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Indirect Tax News – June 2018

Payroll Tax – Review by NSW Treasury

The NSW Government has announced that it is reviewing the administration of payroll tax in NSW.

It has invited submissions from stakeholders to assist the review, with the deadline for such submissions being Friday 6 July 2018.

ITC Group will be making a submission to NSW Treasury on a range of issues.  If you or your clients wished to voice your feedback on the administration of payroll tax by Revenue NSW (previously NSW Office of State Revenue) you could do so directly or ITC Group can incorporate such feedback into its submission.

The review is considering the objectives for payroll tax administration and the effectiveness of Revenue NSW in administering payroll tax and meeting the objectives.  The review will also examine any administrative arrangements that are required to comply with the legislation, but payroll tax rates and thresholds are outside the scope of the review.

Further details are available at the following links:

https://www.treasury.nsw.gov.au/projects-initiatives/review-payroll-tax-administration

https://www.nsw.gov.au/improving-nsw/have-your-say/payroll-tax-administration-review/

GST on Low Value Imports

From 1 July 2018, GST will apply to low value imports.  Strangely, the new regime will not apply at import entry stage – GST and duty will continue not to be levied on most import entries of value less than A$1,000.  Rather, the GST will be imposed at sales contract or payment stage.  The importer will be required to report the import sales in an activity statement and pay GST to the ATO.

Businesses that import into Australia need to be ready for the new regime by 1 July 2018.  If they have not done so already, smaller or occasional importers into Australia need to, as a matter of urgency, determine the following:

  • Are they caught by the new regime or is their GST liability payable by an electronic distribution platform or re-deliverer?
  • Does their Australian turnover meet the threshold of A$75,000, requiring them to register for GST and report their liabilities?
  • How they can apply GST only on sales to Australian customers and not to businesses?
  • How they can identify whether the customer is in Australia?
  • The processes needed to increase prices, charge the tax, issue tax invoices and report and pay the GST liabilities to the ATO.

Contact Steve Baxter on 02 9221 2888 if your clients would like assistance to comply with the new regime.

Indirect Tax News – July 2017

Payroll Tax 2017 – Annual Reconciliation Due Date Fast Approaching

The due date for the payroll tax annual reconciliation for the year ended 30 June 2017 is fast approaching – 21 July 2017.

Below is a list of review points that may assist your clients in completing their payroll tax annual reconciliation.  The review points are designed to raise questions in areas where employers may overlook when determining their payroll tax liability.

Please contact Shane Peters or Anne Darmann at ITC Group if you would like to discuss these matters further.

Review points Suggested Action
Fringe Benefits: For NSW payroll tax purposes, the type 2 rate (currently 1.8868) is used to calculate the taxable value of fringe benefits of both types for the 2017 annual payroll tax reconciliation. Have you used the lower FBT gross up rate in your annual reconciliation? Revise your payroll tax liability for the entire 2017 year by using the lower FBT gross up rate.
If you have used the default proportionate approach to allocate payroll tax liability (between states) on fringe benefits, have you considered you may be better off using the actual method if you have more taxable benefits in low rate states? Review your fringe benefits allocation by state.
Exempt Payments: Are you aware of any deductions that may be available for workers compensation payments, paid parental leave payments, and for emergency services volunteer work? Review these payments and deduct any components that do not constitute wages for payroll tax purposes.
Have you deducted all exempt wages and claimed eligible rebates? Review wages and allowances for common exempt or rebate categories such as kilometre-based motor vehicle allowances, accommodation allowances (to prescribed amounts), maternity and adoption leave (paternity leave in NSW and some other states), trainees’ and apprentices’ wages, etc.
Are there any non-taxable elements in the Employment Termination Payments (ETPs)? Identify all payments made to terminated employees, whether or not they were paid through payroll. Contact ITC Group if there are payments related to restraints of trade, voluntary redundancies or settlements of disputes.
Have you deducted the non-labour component from your contactors’ payments? The OSR has listed a number of default non-labour percentages for common trades and professions. If you wish to deduct non-labour components that are outside of the OSR list you should seek a private ruling.
Employee Share Schemes: Have you properly determined the taxing points and taxable values of options and shares? Have you included any options or shares that issued in a prior year but vest during the current year? The taxation of Employee Share Schemes (ESS) is highly complex. If in doubt, please contact ITC Group to discuss.
Super Contributions: Have you included all salary-sacrifice superannuation contributions in your payroll tax calculations? Review all super contributions and include all salary-sacrifice contributions exceeding the 9.5% super guarantee
Directors Fees: Have you included all payments paid or payable by way of remuneration for the director’s appointment or services to the company? Ascertain whether there were any payments to directors in addition to their directors’ fees or salaries, including payments made to directors’ associated entities.
Grouping:  Have you considered whether your business is grouped with any other business for payroll tax purposes?
If you are currently grouped, have you considered whether you are eligible to be de-grouped under the grouping exclusion provisions (restrictions apply, including that the businesses must be carried on substantially independently of each other)?		 Businesses are commonly grouped due to having common shareholders, directors or trust beneficiaries; or having shared employees.  If in doubt, please contact ITC Group to discuss.
Contractors: If you engaged contractors in the 2017 year, have you considered whether any contractors’ payments are deemed to be wages for payroll tax purposes?  Have you considered whether any sole trader ‘contractors’ are actually common law employees (using common law tests) rather than contractors? Payments to independent contractors are subject to payroll tax unless they meet one of the exclusions applicable in the relevant state.  If sole trader ‘contractors’ are actually common law employees, the payments to them will be subject to payroll tax.
If you place contractors to work for your clients and are not currently paying payroll tax as an employment agent, have you sought payroll tax advice on the likelihood that you may be treated as an employment agent for payroll tax purposes in light of recent tribunal and court cases? Recent case decisions regarding employment agent provisions has created uncertainty in this area. If in doubt please contact ITC Group for a discussion.

