This month’s case study looks at another issue we have discussed previously, Payroll Tax and the ability of the relevant Office of State Revenue to deem business part of a group. With Government measures providing some relief from insolvency actions this may not have been on the radar for some time, but we expect this issue to raise its head in the near future.
Payroll tax is an important consideration when advising clients not only on restructuring a business but on tax matters generally. Businesses can be subject to an audit at any time, the results of which may be a complete surprise to the business owner. This case study seeks to give professional advisers an insight into the issue of Payroll Tax and how this can complicate business structures and tax planning.
Pippa and Harry had operated a family cleaning company for over 15 years. They both started the business and have seen it grow from a small operation of 2 employees to a team of 60.
Due to non-payment by a major debtor, the company experienced cashflow problems that hindered its operations. The company was facing an insurmountable debt position, with trade creditors and statutory obligations seriously overdue
They had attempted to reduce their creditors by realising some excess plant & equipment, however, these measures did not provide sufficient funds to cover the loss of the debtor’s failure to pay. Pippa and Harry were then advised by a consultant to undergo a restructure (sale to a related entity) and to liquidate the existing company in an attempt to ease the pressures. The restructure was completed, and all was going well.
When undertaking the restructure, the directors chose to use one of their pre-existing dormant companies that had been around for numerous years as the purchaser of the business and therefore the new trading entity. Both entities were registered for payroll tax with Victoria’s State Revenue Office (SRO) at different times.
After trading the restructured entity for about 14 months, the State Revenue Office deemed that the restructured entity was related to the original entity for the following reasons:
The principal place of business was the same for both entities;
Both entities had shared the same resources, specifically the same workers;
Both entities were in existence at the time the debt was incurred;
Both entities were represented by the same accountant and had the same registered office;
Both entities had similar and/or related Officeholders;
Both entities were trustees of trusts where the beneficiaries were the same;
After the restructure, the new company used the existing website, thus implying they were the same entity.
Based on these reasons, the State Revenue Office (SRO) deemed that the old entity and the new entity were related and therefore “grouped” them for payroll tax liability. This meant that the old entity’s payroll tax liability (approx. $850K) was not quarantined to the old company, slipped under the corporate veil and was now due and payable by the new entity, even though the old entity was in liquidation.
The decision of the OSR had made the new company technically insolvent which left it with little alternative but to consider liquidation or a payment arrangement.
THE SOLUTION AND LESSONS TO BE LEARNT
The client met with de Jonge Read and in this matter, we were able to negotiate a settlement with the SRO for Pippa and Harry, however, the outcome could have been substantially better if the right advice was sought initially.
This advice should take into account all potential risks, including the possibility of an audit and an adverse finding in relation to the status of employees. If there is any concern that what the business believe to be contractors are actually employees, even more care and risk mitigation is needed.
The following points should be taken into consideration when considering a restructure, especially if the OSR is a creditor of the insolvent company –
It is important to undertake the process properly and refrain from using a pre-existing company as the purchaser/new trading entity however tempting the use of existing/possible tax losses may be;
Avoid the same or similar officeholders;
Should a trust have been used with the original entity, it is important that this trust is wound up at the same time as the original entity is liquidated;
There must be clear and identifiable distinctions between the old entity and the new entity.
Our team are more than happy to discuss this, or any other issue that your clients may be facing, in greater detail. Please feel free to ring us and use us as a resource to assist your clients.
Call us now on: 1300 765 080.