The Dangers of Payroll Tax Grouping



This month we will look at Payroll Tax and the ability of the relevant Offices of State Revenue to deem a business to be part of a group. This issue has come to light again due to a recent court case, Thomas and Naaz v Chief Commission of State Revenue that has caused concern for the owners and operators of medical practices Australia wide. However, this decision could potentially impact any business where contractors or consultants are engaged rather than employed.


Background


Thomas and Naaz Pty Ltd operated several medical practices. The doctors at these medical centres operated under written service agreements. The medical centres provided rooms, administrative and other support services to the doctors. While doctors had the option to submit claims of patient fees directly to Medicare, the overwhelming majority had the medical centre do this on their behalf. The medical centre collected the money and would distribute 70% to the doctors at the end of each month, retaining 30% as a service fee.


It would be fair to say that this structure used by Thomas and Naaz Pty Ltd is very common and is used widely by health care professionals. While it may have been thought that the payments to the doctors were a return of monies they were already owed, this was not deemed to be the case. While the decision relies on a number of specific facts, the payments made to the doctors were found to be wages for the purposes of Payroll Tax. It is expected that this decision will be appealed, but as it stands now, this has major implications for a wide range of different businesses.


This is not just about medical practices


While this case was about medical practices the same situation can arise where businesses pay a consultancy fee or commission. These arrangements are common in a range of industries, such as motor dealerships or real estate agencies. Further, there are many cases where contractors are deemed to be employees. Each situation will come down to the facts in that unique case, however, it is clear that the definition of wages for Payroll Tax purposes is very broad.


This is an immediate issue for the owners and operators of medical centres. Offices of State Revenue around the country are now auditing these operators with the ruling in Thomas and Naaz front and centre. In some cases, Payroll Tax debts have already been assessed and the grouping of companies reviewed. However, the findings in this case can be applied to other industries and lead to an increased focus on Payroll Tax by the various State bodies.


What does grouping for Payroll Tax purposes mean?


The various Offices of State Revenue have very broad powers to deem a related business as part of a business group for Payroll Tax purposes. This means each member of the business group is responsible for the whole amount of the Payroll Tax debt, whether they incurred that debt themselves or not. This can have massive implications for business owners.


The Offices of State Revenue generally consider the ownership and control of related businesses. So, if businesses have common shareholders or directors they are more likely to be grouped for Payroll Tax purposes. Other matters may also be considered, such as:

  • The principal place of business.

  • The registered business office.

  • Whether entities were represented by the same accountant.

  • If entities shared the same resources, such as premises or employees.

Even the definition of ownership can be applied broadly. For example, in a case where a family trust is involved, being a beneficiary of a trust that operates one business and the director of another company can be sufficient to see those businesses grouped for Payroll Tax purposes.


What are the other potential implications?


If payments to contractors, such as the doctors in Thomas and Naaz, are wages what else might this mean? Well, what about superannuation? Many years ago we had a client in a similar situation, where contractors had been deemed to be employees following a superannuation audit. As the superannuation had not been reported within the prescribed timeframes, the whole amount owed was potentially subject to a lockdown Director’s Penalty Notice (DPN). A lockdown DPN means the director/s will need to pay the amount of the penalty or face bankruptcy action by the ATO.


What action can be taken now?


We believe most medical practices are well aware of this ruling now and should be talking to their accountants and lawyers. Other businesses that employ contractors may not be aware of this case and the potential risks they also face. By working with their professional advisors there are some common-sense steps that business owners can take to reduce the chance of an adverse Payroll Tax assessment.


Many businesses are facing Payroll Tax reviews now or may be concerned they could in the future. Having a robust business structure and understanding the potential grouping implications is essential to managing this risk. Business owners need a Plan B that has also considered the ownership and control of entities and the risk of Payroll Tax grouping.


Those businesses that have already been affected by a Payroll Tax ruling or superannuation audit have an immediate issue and need specialist advice now. A business restructure or controlled business exit may be possible, but will need to carefully consider potential grouping issues to be effective.


 

Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.


Contact us now on p. 1300 765 080 | info@djra.com.au





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