Proposals for payroll tax reform - The 18th Annual States’ Taxation Conference


In August 2017, Craig Bowie, CTA, (MinterEllison) took part in the panel session ‘Payroll Tax – Exploring the Issues’, at the Queensland Tax Forum.

In the session, Craig discussed a range of points from a paper he produced with Harry Lakis, CTA, (Barrister) and Damien Bourke (Bourke Legal). 


In July 2018, Craig will expand on some of the points presented in this paper in his session ‘Proposals for payroll tax reform’, at the 18th Annual States’ Taxation Conference in Melbourne

Craig’s session will consist of a discussion on matters that are suitable for harmonisation in the administration of payroll tax around Australia, providing a practical outline as to the impact of the issues raised, and suggested approaches to improve their administration.

This post excerpts the paper presented at the Queensland Tax Forum, which includes a short outline of the grouping provisions’ history, the purpose and scope of the grouping provisions, raises a number of discussion points, and concludes with some proposals for change.

Payroll Tax – Exploring the Issues

Both taxpayers and tax administrators would be assisted by a ‘root and branch’ review of the payroll tax grouping provisions, undertaken with the object of furnishing rulings and guidelines that deliver clarity and certainty as to:

a. what arrangements fall outside grouping;
b. what arrangements qualify for exclusion, and
c. what arrangements properly attract the consequences of grouping.

Unfortunately there have been very few payroll tax grouping matters that have been heard in a Court. Consequently much of the guidance in the application of the provisions arises out of review processes in administrative tribunals. Decisions from such tribunals do not have the standing of judicial authority.

In addition, the matters that are before a tribunal or a court are necessarily heard and determined based only on the facts and issues that are presented in the immediate case. The cases will often identify the matters that fall for grouping, or are denied exclusion, but may not assist in explaining what arrangements fall outside the grouping provisions, or qualify for exclusion orders.

There has seldom, if ever, been an opportunity for the full gamut of legal, statutory and administrative issues encountered in the operation of the grouping provisions (and the issue of exclusion orders) to be considered, enunciated and collated in one compilation.

A Short Outline of the Grouping Provisions’ History

Payroll tax was transitioned from a Federal tax to a State tax in 1971. There were comments made in Queensland Hansard at the time, describing the known (but as yet not outlawed) minimisation structure of splitting employer entities.

Existing Victorian grouping reforms were subsequently adopted in 1975.

The grouping provisions, originally in ss.16A – 16I, were subsequently renumbered as ss.66 - 75.

The provisions were ‘harmonised’ with those in Victoria and NSW in 2008.

The Purpose of the Grouping Provisions

The cases describe an anti-avoidance purpose: to overcome the strategy of accessing the exemption threshold on multiple occasions, by splitting a payroll amongst separate entities carrying on purportedly separate businesses [see the often cited case of Commissioner of Pay-Roll Tax v RG Elsegood & Co Pty Ltd [1983] 1 NSWLR 223 at 229-230].

That ‘anti-avoidance’ purpose has been confirmed on numerous occasions: Plummers Border Valley Orchids v Commissioner of Taxes (NT) 2002 ATC 4530 at 4537; Baxter & Anor v Chief Commissioner of Pay-roll Tax (NSW) 1986 ATC 4816 at 4817; Artistic Pty Ltd v Commissioner of State Revenue [2006] WASAT 39 at [98]; Tasty Chicks Pty Ltd & Ors v Chief Commissioner of State Revenue [2009] NSWSC 1007 at [99].
The cases have also recognised the very broad scope of the grouping provisions, said to be alleviated by the operation of the exclusion provisions (again, see Commissioner of Pay-Roll Tax v RG Elsegood & Co Pty Ltd), although that mechanism for relief from grouping has itself been criticised - see Muir Electrical Co Pty Ltd & Ors v Commissioner of State Revenue (Vic) 2001 ATC 4386 at [14].

