the two companies will be grouped under the Payroll Tax Act.

But there is an even greater problem with family trusts.

Under the grouping provisions if you are capable of having an interest in a family trust then you are deemed to control the trust. It’s quite an artificial, and some would say draconian, provision but its far-reaching effects can be devastatingly disastrous for businesses.

Just to be clear, it doesn’t matter that the person has never actually received a benefit under the trust or even knows that they might possibly be a beneficiary under the trust. 

So you could have a trust where the beneficiaries might include a primary beneficiary’s children and grandchildren, uncles and aunts and their children and grandchildren and any company or trust any of them might have an interest. One of the extended “beneficiaries” goes into business and their business can be grouped with the trust’s business.

Recently I saw a trust deed which defined beneficiaries as including anyone registered on the Australian Electoral Roll. I am sure the drafter of that trust had no idea about the far-reaching effects of the grouping provisions of the Payroll Tax Act.

If you think I am exaggerating read the case Chief Commissioner of State Revenue (NSW) v Smeaton Grange Holdings Pty Ltd & Ors [2017] NSWCA 184.

Limiting the Effects

Fortunately, there are ways of limiting the effects of the grouping provisions particularly where family trusts are involved. And if, despite your best efforts, you are still caught up under the grouping provisions then you can always make an application for exclusion which is also called an application for de-grouping. But you are not permitted under the Payroll Tax Act to make an application for exclusion where one company is a related company (subsidiary) of the other.

However, sometimes it can be very difficult to convince the OSR to grant an order for exclusion of one of the businesses from the group.

Fortunately, the team at Tobin Partners has many years of experience in setting up businesses to avoid the grouping provisions and advising businesses on making an application for exclusion or de-grouping.

For further information contact Tobin Partners Lawyers by email or call Peter Tobin 0438 001 809 directly.

Article by Peter Tobin, Tobin Partners Lawyers

Disclaimer

This article contains general information only. It should not be relied upon as legal advice. Formal legal advice should be sought on particular matters canvassed.