Payroll Tax Year End
The payroll tax year ends on 30 June. Registered businesses are required to lodge their annual reconciliation returns by 21 July. The next few weeks is an ideal time for affected businesses to critically review their payroll tax compliance, as our experience shows that the majority of businesses are either underpaying or overpaying payroll tax. Few businesses get it exactly right.
Critical issues to address include:
- Did the “wages” paid by your client’s business exceed the exemption threshold for the first time in 2015/16? If so, payroll tax registration is required. [The NSW exemption threshold is $750,000 for 2015/16].
- Don’t forget that “wages” for payroll tax purposes includes superannuation contributions, salary sacrifice super, most fringe benefits, most allowances, most termination payments, directors’ fees, employee share and option schemes, etc. OSR auditors also target expenses described in the P&L as management fees or administration fees, as they may also be wages or deemed wages, depending on what they are paid for.
- Do payments to contractors need to be included in taxable wages? (refer below)
- Is your client’s business grouped with other businesses, by common shareholders, common directors, or sharing of employees? (refer below)
- Have all available exemptions and concessions been taken up?
Action Point: We recommend that advisers review clients who regularly engage contractors or subcontractors or who have interests in more than one business, as they may be unaware of their exposure. ITC Group can perform an external evaluation of compliance if required. Contact Shane Peters for further details.
Enhanced Payroll Tax Compliance Activity
In both the 2013 and 2014 Budgets, the NSW Government announced expansion of compliance activity for payroll tax, land tax and stamp duties, expecting to increase revenues by $250 million over 4 years. The growing preference for desk audits (more efficient for the OSR, but increased costs and delays for taxpayers), combined with sophisticated data mining, has resulted in increasing the number and coverage of audits being undertaken. Industries currently being targeted include medical practices, cleaning companies, employment agencies, transport companies, the building industry (a perennial), real estate agents and businesses using service entities.
Payroll Tax & Contractor Payments
Payments to certain contractors are deemed to be wages for payroll tax purposes. In broad terms, the intention of the Government is to tax such payments where contractors/subcontractors work exclusively or primarily for a single principal.
The legislation works by making contractor payments subject to payroll tax, unless the payments are covered by one of the prescribed exclusions, of which there are 4-9 depending on the State/Territory (e.g., contractor engaged for less than 90 days, the contract requires the services to be provided by two persons, etc.). Note that the ACT has only 4 prescribed exclusions and WA has different contractor provisions to the other States.
Note that payments to contractors can be subject to payroll tax even if the contractor operates through an interposed entity (e.g., company or trust).
As with grouping, our experience is that many businesses do not realise they have a liability to pay payroll tax on contractor payments until they receive an audit questionnaire or audit, and are subject to a five-year adjustment.
Action Point: If your client’s P&L statement shows an amount for ‘contractors’ or ‘subcontractors’ (the proverbial ‘red flag’ for OSR auditors), has your client considered whether they have a potential payroll tax liability?
How does Payroll Tax Grouping Work?
In all States and Territories, payroll tax is only payable on wages in excess of the exemption threshold ($750,000 in NSW in 2015/16). If two or more businesses are ‘grouped’, they are required to share the threshold. Also, if a business has interstate wages, the threshold is reduced proportionately, e.g., if 50% of national wages are paid in NSW, then only 50% of the NSW threshold is available.
Businesses are grouped where:
- they are ‘related bodies corporate’ under the Corporations Act 2001
- the same ‘person’ or ‘set of persons’ has a ‘controlling interest’ (i.e., >50%) in two or more businesses, by shareholding or directorship (note, particularly, that any beneficiary of a discretionary trust is deemed to have a controlling interest in the business conducted by that trust)
- an employee of one business performs duties for another business, whether for a commercial fee or not, and regardless of the level of inter-use of employees, i.e., there is no de minimus test. Inter-use of employees is commonly identified by OSR auditors seeing ‘management fees’ in the P&L statement of a business.
Our experience is that many businesses (especially those operated through discretionary trusts) do not realise they are grouped with other businesses until they receive an audit questionnaire or audit, and often find themselves with a five-year OSR assessment with penalties and interest.
Action Point: If you have clients who have interests in more than one business (directly or indirectly), we recommend you critically review whether they have a potential exposure through the grouping provisions.
What is Payroll Tax De-Grouping?
Because the payroll tax grouping provisions are drafted so broadly, they often have the outcome of technically grouping businesses that are otherwise independent, e.g., businesses that have some minor inter-use of employees. To avoid unintended consequences, the legislation gives a discretion to the Commissioner to exclude a business from a group where he is satisfied that the business ‘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’.
Non-Labour Component of Contractor Payments
Contractors will often charge an all-inclusive price for the supply of their labour and any associated equipment and/or materials supplied. As the scheme of the legislation is essentially to impose tax on labour, the legislation allows the non-labour component to be excluded from ‘wages’ for payroll tax purposes. The twist is that the non-labour component is an amount ‘as determined by the Chief Commissioner’.
The Commissioner has approved a number of default percentages for common trades and professions, e.g., 25% standard non-labour component for contract carpenters, electricians and plumbers. However, if the contractor type is not listed, a taxpayer will either need to obtain a private ruling if they wish to use an average non-labour component percentage, or seek the OSR’s agreement to a retrospective percentage if the exclusion of a non-labour component becomes an issue in an OSR audit.
Action Point: If you client is excluding a non-labour component that is not covered by an OSR ruling, they should consider seeking a private ruling from the OSR, to avoid any surprises at an OSR audit.
Exemptions and Rebates
All of the States and Territories have various exemptions from payroll tax and/or rebates payable in respect of specified payments.
For example, kilometre-based allowances (up to 77c per kilometre for the 2015/16 year) are exempt. Similarly, accommodation allowances (up to $255.45 for the 2015/16 year) are exempt.
In NSW, maternity, paternity and adoption leave payments are exempt. Most of the other States and Territories have comparable exemptions.
Most of the States and Territories also have concessions for employing apprentices and trainees. In NSW there is a payroll tax rebate for wages paid to apprentices and trainees.
NSW also a payroll tax rebate scheme to encourage the creation of new jobs. The scheme currently runs to 30 June 2019, with the rebate being $5000 for new jobs created on or before 31 July 2016 and$6,000 for new jobs created after 31 July 2016. Note that after 31 July 2016 the scheme is limited to employers with 50 or less employees.
This newsletter is issued as a helpful guide. It is not intended to, and does not cover all aspects of the topics discussed. Professional advice should be sought before any action upon these topics is taken.