In this 11th and final part of our payroll tax series, we explore the payroll tax de-grouping provisions. While we will refer to the Victorian legislation, similar provisions exist in all states and territories due to a harmonisation of the law.
What is de-grouping?
In Part 10 of this series we discussed the payroll tax grouping provisions. To avoid anomalies which may arise from the strict application of those provisions, section 79 of the Payroll Tax Act 2007 (Act) provides the Victorian Commissioner of State Revenue (Commissioner) with the discretion to de-group entities.
Section 79(2) of the Act provides that the Commissioner may exercise his discretion to de-group entities if he is satisfied:
…having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters Commissioner considers relevant, that a business carried on by the person, 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.
The de-grouping provisions were explained by the High Court in Tasty Chicks Pty Limited and Others v Chief Commissioner of State Revenue of the State of New South Wales [2011] 245 CLR 446 (Tasty Chicks) at 451:
The "grouping" provisions were designed to counter tax avoidance through the splitting of business activities by the use of additional entities, each attracting a threshold. The "degrouping" provisions were available for application by the Chief Commissioner upon determination, in broad terms, that it would be unreasonable to apply the "grouping provisions".
Importantly it should be noted that the de-grouping provisions do not apply to entities grouped by reason of section 50 of the Corporations Act 2001. That is, related bodies corporate can never be de-grouped even if their businesses are distinct and there is no connection between them.
How can businesses be de-grouped?
In Revenue Ruling PTA031, the Commissioner sets out certain factors which he will consider when deciding to exercise his discretion to de-group entities. No factor is determinative by itself rather each factor should be considered in totality.
We summarise below the key factors considered by the Commissioner:
the level of trade between the businesses - Where the level of trade between businesses is significant, regular and recurrent, this factor may lead the Commissioner to consider this to be indicative of a group for payroll tax purposes. This factor requires analysis of the nature and extent of any commercial transactions between the members, including the value and percentage of the member’s total business which is conducted with other members of the group. For example, in the case of Terick Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2015] VCAT 1901 (Terick) a large proportion of the applicant’s business depended on it being able to hire out equipment and staff to the other businesses in the group. Such hiring accounted for over 50% of the applicant’s business and thus a de-grouping application was denied.
the sharing of resources between the businesses – independent businesses generally do not share resources. In circumstances where resources are used by both it would be anticipated that this is undertaken on commercial terms.
common management of the businesses – where the responsibility for day to day operations of entities is carried on by the same person or persons this will indicate common businesses that should be grouped for payroll tax purposes. As stated in Tasty Chicks, the inquiry into common management of a business and its effect on the grouping of entities requires consideration of:
…the conduct of the activities of that business and its inter-relationship, if any, with the conduct of the activities of the businesses of the other members of the group….[and the] ability of a principal of one business to influence the management and decision-making of the other.
common financial arrangements between the businesses – where businesses rely upon each other financially it is more likely that they will be grouped. Financial dependence includes sharing of cash flow, intra-group loans on non-commercial terms, intra-group guarantees and shared bank facilities. In the Terick case the applicant had approximately 50% of its assets invested in loans to the other businesses in the group. This presence of inter-company financial arrangements was found to be a strong suggestion of dependence and lead to the Tribunal concluding that grouping for payroll tax purposes was be appropriate. The Tribunal Member noted in respect of the common financial arrangements that existed:
On the evidence, it is difficult not to conclude that the Applicant did not operate independently of Alpine and Albem. In the context of family ownership of all the companies, the ability of the other siblings to exercise their powers as shareholders and directors of the Applicant's holding company and most importantly the Applicant's significant dependence on Alpine and Albem, the Applicant's application to be excluded from the group under s 79(2) of the Act must fail. The prerequisites for an exclusion order have clearly not been met.
any other relevant factor.
To be de-grouped an application must be made to the Commissioner addressing the above factors and highlighting how they favour the de-grouping of yours, or your client’s, business. Careful consideration should be given to draw similarities with favourable case law and guidance on point and in the case of unfavourable case law the facts should be clearly and precisely distinguished. We have had a number of successes in such applications for clients.
If your business has been grouped for payroll tax purposes, or you consider that it may be, contact one of our specialists to discuss your ability to apply for a de-grouping:
Laura Spencer
Senior Associate
M +61 436 436 718 | 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
