Finsure takes court action against Revenue NSW

Revenue NSW has been seeking to retrospectively introduce a new tax on mortgage brokers – a payroll tax on commissions paid to mortgage and finance brokers.

According to the industry, the tax is not only irrelevant to broking but has no legal basis and could destroy the entire industry.

Indeed, Loan Market has already launched legal action to challenge Revenue NSW’s application of these payroll tax laws (still awaiting judgement) and brokers have been writing to their local MPs to raise the issue with them. The office said last year that it would not commence any new audits connected to aggregators in regard to payroll tax until court action had been resolved.

While there are seven exemptions (including if two or more people perform the work required under the contract in the financial year and each worker performs work that is not de minimis), the commissioner of state revenue said that there were common “misconceptions” that had been resulting in tax defaults.

It therefore takes the position that aggregators are liable to retrospectively pay single-operator brokers.

Finsure has said it is also now defending the assessments in the Supreme Court to “stand up” for single broker operators who would otherwise bear the brunt of the costs of the tax.

Finsure chief executive Simon Bednar said: “If Revenue NSW is successful, payroll tax would be applicable to all aggregators on commissions paid to brokerages with less than two brokers. This could be the tip of the iceberg and have ramifications across the mortgage broking industry nationwide.

“This payroll tax money grab impacts all mortgage aggregators in the market, not just Finsure.”

Mr Bednar said Finsure was confident the group could stop the payroll tax impost.

“Our opinion is that Finsure will be successful,” he said.

“If this tax is successful, then the last thing Finsure or any other aggregator wants to do is pass on the costs of the tax to brokers.

“But we don’t anticipate this will occur as we are of the opinion this payroll tax move is unlikely to succeed.”

Associations 'ready to defend' industry

Noting the news, Peter White AM, managing director of the Finance Brokers Association of Australasia (FBAA), said the payroll tax issue was a “serious” matter given its “broader impacts” on the industry, but added that “brokers and anyone need to be careful with what they say publicly on this as it could prejudice the case/s at hand, and that would not be helpful to anyone or the industry”.

“The broader industry needs to leave the matter between those involved in court action and the association’s relationship management with the politicians and regulators. The wrong step or wrong comment could lead to an adverse path or outcome, and we don’t want that,” he said.

He advised FBAA members to reach out to him via email if they wanted to make a statement to politicians or regulators, flagging that he was in “regular contact with the State Government”.

The CEO of the Mortgage and Finance Association of Australia (MFAA) told The Adviser that they believed payroll tax “should not be applied to arrangements between brokers and aggregators.”

MFAA CEO Anja Pannek said: “The way Revenue NSW has been seeking to apply payroll tax fails to recognise a broker is running their own business – they are not an employee of their aggregator, and also neglects the fact that commissions are not a broker’s salary, rather it is business income.

“This tax threatens the viability of broking businesses and the industry – and will likely lead to less access to credit, choice and competition for consumers and business owners," she added.

Ms Pannek flagged that the association had met with Revenue NSW and both sides of government last year "to explain the consequences if payroll tax is applied to broker arrangements" and highlight that the "lack of clarity at law would lead to years of litigation and associated costs for NSW taxpayers and we are now seeing this play out with this new court action".

“Our advocacy campaign last year, which thousands of brokers participated in, got the attention of government and Revenue NSW, and successfully secured a stop-action on any new audits until the outcome of a legal case being heard at that time was known." Ms Pannek continued,

“In 2024 payroll tax remains a key focus for the MFAA. We’re continuing to advocate for a common sense approach that reflects how the industry operates.

“The MFAA is ready to defend the industry if the outcome of the two legal cases before the courts is unfavourable," she said.

"Broker participation in our campaign will once again be crucial and we’ll be making it easy for our members to contact their local MP and add their voice."

Determining the aggregator-broker relationship

While the treatment of payroll tax has been contended for some time in the broking industry, things have been heating up recently.

Revenue NSW has previously outlined that payments of commission or other forms of remuneration by entities that hold an AFS licence or an ACL – such as payments by aggregators to their ‘agents’ (i.e. brokers) – may be liable for payroll tax if they are deemed to form part of a ‘relevant contract’.

For example, it flagged that this may apply to contracts between an aggregator and their authorised credit representatives (brokers).

If Revenue NSW assesses the broker to have a relevant contract, then the aggregator is taken to be an employer, the ‘agent’ (i.e. broker) is taken to be an employee, and their remuneration (i.e. upfront and trail commissions) is taken to be wages.

The commissioner flagged that, under s.33(1) of the Act, a person who supplies services or is supplied with services under a relevant contract is taken to be an employer.

“An AFS Licensee or an AC Licensee (including an aggregator) who is supplied with services, and also supplies services under a contract with an agent is therefore taken to be an employer,” he wrote.

According to financial services lawyer Jon Denovan, a partner at Dentons Australia, who specialises in the mortgage industry, the centre of the issue comes down to what the aggregator-broker relationship is defined as.

According to the lawyer, the Tax Office is of the view that the lenders retain the aggregator and the aggregator in turn retains the brokers. And, because of this, the revenue office views the commission as salary and therefore says that the payroll tax applies.

However, he suggested that because lenders calculate the commissions for each broker and provide the aggregation groups with a lump sum to distribute, aggregators are simply distributing money to lenders.

As such, Mr Denovan said aggregators are taking a cut for the service they provide broker members before passing the commissions through to the broker. He likened this to real estate agents collecting rent from tenants and paying that on to the landlord, minus a service charge.

“So, I say the correct view is that the brokers are working for the lender and the aggregator is providing support service to that activity,” Mr Denovan said.

“This reflects the fact that usually brokers lodge deals direct with lenders albeit using systems supplied by their aggregator.”

The Dentons senior consultant flagged that while the payroll tax issue has been a thorn in aggregators’ sides for many years, it “only seems to be New South Wales that’s on this journey to bash up aggregators”.

“It’s a terrible thing [for aggregators], because it has this retrospective effect,” he said.

You can find out more about the payroll tax issue, in The Adviser’s In Focus podcast, here:

[Related: In Focus: The payroll tax issue]