The information in this video is correct at the time of publication. Legislation and other details may change without notice.

Intro

Welcome to today's video payroll tax groupings.

For those of you who are new to payroll tax or if you just like a refresher, this video will assist you with the payroll tax treatment of grouped businesses.

Payroll tax videos

This video is the final in our three-part series on payroll tax. We recommend you also view the other videos for further information on payroll tax. They are video 1: understanding the basics (allowances, fringe benefits tax, exemptions and rebates) and video 2: contractor provisions and employment agents.

The harmonised videos are the result of efforts from each of the respective revenue offices.

While the content of this video is harmonised, there may be some differences between the states and territories so where applicable the differences will be highlighted.

The information provided in this video is of a general nature if you have any specific queries, please contact the applicable revenue office or seek independent professional advice.

You can find other helpful information resources and links to revenue offices at payrolltax.gov.au.

In this video we will look at the effects of payroll tax grouping provisions and then examine when a payroll tax group exists. We will also cover the Commissioner's discretion to de-group an employer, online registration and group deduction entitlement.

Effect of the grouping provisions

When two or more businesses are related or connected, they will be grouped together for payroll tax purposes and payroll tax will be determined on the total wages paid by the group related. Businesses are grouped regardless of which state they operate from, for example a group can consist of Victorian, South Australian and Tasmanian businesses.

Three important effects of grouping are:

1. Single deduction for the group each group is entitled to only one deduction in each state or territory and is claimed by the designated group employer (DGE). The group nominates which employer will be the DGE. All other grouped employers in that jurisdiction pay payroll tax on all taxable wages. For groups that employ in multiple jurisdictions, the designated group employer may vary from state to state.

   second

2. The group deduction entitlement is based on the group's Australian taxable wages. The deduction entitlement in each state depends on the percentage of the Australian wages paid in that jurisdiction

   and third joint and several liability

3. All current members of a group, whether or not they are employers, are jointly and severally liable for the debts of the group, therefore if one member has a payroll tax debt that amount can be recovered from any of the other group members.

Now let's look at the reasons why a business may be grouped with another business

When does a payroll tax group exist?

There are six different ways in which a payroll tax group can be formed, I'll go into more detail on the coming slides.

• First are related corporations. Put simply this is where a company controls another company.
• Second is common employees, where employees are shared between multiple businesses.
• Third is for groups of commonly controlled businesses. This occurs where the same person or group of people control two or more businesses.
• Fourth we have indirect relationships. This also relates to situations where people are controlling multiple businesses however the relationship between those people are indirect.
• Fifth is the tracing of interests. An entity with a direct indirect or aggregate controlling interest in a corporation will be grouped with that corporation.
• Sixth is amalgamation. Where multiple groups with common members are combined to form a larger group.

Let's take a look at the six grouping methods in more detail first.

Related corporations

Let's look at related bodies corporate. As per section 9 of the Corporation's Act which states related body corporate in relation to a body corporate means a body corporate that is related to the first mentioned body by virtue of section 50.

If a company has a controlling interest in one or more other companies, they all form a payroll tax group. This group type includes corporations in a direct holding or subsidiary relationship, as well as corporations with the common holding company or common ultimate holding company.

It is very important for a subsidiary company to be aware of the overarching structure of their parent company and any other related companies.

One last important point to note about this grouping provision is that the holding company does not have to be an Australian company or based in Australia for its Australian subsidiaries to be grouped as related bodies corporate.

This is the only group type where the Commissioner of the relevant state or territory revenue office has no discretion to exclude a member from a group, more about this later.

Corporations are related if any of the following apply:

• One corporation controls the board composition of another corporation.
• One corporation can control more than 50 percent of votes in a general meeting of another corporation.
• One corporation holds more than 50 percent of the share capital of another corporation.

Let's look at an example of related bodies corporate. In this example A corporation forms a group with both B corporation and C proprietary limited because A has a controlling interest greater than 50 percent of both B and C.

B, D, and E also form a group because B has a controlling interest of both D and E. C and F do not form a group as C does not have a controlling interest in F.

A, B, C, D and E form an overall group because A is the common ultimate holding company.

A group under this provision is a mandatory group which means the Commissioner of the relevant state or territory revenue office has no discretion to exclude a member of related bodies corporate, even if the business carried on by that corporation is independent of and not connected with the business of other corporations in the group. The only exception to this rule is where a corporation only acts as a trustee of a trust and does not trade in its own right, even if it is a holding or subsidiary relationship with another corporation.

Any Australian company owned or controlled by an overseas parent company should contact the parent company to determine whether there are any other subsidiary companies operating in Australia. If so, the Australian subsidiaries will form a related bodies corporate group.

Common employees

The second way a group can be formed is where two or more businesses have an agreement to share employees. We call this into use of or common employees.

