It is a common misconception that only related entities may be grouped under the Payroll Tax Provisions. However, this is often not the case as many of our matters have consisted of several unrelated SMEs being grouped despite having no connection with each other. We understand that these circumstances arise commonly in the context of where Management Agreements are used for the provision of services in a business premise. As such, this is quite relevant in the context of pharmacies, vets and medical practices, where management agreements are commonly used and more than one business operates within a single business premise.
This article will discuss the following:
- What are the grouping provisions;
- How the common employee grouping rules will apply to you;
- Case study on how the grouping rule applied to many of our clients and how we successfully degrouped them; and
- How to avoid being grouped for the purpose of the payroll tax provisions.
What is Grouping?
The grouping rules under the Payroll Tax Act 2007, and its equivalent provisions in other State laws, seek to aggregate several entities for the purpose of payroll tax liability. As noted in Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue, the purpose of these rules is to prevent entities from splitting their business activities among different entities such that they stay under the respective payroll tax thresholds, currently $900,000.
Take for example the below:
At first glance, none of these companies would be caught under the grouping provisions as the wages paid in the 2023-2024 year is under the $900,000 threshold. However, if these companies were grouped, on the basis that Holding Company A owns 100% of Subsidiary Company B, the threshold will be met and all the companies in this group would have to pay payroll tax. This is in addition to the General Interest Charge and Penalties that may arise in failing to pay their respective payroll tax liability.
There are several ways in which companies may be grouped for payroll tax purposes. These consist of the following:
- Related Entities – Companies may be grouped pursuant to the fact that they are related body corporates within the meaning of the Corporations Act 2001. This means that a company that either controls a subsidiary company’s board, holds more than 50% of the voting rights in the subsidiary company or holds more than 50% of the share capital in said subsidiary company will as a whole constitute a group for the payroll tax provisions.
- Common Control – An entity that has a controlling interest in two or more entities will be grouped.
- Common Employees – Entities that employ the same entities will be grouped.
The first two ways in which businesses may be grouped is often quite obvious, however the common employee method of grouping is often more ambiguous. As noted in the case of Liquid Rock (our emphasis):
The application of s 71 can be difficult because its terms are apt to cover more than the policy of the legislation would suggest. The mere provision of a service to someone by a person employed by another who is otherwise wholly independent, could come within the literal application of the section although that could not be thought to be the purpose, intention or reach of the provision …A person may appear to be performing duties for someone other than the employer when careful analysis will show that not to be the case. It is commonplace for an employee to discharge duties for an employer by provision of duties to another as provision by the employer rather than for or in connection with the business of the other.
This highlights some of the difficulties the SRO may have in applying these provisions. Due to the complexities that may be involved in management agreements, especially in pharmaceutical businesses, and whilst it appear that two businesses may share employees based on their shared premise, the onus is on the SRO to carefully review these arrangements before deciding whether these two businesses should be caught under the provisions.
In our experience, the SRO often errs in deciding that two businesses that operate on the same premise/s do share employees and therefore ought to be captured by the grouping provisions. The following sections will discuss how to avoid this.
How to avoid being Grouped and Degrouping
While the wording of these provisions vary across states, they commonly apply in the following circumstance:
- An employee that performs duties for a business carried on by their employer and another party, the employer and that other party will be grouped.
In light of the above, there are several factors which the SRO should look at in assessing whether two businesses are grouped by virtue of the shared employee grouping provisions.
The first thing that is looked at is the degree of autonomy that each business has from each other. In assessing this, the SRO should have regard to the nature and degree of ownership and control of the business, the nature of the business and other matters they may consider relevant.
In assessing independence, the SRO will also look at the following factors, including but not limited to:
- The degree of commercial transactions between the businesses, including the value and proportion of the entity’s total business conducted with the other entity;
- The degree to which the members share resources, facilities, and/or services;
- The level of control the entity has over, of its involvement in, the managerial decisions and day-to-day operations of the other business (and vice versa);
- The respective duties of each businesses’ employees; and
- The type of connection between the nature of the businesses of the entities.
Whether both businesses/entities share the same management (e.g. whether the directors are the same);
Ordinarily, the employees of PRU and XYZ at the Ascot Vale premise are not shared employees given they are employed with their respective employers and not both. However we have often seen the SRO group these entities together due to the fact that they operate in the same premise.
In many of these cases, we find that the employees of PRU and XYZ often are providing services to each other rather than providing duties which would be caught under the grouping provisions. For example, the employees of XYZ are employed to carry out general, non-pharmaceutical services in the Ascot Vale pharmacy. They fall short of providing duties to PRU because the employees of XYZ are unable to provide duties associated with being a pharmacist. In many of our matters, we have successfully argued for degrouping by arguing that the employees of PRU and XYZ are wholly separate, being that one operates in the pharmaceutical industry and the other retail. They merely provide services to each other to ensure that the businesses are efficient and professionally run and enabling one business of the premise to focus solely on their day to day operations leaving the matters within the purview of the management agreement with the other business and their expertise.
Further to this, an application to degroup is also necessary. In assessing whether to degroup XYZ and PRU the level of independence between these two entities is a significant factor.
In these circumstances, the following is influential in determining a favourable outcome for clients like PRU and XYZ:
- Whether they share directors/partners with each other;
- The types of employees they employ and whether they are separate;
- The necessity to operate through a management agreement due to regulations;
- Whether the employees of PRU and XYZ may direct each other on their duties; and
- The fact that PRU and XYZ do not hold any shares or interests in each other.
While we see these provisions applying to the context of pharmaceutical businesses, other businesses that utilise management agreements may unknowingly be caught by the grouping provisions despite operating wholly different businesses. The ambit of these provisions of often wide and unjustly captures businesses that are independent of each other.
If you wish to discuss this further and how the grouping provisions may apply to your business, please contact Tony Pointon and Andrew Pointon of our Taxation Team.
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