Aggregators under threat as Revenue NSW chases payroll tax

The Adviser understands that the Revenue NSW office is seeking backdated payroll tax from up to eight years ago, amounting to tens of millions of dollars.

The issue does not seem limited to any particular model or pass-through model. However, there are exemptions to which type of broker it applies. For example, brokers with two or more brokers may be exempt in some circumstances.

The crux of the issue

The payroll tax argument has been plaguing the industry for several years. Employers that pay wages to employees are required to pay tax if their payroll surpasses a certain threshold. For financial year 2023, this applies to businesses paying more than $1.2 million in wages a year. They are currently subject to a payroll tax of 5.45 per cent.

While aggregators argued that they provide a service to brokers (rather than the other way around), Revenue NSW has been taking the position that brokers are caught under a relevant contract provision defined in the Payroll Tax Act and therefore aggregation groups are liable to pay payroll tax. 

However, aggregators have been challenging this reading, flagging that brokers are customers, not employees, of the groups. Indeed, they highlight that lenders are actually the ones who pay commissions to aggregators, who in turn pay those commissions (minus their cut for their services) to brokers.

Blake Buchanan, general manager of Specialist Finance Group (SFG), said that the “insinuation is that brokers provide a service to the aggregator and that brokers are therefore deemed employees of aggregators and therefore have always been liable for payroll tax”.

He told The Adviser: “Brokers are not an employee of an aggregator. Aggregators provide a service to brokers; brokers do not provide a service to aggregators...

“This is about the interpretation of the application of payroll tax … The problem with governmental bodies and offices of state revenue is that they pull the trigger first and ask questions later … So, they’ll do a detailed tax assessment and issue aggregators with multi-million dollar bills for backdated payroll tax and then it’s up to us to fight it.”

Litigation activity commences

Indeed, groups are now mounting a fight. Major aggregation and brokerage group Loan Market Group was one of the first aggregators to be contacted by Revenue NSW for backdated payroll tax.

Speaking to The Adviser, Loan Market’s executive chairman Sam White said that Loan Market Group had “been putting its best foot forward for the industry” to explain why the Revenue NSW’s reading of the broker-aggregator relationship was fundamentally incorrect.

The aggregator argued that brokers are customers of the aggregator and therefore not subject to payroll tax.

He went on to highlight that Revenue NSW’s position on how payroll tax applies to brokers actually goes against the spirit of the Act.

For example, he said that given there is an exemption for those who employ two or more people, this results in taxes being levied on “the smallest of small businesses” (i.e. sole traders). This could therefore result in aggregation groups that have a high proportion of single-operator brokers facing high payroll tax bills.

“This is just fundamentally against how [the NSW] payroll tax system operates … which is to tax bigger businesses and payroll tax thresholds,” Mr White said.

“This just obliterates all of that and it makes a mockery of the whole payroll tax system. Their application penalises small businesses, that’s all it does.

“The way they’re interpreting this is to say that payroll tax is levied on businesses that don’t engage support in their business. And that’s a completely unfair and erroneous application of the facts.”

However, as the revenue office’s position has not moved, the group has now launched legal action against Revenue NSW.

“After a period of trying to explain how our industry works, we have been left with no choice but to litigate the matter with Revenue NSW,” the Loan Market executive chairman told The Adviser.

“We are one of the groups that have been targeted and we believe it’s totally wrong, so we’re taking action to clarify the matter. We’re not trying to manufacture or invent something; we know how it works. And they’re just totally wrong.

“We’re working with the industry associations and other aggregators to demonstrate why this position of Revenue NSW is wrong and we’ve been delighted by the support we’ve received.

“This is an aggregation challenge and we want to fight for brokers and aggregators in this space because what it tries to do is, effectively, take money out of the system and pay the government.

“But in some cases, payroll tax is more than what aggregators charge their brokers. So it’s a significant impost. And we fundamentally disagree with how it’s been interpreted.” 

More aggregators facing hefty bills

Given that the Loan Market case has been mounting, the industry has been surprised by several other notices being issued by Revenue NSW seeking back payment. 

The Adviser understands that at least three other groups have been levied with backdated payroll tax bills, totalling tens of millions of dollars.

However, if they fail to pay the bill in the adequate time slot (notice of assessments are generally payable within 90 days of receipt), they could also face penalties for late payment. 

As such, it is likely that groups will have to pay the tax bill first and then try and recoup the costs (including, potentially, legal costs) at a later date. It is yet to be seen if this will result in brokers seeing additional shading to their commissions.

The NSW tax issue has far-reaching implications for the broking industry as state revenue offices across Australia are generally aligned.

As such, if one revenue office begins recouping payroll tax costs from aggregation groups, the concern is that this will result in contagion across the other states (apart from Western Australia, which doesn’t align with the other revenue offices).

SFG’s Mr Buchanan said: “If history proves anything, it proves that when a state revenue agency goes after a tax — like stamp duty or payroll tax — the other states follow soon enough. And so, if we don’t do anything about this in NSW (particularly as there is an election coming up on the 25 March), it will be contagious in every other state.” 

Moreover, he flagged that if aggregators are deemed to be liable for payroll tax, they could also be liable for other employee obligations and other fees.

Industry associations react

Both the Finance Brokers Association of Australia (FBAA) and the Mortgage & Finance Association of Australia (MFAA) have told The Adviser that they are working to engage with Revenue NSW and the state government on the matter.

FBAA managing director Peter White said: “We’ve been engaging with aggregators on this matter for several years; this is not new; it’s been a problem for a while that is being dealt with in legal forums. 

“We are looking at assisting at the moment … because we are very much against where the [revenue office] is landing on this. We don’t believe it’s appropriate, we don’t believe it fits within the legislation as to how payroll tax is meant to be applied.

“Brokers are not employees…

“This, to me, feels very much like a state revenue grab; more taxes more income.”

MFAA chief executive Anja Pannek commented: “The MFAA has been engaging with the industry, Revenue NSW and the NSW Government on this very pressing and complex matter since 2020. 

“Representing the interests of our members, we simply do not agree with the interpretation and approach taken by Revenue NSW in its application of the Payroll Tax Act to our industry.

“Our main concern on this issue is the approach is effectively an additional and inappropriately levied tax on the smallest of small businesses in our industry. 

“We are committed to continuing to work with aggregators, industry participants, Revenue NSW and the NSW Government on this matter and to seek a sensible resolution.”

[Related: Accountants urge home buyers to weigh cost of dodging stamp duty]