Ultimately the grouping provisions have been allowed to aggregate businesses that were never operated as one integrated payroll, and despite which remedial exclusion orders are often denied. See the analysis by Bond J in Scott and Bird and Ors v Commissioner of State Revenue [2016] QSC 132 at [27] – [28]. The provisions do this independently of any decision or determination of the Commissioner. No notice is required to a group member who then automatically becomes liable to pay – even though the assessment may only have been served on the “Designated Group Employer”. While the group member would qualify as a ‘taxpayer’ who can object, in most cases the time limit to lodge an objection in respect of previous periods will have expired.

The Scope of the Grouping Provisions
Many of the scenarios that incur grouping squarely fulfil the perceived purpose as an anti-avoidance measure to aggregate payrolls amongst businesses that are purported to operate separately.
The provisions start to overreach when they deem grouping when there is nothing more than a mere common discretionary beneficiary amongst separate discretionary trusts.

In other scenarios, simple common elements will combine two seemingly separate groups, for example through common sets of directors, or shareholdings.

An alarming provision is found in s.72, which causes individuals (directors or shareholders) to be branded as “relevant entities”, and to thereby become part of a payroll tax group by operation of the definitions in ss.74A-74G.

Some contended applications of the grouping provisions have thrown up absurd results that are unlikely to have been intended by the legislature. This is a basis to reject the absurd interpretation for a more reasonable one. The case that is most frequently cited in support of the proposition that Courts are entitled to approach the interpretation of legislation by taking into account the consequences of giving a particular meaning, is Cooper Brookes (Wollongong) Pty Ltd v FCT (1981) 147 CLR 297, at 320-321.



Discussion points

The paper goes to raise a number of discussion points, including:
  • The Grouping Provisions – looking at the existence of a “business” being a pre-requisite, and the purpose of s.72 and ss.74A-74G. 
  • Exclusion Orders – including some general principles about the exclusion discretion, prohibition for corporate groups, a suggested logical methodology, and what ‘substantial’ means in relation to the exclusion provisions. 
  • The Factor of Ownership ‘and’ Control 
  • Nature of the Businesses 
  • Joint Liability of Group Entities, including liability to be construed in context, joint liability Under s.34(2) and s.42(2), and the scope of s.51A

Finally, the paper discusses some proposals for change.

Purpose of grouping provisions

Any proposal for reform of the grouping provisions should start with a consideration of their purpose. As described above, the purpose of the provisions is to prevent avoidance of payroll tax by subdividing businesses. It is therefore relevant to consider to what extent the provisions serve that purpose.

In this respect, the provisions, as presently drafted, perform two functions:

a. They deny access to multiple tax free thresholds to employers who carry on related businesses

b. They impose joint and several liability upon all members of the group (subject to the comments in the full paper in relation to the restraints upon section 51A(2)). In doing this, they define a 'group' which includes those employers, together with numerous other persons and entities, including those which do not carry on a business, and which have never had employees.

It may be suggested that only the first function serves the purpose of the provisions. To be generous to the drafters, it may also be suggested that the deeming provisions which expand the group to include non-employers, and persons who do not carry on businesses, serve the purpose of allowing those persons to be used as 'links' in a chain which allows other businesses to be added to the group. Breaking those links can be addressed not only by reform, but also by the manner in which the provisions are administered.

Even accepting that it is appropriate to use 'links in a chain', the provisions go far beyond what might be considered reasonable. In particular, the suggestion that all beneficiaries of a discretionary trust control that trust flies in the face of common sense and practice, particularly in cases where the beneficiary has never had a distribution made to it, and is not even aware of the existence or terms of the trust.

The second function of the provisions, however, does not serve the purpose of the provisions at all. The purpose of the provisions is sufficiently served by denying each business a separate entitlement to the benefit of the payroll tax threshold. Once that purpose has been served, it is appropriate to consider whether the same set of provisions should be applied in determining who should be liable to pay the resulting tax. This is particularly relevant if it is accepted that non-employers and persons who do not conduct businesses are legitimately included in the group only as links in a chain – the justification for them being additionally subject to personal liability is quite different, and not in any way related to the purpose of the provisions.

