Payroll Tax Series – Part 9 – General Exemptions

In part 9 of our payroll tax series, we explore the different types of payroll tax exemptions employers may qualify for. While we will refer to the Victorian legislation, these principles apply across all States and Territories as the payroll tax legislation is uniformed across Australia.

Entities that qualify for an exemption

Certain types of employers may be eligible for a payroll tax exemption pursuant to part 4 of the Payroll Tax Act 2007 (Vic) (Act), including:

  • Public benevolent institution (sub-type of NFP which main charitable purpose is for the relief of poverty or distress).

  • Religious institution;

  • Non-profit non-government school;

  • State school council;

  • Healthcare service provider;

  • Municipality.

  • Not-for-profit (NFP) organisation with a whole or dominant charitable purpose.

What are charitable purposes?

As noted above, NFPs are only exempt if the organisation has a whole or dominant charitable purpose.  Charitable purposes is not defined and therefore will revert to the common law definition, which will relevantly refer to the following heads of charity identified in Commissioners for Special Purposes of the Income Tax v Pemsel [1891] AC 531 (Pemsel):

  • the relief of poverty;

  • the advancement of education;

  • the advancement of religion; and

  • other purposes beneficial to the community.

Only wages paid to workers undertaking certain activities are exempt

Only wages paid to persons engaged exclusively in work of a religious, charitable, benevolent, or patriotic nature for the eligible institution or NFP organisations are exempt.

For example, Religious Services Ltd  is a religious charity registered with the Australian Charities and Not-for-profits Commission with its main charitable purpose falling within one of the heads of Pemsel, the advancement of religion. Religious Services Ltd pays wages to persons engaged in both its charitable activities and in commercial activities. Its commercial activities comprise a funeral parlour business that generates profits which are paid to Religious Services Ltd to help fund its charitable activities. In this example:

  • Only wages paid to persons engaged exclusively to work in its charitable activities will be exempt from payroll tax.

  • Wages paid to person’s engaged in to commercial activities (funeral parlour business) is subject to payroll tax.

  • The legislation does not clearly address situations where employees are engaged in both charitable work and other work.

Common issues with claiming an exemption

While the exemptions appear simple, in practice they can be complex. In addition, in recent years revenue authorities are increasing challenging exemptions. Typical complexities we have seen over the years include:

  • The definition of charity has not kept up with the nature of modern charitable organisations

The evolving case law, and revenue authority interpretation, in relation to the common law definition of ‘charitable purpose’ entails and how this is interpreted by revenue authorities in the changing NFP space.  

For example, the activities of many charitable organisations differs greatly from what they did 30 plus years ago. As a result, these gaps can result in genuine, progressive charitable NFPs falling through the cracks.

  • The application of the exemption to mixed role employees

The legislative ambiguity in the Victorian State Revenue Office’s (SRO) approach to imposing payroll tax can create uncertainty where employees have mixed roles in organisations.  In particular, in relation to apporting employees’ activities (and wages) between charitable (exempt) and commercial (taxable) activities.  That said, in our experience, the SRO has typically taken a practical approach in interpreting the legislation and allowing a practical apportionment.

This issue could be an increasing problem due to NFPs facing unprecedented challenges in 2020 with the likelihood of NFP employees having to operate in a leaner environment and outside their traditional roles.

The provision of certainty by revenue authorities across Australia to NFPs in the current environment is vital and greatly needed.

* * * * *

If you have any further questions on NFPs and any resulting tax implications, please contact one of the members of our specialist team:

Denise Tan
Senior Associate
M +61 438 714 965 | T +61 3 9611 0160 
E: dtan@sladen.com.au

Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E lspencer@sladen.com.au

Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163  
E: pbroderick@sladen.com.au           

Lucy Liang
Graduate Lawyer
E lliang@sladen.com.au

Phil Broderick