An employer will be grouped with the person or persons carrying on another business or businesses where one or more employees of the initial employer perform duties for any other businesses carried on by that employer, either solely or in partnership, or are employed solely or mainly to perform duties for another business or businesses, or where those employees perform duties for any other business or businesses as part of an agreement or arrangement by the first employer to provide those services.

Unlike related bodies corporate, section 79 of the Payroll Tax Act allows the

Commissioner of the relevant state or territory revenue office to exclude businesses from this type of payroll tax group under certain circumstances.

Let's take a look at a very simple example of common employees. Here we have two businesses, the business on the left provides administration services, the business on the right is a manufacturing company and their employees produce widgets.

The two businesses have an agreement where the employees of the XYZ administration services also provide administration services to CDE manufacturing. These two businesses form a payroll tax group because they inter-use employees.

This group type can impact professional practices such as legal accounting or medical practices that operate from the same premises and use the same administrative services business to provide reception admin support and so on. In this case there are common admin employees being used by all the professional practices technically forming a payroll tax group, however revenue ruling PTA17 states that professional practices and an administration services business will not be grouped where:

• all the owners or operators of the professional practices have no direct or indirect proprietary interest in any of the other professional practices and/or a controlling interest in the admin services business and
• the practices are independent and unconnected from each other and
• the admin services business does not derive more than 60 percent of its income from any of the professional practices and
• there is no suggestion of intent to avoid payroll tax.

Commonly controlled businesses

Let's move to the next way a payroll tax group can be formed, common control.

This group exists where a person or a set of persons together have controlling interest in two or more businesses and this is what ties the group together, however it is the entities actually conducting the businesses that are grouped, even if they are not the people with the controlling interest in the businesses.

This group type differs from related bodies corporate because any type of entity can be grouped including corporations with incorporated or unincorporated bodies trusts, partnerships or sole traders.

This is the second group type where the Payroll Tax Act allows the Commissioner of the relevant state or territory revenue office to exclude businesses under certain circumstances.

So, what constitutes control first corporations or companies?

Where a business is conducted by a corporation a person or set of persons would have a controlling interest if:

• they can exercise or influence more than 50 percent of the voting power attached to any class of issued voting shares of the corporation or
• they are the director of that corporation and can exercise more than 50 percent of the voting power at a director's meeting or can control the other director's votes

Next businesses conducted by either an incorporated or unincorporated body. Any person or set of persons who form more than 50 percent of the board of management of that body has control of that business.

Where a business is conducted by a trust, any individual or group of people who are beneficiaries of more than 50 percent of the value of the interests in the trust control. That trust interests include among other things entitlements to profits or capital distributions. In the case of a discretionary trust any beneficiary is deemed to have control of that trust regardless of what the trust deed says.

Control of a partnership is where a person or set of persons together own more than 50 percent of the capital of the partnership or are entitled to more than 50 of profits of the partnership whether beneficial or not.

Finally, where a business is conducted and owned by one person as a sole trader that person has total control. This also includes the group of people who are sole owners of the business as trustee.

Considering what we just covered if you meet any of these definitions, you are deemed to have a controlling interest in your business and if you are deemed to have a controlling interest in two or more businesses then it is likely you would form a payroll tax group.

Here's an example of common control.

First we have Blue Unit Trust with three unit holders Fred with a 40 percent share, Mary with a 40 percent share and Tony with a 20 percent share. Individually none of them holds a controlling interest in Blue Unit Trust as each has less than 50 percent interest, however Fred and Mary together hold an 80 percent share in Blue Unit Trusts which constitutes a controlling interest.

We can also see that Fred and Mary each have a 50 percent interest in ABC partnership. Once again neither of these individually have a controlling interest in the partnership remember it needs to be greater than 50 percent, however together they control 100 percent of the partnership.

Based on this information Fred and Mary together have common control of both Blue Unit Trust and ABC partnership so both these two businesses form a payroll tax group.

Indirect relationships

A controlling interest for payroll tax purposes does not need to be direct and groups can also be formed by certain indirect relationships that have controlling interests. If corporations are related under section 50 of the Corporations Act a corporation is deemed to have controlling interest in any business in which a related corporation has a controlling interest.

In the example on your screen Second Co Proprietary Limited is a subsidiary of Sarah Holder Proprietary Limited so they are related under section 50 of the Corporations Act. Second Co also has a controlling interest in The Alternative Partnership, this means that Sarah Holder Proprietary Limited is deemed to also have a controlling interest in The Alternative Partnership.

In addition, Sarah Holder Proprietary Limited has a controlling interest in The Business Partnership.

All the entities in this example form one payroll tax group.