 

You may also wish to read our July 2016 newsletter on our website for more general discussion about payroll tax.

DISCLAIMER: 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.

 

Indirect Tax News – June 2017

Payroll Tax – Employment Agent Provisions – Shifting the Goal Posts

Probably the most contentious issue that has arisen in OSR payroll tax audits in the last 3 years is the OSR’s broadening of its interpretation of the Employment Agent (“EA”) provisions in the payroll tax legislation. Numerous taxpayers who for years were determining their liability on contractor payments under the payroll tax Contractor Provisions (which has numerous exemptions) were suddenly assessed by OSR auditors under the Employment Agent Provisions (which has few exclusions). A common example is where a business employs subcontractors to assist the business to deliver a service to a customer (e.g., a cleaning company using subcontractors to provide cleaning services to its customers).

In general terms, the contractor provisions are intended to tax payments by businesses to contractors who provide their services exclusively or mainly to that business. Consequently, the legislation has a large number of exclusions to ensure that the majority of contractor payments are exempt for most businesses.

The EA provisions were originally introduced to create certainty as to who had liability for payroll tax in a typical three-party EA arrangement (worker-agent-client). Under these provisions, the EA, rather than the client, has the liability. Until three years ago the OSR’s policy was to only apply these provisions to traditional employment agents.

However, because the wording of the EA provisions is so broad (“a contract .. under which a person .. procures the services of another person .. for a client”), the OSR took the position three years ago that it could use the EA provisions to override the contract provisions, which in some instances increased the liability of the taxpayer tenfold. As most payroll tax audits go back at least four years, the audit adjustments have been very substantial.

There are a number of legal challenges to the OSR’s views currently proceeding through the Supreme Court and NCAT. The most recent Supreme Court decision reined in the OSR’s position somewhat but further decisions are awaited before any final position can be settled.

Action Point: We have represented a number of businesses in disputes with the OSR on the issue of whether the EA provisions or contractor provisions are applicable to their circumstances. Please contact Shane Peters if you would like further information about this issue or require assistance in relation to a client with a current dispute with the OSR.

GST – Do you have clients who sell into Australia?

The biggest change to GST since its inception in the year 2000 takes effect from 1 July 2017. While the deferral of GST on low-value imports is making all the political noise, the commencement of the so-called “Netflix tax” next month is likely to affect more transactions and raise more GST in the long term.

GST will apply from 1 July 2017 on the supply by non-residents of digital products and intangibles to Australian consumers. The most obvious transactions to be taxed are the downloading of movies, music, apps, games and e-books. What is not as well known is that the new tax can also apply to professional, consulting and other services. The new tax will only apply when Australian individuals or non-GST registered organisations acquire the digital products and intangibles. While some non-resident suppliers will be below the GST registration threshold and not required to charge GST, we understand that the Government is expecting to collect GST on more than 80% of the targeted supplies.

Action Point: Accounting, legal and other business professionals are encouraged to consider any of your connections which may be affected by this change. These include Australian and non-resident developers of digital products and creative content, resident clients who supply into Australia via a non-resident entity and venture capitalists or investors in non-resident entities and R&D. Others who may need to know about the changes include non-resident affiliates of your firm and even any non-resident client. After all, that non-resident client of yours may have generated the capital to buy their Australian investment property from a business supplying digital products worldwide. Please contact Steve Baxter if you would like to receive before and after charts displaying the changes and if you would like to know what matters need to be discussed with your clients.

