Payroll tax – don’t underestimate the long reach of grouping

Payroll tax grouping is a key risk area for all businesses. It is not only a problem for closely related entities that carry on a common or similar business. Seemingly unrelated entities can also be grouped.

Where entities are grouped, the members of the group will, effectively, have a single payroll tax threshold (currently $850,000 in New South Wales) and, perhaps more significantly, be jointly and severally liable for the payroll tax debts of each member of the group.

Traditionally, the grouping provisions were primarily used to group entities that were clearly carrying on common or similar businesses so they did not avoid payroll tax by having a separate payroll tax threshold for each entity. The joint and several liability of such entities was rarely the main consideration in seeking to group the entities in the first place. However, more recently, State revenue authorities have commenced using the grouping provisions more strategically. Where a primary taxpayer is unable to pay its payroll tax liabilities, the State revenue authorities will look to identify other entities that should be grouped with the primary taxpayer in order to recover the payroll tax from the other entities.

Inclusion of entities within Group

Entities are grouped where they have specified common connections including as follows:

  • where the entities are 'related bodies corporate' as defined in the Corporations Act 2001;

  • where the entities are commonly controlled. This is generally where a person or set of persons has a greater than 50% interest in different entities but in the case of companies, will include where the person or set of persons control the board;

  • where an entity has a ‘controlling interest’ in another entity. A 'controlling interest' for this purpose includes an indirect interest and an interest aggregated with associates;

  • where the entities use common employees; and

  • where 2 payroll tax groups have common members, all of the entities in the 2 groups form a single “super” group.

Discretionary trust rules

Importantly, there are special rules around discretionary trusts that have the effect of significantly increasing the scope of the grouping provisions. A person falling within the class of beneficiaries of a discretionary trust (whether or not named) is treated as having a ‘controlling interest’ in the business carried on by the trust.

In addition, all trusts are treated as carrying on a business. Accordingly, a dormant trust or trust that only holds passive investments can be included in a payroll tax group.

Given that classes of beneficiaries of discretionary trusts are ordinarily designed to be wide, the potential application of the grouping provisions can be endless given the rules mentioned above, particularly when you bear in mind that 2 groups with common members form a single “super” group.

A recent case demonstrates how discretionary trusts can be used by revenue authorities to expand the group. In Smeaton Grange Holdings Pty Ltd v Chief Comr of State Revenue [2016] NSWSC 1594 (reported at 2016 WTB 49 [1709]), a company called Tri-City Trucks Pty Ltd went into liquidation with outstanding payroll tax liabilities. The sole shareholder of the company was Michael Gerace. Michael’s parents had a family discretionary trust, the Smeaton Trust. Both Michael and his brother, Ralph, were potential beneficiaries of the trust. No distributions had ever been made from the Smeaton Trust to Michael. Ralph was the sole shareholder of a company called Tri-City Smash Repairs Pty Ltd.

Under the grouping provisions, Michael controlled both Tri-City Trucks and the Smeaton Trust, being a beneficiary of that trust. As such, the 2 entities were grouped. Similarly, Ralph controlled Tri-City Smash Repairs and the Smeaton Trust, and as a result the 2 entities were grouped. As the 2 groups had a common group member, being the Smeaton Trust, the groups formed a single “super” group. The consequence of this was that Tri-City Smash Repairs could be held liable for the payroll tax debts of Tri-City Trucks.

Whilst the names of the 2 companies in Smeaton suggest some commonality in their businesses, they would have been grouped even if they were completely unrelated businesses.

Common employees

The grouping of entities due to the use of common employees is broader than many expect. It is not necessary that 2 entities formally employ the same employee for the 2 entities to be grouped. For example, in New South Wales, if an entity (the first entity) agrees to provide services to another entity (second entity) and those services will be performed by an employee of the first entity, the first entity and second entity may be grouped.

Revenue NSW has provided the following example illustrating such an arrangement:

Michael and Sons Pty Ltd is a legal practice. There are four legal practitioners who receive a wage including superannuation from the corporation.

Smith’s Servicing Pty Ltd has an agreement to supply receptionist, secretarial and other administrative duties for Michael and Sons Pty Ltd. Such an agreement will result in the employees of Smiths Servicing Pty Ltd performing duties connected with the business of Michael and Sons Pty Ltd. A grouping between the two businesses exists.

The potential breadth of the common employees form of grouping needs to be considered in light of the common practice to outsource business functions, such as bookkeeping, payroll or IT. In all such cases, there would be a risk that the business and the outsourced service provider will be grouped for payroll tax, despite being separate and independent businesses.

Exclusion of entities from the group

As can be seen from the above, the grouping provisions are designed to include a wide class of entities within a payroll tax group. However, to overcome any unintended or harsh impact of such wide provisions, there is an "out" – the State revenue authorities have discretion to exclude entities from a group when such entities were not really carrying on common businesses.

Importantly, taxpayers are not meant to self-assess the entitlement to exclude an entity or entities from a group. An application must be made to the State revenue authority.

In order for such a discretion to be exercised, the State revenue authority must be satisfied that the business is independent of and unconnected with any other member of that group. If this test is met, some of the factors that are then considered in determining whether an entity should be excluded are as follows:

  • whether the persons with a controlling interest in the entity participated in the management of its business;

  • the extent of the common ownership;

  • whether the entity has provided financial support to the entities within the group;

  • whether the businesses are operated from the same premises or have the same registered office;

  • whether the businesses have common employees;

  • whether the businesses use the same computer systems etc; and

  • whether the nature of the businesses are completely different.

Key takeaways

The key takeaways from the above are as follows:

  • the payroll tax grouping provisions can result in unconnected and independent entities being grouped;

  • the grouping rules can be used by State revenue authorities to recover payroll tax liabilities from other entities within a group, whether or not those entities were previously identified as being members of the group;

  • careful attention to the grouping rules when structuring entities can prevent inadvertent grouping; and

  • if entities are grouped, an application may be made to the State revenue authorities for an entity or entities to be excluded from the group. The exclusion of an entity or entities from a group should not be self-assessed.


The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.


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