The second indirect interest scenario is where a person has a controlling interest in a business and the person who carries on that business has a controlling interest in another business. In these cases, the first person is deemed to have a controlling interest in the second business.

For example, Ian Greene has a controlling interest in Company A, and Company A has a controlling interest in Partnership B. Ian Greene is deemed to have a controlling interest in Partnership B via his controlling interest in business A.

The third scenario involves a trustee of A Trust having a controlling interest in a business any beneficiary of that trust who is entitled to more than 50 percent of the trust's interests is deemed to also have control of the trustee's business.

In the example on your screen the Robinson Family Trust is a discretionary trust of which Lucy Robinson is a beneficiary entitled to greater than 50 percent the trust interests which is a controlling interest.

Also, the trustee of the Robinson Family Trust, Trustee Co Proprietary Limited, has an 80 percent controlling interest in the business carried on by Trading Co Proprietary Limited. Therefore, Lucy is deemed to also have a controlling interest in the trustees business. Trading Co Proprietary Limited

The Payroll Tax Act allows the Commissioner of the relevant state or territory revenue office to exclude or de-group persons from this type of group under certain circumstances.

Tracing of interests

We will now look at tracing of interests under the tracing provisions.

An entity will be grouped with a corporation in which the entity has a controlling interest. A controlling interest exists if the entity has a direct interest, indirect interest or an aggregate interest in the corporation and the total of those interests exceeds 50 percent.

Let's take a look at some examples.

In the first example the entity on the left has an 80 percent direct interest in Corporation A. Corporation A has a 70 percent direct interest in Corporation B and Corporation B has a 40 percent direct interest in Corporation C.

This means that the entity on the left also has indirect interest in both Corporation B and C.

The value of entities indirect interest in Corporation B is 80 percent of 70 percent. When we multiply these together, indirect interest equals 56 percent the value of entities.

Indirect interest in Corporation C is 80 percent of 70 percent of 40 percent, when we do the sums this equals 22.4 percent indirect interest in Corporation C which is less than 50 percent.

Therefore, under the tracing of interest provisions entity forms a group with Corporations A and B because its direct interest in Corporation A and its indirect interest in Corporation B both exceed 50 percent. Corporation C does not form part of the group because entities indirect interest in corporation is less than 50 percent.

The second example shows that the entity has a direct interest in Corporation A of 25 percent and a direct interest in Corporation B of 40 percent. Both direct interests are less than 50 percent so on their own are not controlling interest, however entity also has an indirect interest in Corporation B via Corporation A of 25 percent multiplied by 50 percent equals 12.5 percent. So, entities aggregate interest in Corporation B is the 40 direct interest plus the 12.5 percent indirect interest, in sum this equals 52.5 percent which is a controlling interest.

Therefore, entity and Corporation B form a group. Under the tracing of interest provisions Corporation A is not part of the group as the entity has an interest of less than 50 percent.

The Payroll Tax Act allows the Commissioner of the relevant state or territory revenue offers to exclude or de-group members of this type of group in certain circumstances.

On the next two screens we will look at the amalgamation of groups this occurs where two or more groups exist and at least one member is common to each group. In these cases the groups will, subject to the Commissioner's discretion, be amalgamated and form one large group.

The example on this screen shows the first way in which this can happen. Group 1 on the left is made up of Company A and Company B. Group 2 on the right is made up of Company A and Partnership C.

As company A is the common member in both group 1 and group 2, these two groups will be amalgamated so that Companies A and B and Partnership C form one group.

The second example is where two or more members of a group together have a controlling interest in another business all the members of the group and the person or persons who carry on the other business will amalgamate into a larger group.

In the example on the screen Company A and Company B are a payroll tax group in addition Company A has a 25 percent interest in Company C, and Company B has a 30 percent interest in Company C. Together Company A and Company B have a controlling interest of 55 percent in Company C. Therefore, the three companies form a larger payroll tax group.

This is another group type where the Commissioner of state and territory revenue officers has discretion to de-group members in certain circumstances.

Commissioner's discretion

Now that we've covered the ways in which a group can be formed let's look in more detail at the discretion that the Commissioner of the relevant state or territory revenue office has to exclude or de-group a member by necessity.

The grouping provisions of the Payroll Tax Act are very broad in their application, so the act gives the Commissioner of the relevant state or territory revenue office discretion to exclude a member from a group in certain circumstances.

Revenue ruling PTA31 goes into a lot more detail regarding the Commissioner's discretion to exclude a member from a group.  You can find the ruling on the payroll tax Australia website.

Employers seeking to be excluded from a group must apply to the relevant revenue office. Information on how to apply for exclusion is included on the website for each revenue office.

Businesses can be de-grouped if it is found that the relationship between them is not continuous active and significant and any connection between the businesses are merely casual.