R&D Incentives – Claims under Greater Scrutiny

Two taxpayer alerts have recently been co-issued by AusIndustry and the Tax Office concerning R&D claims in specific industries. These are software development and building & construction. There are concerns that many projects in these sectors may not satisfy the eligibility criteria and expenditure claimed is not directly related and claimable.

Claims in these sectors may be subject to much greater scrutiny. There are many concerns raised in the taxpayer alerts and you can contact us if you have clients making claims in these sectors to ensure that they are compliant.

Action Point: R&D claims relating to building and construction should be thoroughly reviewed to ensure that they satisfy all eligibility criteria and expenditure is directly related and claimable. You can contact us to conduct this review before these claims are lodged. Contact John Walden for further information.

Wine Equalisation Tax (WET) – A Sobering Thought!

WET is a sizeable impost of 29 percent of a wholesale price. Notwithstanding the Wine Producer Rebate, there are still some WET traps to navigate, particularly for imported wine. The WET legislation sets out the “Assessable Dealings Table” and the “Normal taxable value” required.

The WET Table refers to Part A – Australia Wine and Part B – Imported Wine. There are differing taxable value methods for both wines. The half retail price method allows for calculation of a notional wholesale selling price for a retail sale of Australian grape wine.

A taxable dealing with wine that is not a retail sale of wine requires that the notional wholesale selling price is the price (excluding wine tax and GST) for which you could reasonably have been expected to sell the wine by wholesale under an arm’s length transaction.

Therefore, a sale between an importer-wholesaler of wine to an associated retail entity cannot use the half retail price (including WET and GST) method as it is a wholesale transaction and not a retail sale.

To ensure that no under or overpayments of WET occur, taxpayers need to review the method of taxable value calculations periodically and under guidance. Action Point: Contact Steve Callanan for further information.

Indirect Tax News – July 2016

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.

DISCLAIMER

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.

Indirect Tax News – February 2015

Land Tax Free Threshold at Risk

Some landowners face the prospect of loss of their NSW land tax free threshold resulting in ongoing liabilities exceeding $6,900 per year.  The relevant scenario involves individuals or companies owning land as trustees but the OSR is not aware of the trust’s existence.  The OSR mistakenly thinks that the individual or company owns full legal and equitable title. It may not have issued a land tax assessment as a result of the land value being below the threshold (currently $432,000) and it certainly will not have sought to review the trust deed.  The risk is where, on closer scrutiny, the deed does not allow the underlying trust to qualify as a “fixed trust”.  Hence, the trust gains the land tax free threshold which it is not entitled to.

While exposures of up to five years could apply, it is doubtful that anything can be done about them.  What can be done is the execution of suitable variations to the trust deed to enable the trust to qualify as a fixed trust prospectively and the land tax free threshold to be secured for the future.

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Indirect Tax News – May 2014

Royalty Withholding Tax (RWT)

The recent Federal Court decision on whether payments made by the Australian distributor to a Canadian resident entity were “royalties” relied on the distribution agreement and the definition in the Double Tax  Agreement (“the DTA”).

The Court found that the payments were not excluded from the definition of “royalties” in the DTA because the nature of the rights acquired under the distribution agreement, as it related to the use of the software, were not limited to such rights as were necessary for the effective use or operation of the software by the distributor itself. Rather the rights were for the commercial exploitation of the software through the rights to copy the software for sale to end users and the right to use the copyright for the purposes of developing its own templates to sell in conjunction with the software.

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Indirect Tax News – November 2013

Landlords are not paying GST on commercial leases

Following a recent Federal Court case, we are aware that some lessors have stopped remitting GST on commercial and retail lease rentals. As you may have heard rumours of this practice, this edition of Indirect Tax News primarily focuses on the issue.

The Federal Court case involved a sale of a residential apartment under lease. The supply was treated as a GST-free going concern by the parties which was not disputed by the ATO. The ATO did, however, assess the apartment purchaser, imposing a Div 135 increasing adjustment equivalent to 10% of the purchase price. The ATO’s argument was that the purchaser intended that the supplies made through its enterprise (being the leased apartment) will be input taxed residential rentals.

The Federal Court decided unanimously that the grant of the original lease by the apartment vendor wasthe supply by way of lease. It held that the purchaser made neither a supply of the grant of a lease nor a continuing supply of the leased apartment to the tenant. As such, it held that the purchaser itself did not make input taxed supplies through its enterprise hence a Div 135 adjustment did not apply.

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