The situation may be contrasted with the income tax consolidation provisions, which also impose joint and several liability in many circumstances. In the case of the consolidations provisions:

a. The head company elects into those provisions – in the absence of an election, the provisions do not apply.

b. The provisions are limited to genuine company groups and do not extend to unrelated third parties.

c. The companies within the group benefit from the provisions, as they simplify the tax treatment of company groups, and allow intra-group transactions to be ignored.

d. When the provisions apply, it becomes difficult to separate out the liabilities of each entity.

None of those considerations is relevant to payroll tax.

a. Payroll tax grouping is not voluntary

b. The provisions extend well beyond genuine company groups, including to non-employers (subject to the remarks in the full paper) and persons who do not carry on businesses at all

c. No company benefits from payroll tax grouping.

d. it is very straightforward to work out the liability which each employer would otherwise have incurred had the threshold been unavailable.

Options for reform

We have broken the options into two groups – those that relate to the breadth of the grouping provisions, and those that relate to the 'dual use' of the grouping provisions.

Options which may be considered in relation to the breadth of the provisions include:

a. Limiting the 'control' provisions relating to beneficiaries of discretionary trusts to default beneficiaries of those trusts, and perhaps to beneficiaries to whom a distribution has actually been made. This would eliminate 'accidental' groups which result simply from a wide beneficiary definition commonly used in family discretionary trusts.

b. Removing the provision by which unrelated groups are joined together by the simple presence of a common member.

c. Expanding the use of the de-grouping provisions, so that they focus on ensuring that the only businesses which are grouped are those which are obviously related, and could (and should) have been conducted more practically under a single umbrella. A 'similar business test' may be a good starting point here. If the businesses being conducted are not similar in nature, there is no reason to think that they have been separated simply to avoid payroll tax. Under this approach, florists would be immediately de-grouped from hotels. This option may be given effect statutorily, or by changes in administrative practice.

Options which relate to the 'dual use' of the grouping provisions include:

a. Providing that the liability of each member of the group is no greater than their individual liability would have been had the threshold not been available at all. This strikes a balance between ensuring that parties are not incentivised to avoid payroll tax, and ensuring that 'innocent' parties are not subject to payroll tax obligations over which they have no control.

b. Restricting the operation of the joint and several liability provisions to actual employers who conduct businesses, and excluding non-employers and those who do not conduct businesses. If the State still considers it appropriate to pierce the corporate veil in relation to directors of companies which fail to comply with their payroll tax obligations, that could be done in a clear and specific manner, such that those directors are liable only for the obligations of companies which they direct. At present, 'back door' liability is imposed on directors, not only in relation to companies which they control, but also in relation to entirely unrelated companies over which they have no control.

c. Removing the joint and several liability provisions altogether.

--- ends ---

The full paper is available for purchase here, or is included in a subscription to the Tax Knowledge eXchange.

Craig Bowie, CTA, is a Special Counsel in the Tax Division at MinterEllison.

Craig Bowie, CTA
In addition to his law degree, he holds a Graduate Diploma of Insurance and a Masters of Tax, and is completing a PhD in physics in his spare time. Craig has specialised in corporate taxation since 2000, and also assists clients with the resolution of disputes with the ATO and the Office of State Revenue. Craig is the Chair of The Tax Institute’s Queensland Technical Resources Committee and is recognised in both Best Lawyers and Doyle’s Guide.

In his upcoming session at the 18th Annual States’ Taxation Conference, Craig will look at potential improvements to the administration of the grouping rules and obtaining certainty and consistency, around Australia, with respect to applications for de-grouping, the approach to the recovery of payroll tax liabilities from entities jointly and severally liable for group debts, and the application of the employment agent provisions.

Find out more on our website.

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