Grouping is one of the most complex elements of payroll tax and the implications of getting it wrong are often significant. If you have any concerns, please contact the relevant revenue office.

Remember Commissioner's discretion is not available for members that are related corporations within the meaning of section 50 of the Corporations Act, but it is available for groups formed as a result of use of common employees, commonly controlled businesses, tracing of interest, indirect relationships or amalgamation of groups with common membership.

The Commissioner can exclude a member of these groups if they are satisfied the business conducted by the member seeking exclusion is independent of and not connected with the business conducted by any other member of the group. When making this decision the Commissioner considers the nature and degree of ownership and control of the businesses the nature of the businesses and any other relevant matters.

Let's have a look at an example.

Here we have a payroll tax group consisting of five entities. The family trust has written to the Commissioner requesting to be excluded from the group. You can see on your screen in this instance the Commissioner would assess the relationship and connections between the businesses. If they are found to not be continuous active and significant, the family trust can be excluded from the group.

Let's take a look at some of those different elements that the Commissioner considers when deciding to exercise their discretion. All of these considerations are detailed in revenue ruling PTA31 which is available at the Payroll Tax Australia website.

First, we have trade between the businesses, the Commissioner would ask are transactions occurring between the businesses. If so, what is the purpose of these transactions, what is the level of trade between the businesses, do the purchases of one of the businesses constitute a large proportion of the sales of the other businesses and are these transactions conducted on normal commercial terms or are discounts provided.

Sharing of resources between businesses. Do the businesses share resources including premises, staff, management and accounting services? If there is sharing of resources, is there any charge made, if there is a charge is the charge reasonable given the type of resource shared and the level of sharing.

Common management of the businesses. Is the same person or persons responsible for the day-to-day operations of all the businesses in the group? If so, are the operating decisions for one of the businesses made after first considering the impact of those decisions on the other businesses, are the managers of the businesses controlled or obliged to follow the directions of another person or persons.

Common financial arrangements between the businesses. Do the businesses have common financial arrangements? Have the businesses sort finance as a group from a financial institution? If so, are there cross securities for arrangements between the businesses, are there loans between the businesses? If so, do written loan agreements exist, is a reasonable rate of interest charged on the loans and our regular repayments required.

Common customers of the businesses. Is there a relationship between the customers of the businesses? Do the customers of one of the businesses automatically become customers of the other group members? Do the businesses provide complementary services to customers?

Is there a connection between the nature of the businesses does one of the businesses add value to goods or services provided by the other businesses?

Finally, what is the extent of the connection between the business owners. Are they the same people or are they closely related?

These factors are just some of the more common issues the Commissioner considers when deciding whether to exercise discretion to exclude a member from a group. It is not an exhaustive list.

Each case is considered based on all the relevant facts.

If you are not certain about your group status, please contact the relevant revenue office.

Online registration and lodgements

Let's now look at registering for payroll tax and or changing your group status.

Each state and territory has its own online registration and lodgement requirements, particularly when it comes to registering and lodgements for payroll tax groups. In some jurisdictions group members are required to lodge separate returns, as such you must familiarise yourself with the lodgement system of any revenue office you pay payroll tax and submit returns as required by the legislative due dates.

Where an employer is grouped, they need to register for payroll tax if the group's Australia-wide taxable wages are above the threshold, even if their individual wages are below the threshold.

Change of status

A change of status occurs if:

• You become or stop being the designated group employer for a group.
• You become or stop being a group member
• An administrator receiver and manager or liquidator is appointed, or their appointment ceases.
• Cease to employ and do not intend to resume being an employer for the remainder of the year or next financial year.

If any of these events occur, you need to advise the relevant revenue office.

Group deductions

let's now look at group deduction entitlement.

As mentioned earlier a payroll tax group is only entitled to one deduction or tax-free threshold which is claimed by the designated group employer. The deduction amount is a portion based on the portion of total Australian group wages that are paid in the relevant state or territory.

To calculate the deduction for the group, divide the total group state or territory wages by the total group Australian wages, then multiply that fraction by the full state or territory deduction entitlement.

The example on your screen is for a group that employs in Victoria ends in other states and territories and assumes the group has employed for the full financial year.

The group's total Victorian wages for the year are 3 million and the group's total Australian wages for the year are 5 million. Three million divided by 5 million is 0.6. 0.6 multiplied by the full payroll tax threshold for Victoria gives a group deduction as shown on the screen.

If the group only employed for part of the year the deduction would be further apportioned based on the number of days the group employed during the financial year.

End

That brings us to the end of today's video.

If you would like to know more the harmonised payroll tax website payrolltax.gov.au provides plenty of useful information on harmonised payroll tax matters.

Should you have any queries as a result of the information presented in today's video, please contact the relevant revenue office via the website's currently displayed on your screen.