‘Payroll tax is payable’, judge finds in Loan Market case

The case – which has widespread implications for the entire broking industry and other payroll tax court cases in the industry, such as the Finsure case – focused on the financial years ended 30 June 2012 to 30 June 2018 (before the aggregation group rolled out its Bring Your Own Brand model and acquired PLAN, Choice, and FAST).

It largely centred on whether brokers operating under the Loan Market brand were deemed to be working under a ‘relevant contract’ where payroll tax applies (as per section 32 of the Payroll Tax Act 2007 NSW).

A relevant contract includes a contract under which one person supplies work-related services to another person in the course of that second person’s business.

Loan Market had argued that payroll tax should not be payable at all, outlining its belief that brokers were customers of aggregators and not employees.

What did the judge find?

In his judgment, Justice Richmond found that – for the purposes of the Payroll Tax Act – there was a ‘relevant contract’ that existed between Loan Market and active brokers who use its aggregation services.

As such, he found that payroll tax would be payable on the payments passed through the aggregator to all individual operators (whether they are incorporated or not), unless they could establish an exemption.

The judgement read: “The conclusion that the Broker Agreements constitute a relevant contract under s 32 may be seen as a harsh outcome for LML [Loan Market] because the contractor provisions now found in s 32 were originally introduced as an anti-avoidance measure which was not intended to catch “bona fide independent contractors...

“The potential difficulty for a taxpayer is that the exclusions are very specific and may leave a subset of relationships such as those in the present case where the contractor is a genuine independent contractor but may not come within any of the exclusions.”

The judgment appears to equally apply to those who hold an Australian Credit Licence (ACL) or are a credit representative of an ACL held by their aggregator.

What are the exemptions?

While the judge said that payroll tax would be payable for individual brokers in certain instances, there are several exemptions to the application.

Exemptions had been agreed to before the trial, however, the judge “clarified and broadened” these beyond what had been previously recognised by Revenue NSW after seven brokers gave evidence concerning how they conduct their mortgage broking businesses and their relationship with Loan Market.

For example, the broadened exemptions mean that payroll tax may not apply to individual operators if:

• A credit representative was under LML’s credit licence for 90 days or less in a given financial year and only received trail commissions and no upfront commissions during that given financial year.
• A broker engaged offshore loan processor (including, for example, BrokerForce or LMG outsource).
• A broker engaged a family member in the business (on the basis that it can be shown that the family member is doing genuine work for the business). According to Loan Market, examples of evidence would include a job description and an ability to show consideration being made to that person in exchange for their services.
• A broker engaged another business as a genuine service provider (and can provide evidence to demonstrate this).

What happens next?

While the judgment has now been handed down, Loan Market Group has 28 days to determine whether it will lodge an appeal. Any appeal must be made on a point of law.

The aggregation group has said it is “currently reviewing the judgment” to determine whether it will exercise its appeal rights.

The group will also have to meet Revenue NSW to discuss how this judgment applies to the case and the group’s overall liability.

Once these have been agreed, the parties will return to court to propose orders.

Loan Market has already noted, however, that the judgment had resulted in “a substantial reduction” of its potential tax liability, given the identified exemptions (such as brokers hiring family members or using offshore loan processing services).

Despite this, it is likely that the new tax liability will still cost millions of dollars.

It is believed that the group has been retaining cash for this potential outcome.

What does Loan Market think of the judgment?

In an update to brokers this morning (15 April), the group said: “Revenue NSW is of the view that [Loan Market], for the period from 2012–18, have what is termed a ‘relevant contract’ (a term defined in the Payroll Tax Act where the Commissioner believes that, in our case, a broker supplies services to an aggregator), and has therefore made an assessment that payroll tax should be paid on commissions and payments to our brokers.

“We believe this is completely wrong – our brokers are our customers, not our employees.”

The executive chairman of LMG/Loan Market, Sam White, said: “It is a complicated case and judgment and we’ve spent the weekend closely analysing and dissecting the judgment with our legal team.

“On the key threshold question, His Honour has ruled that, for the purposes of the Payroll Tax Act, there is a ‘relevant contract’ that exists between Loan Market and the brokers that use its aggregation services.

“This does not mean that brokers are employees of Loan Market, but that for payroll tax purposes only, there is a deemed relationship where payroll tax is payable on broker payments passed through from lenders to aggregators to broker, unless the broker business can establish they fall into an exemption.

“This is obviously a disappointing outcome.”

However, he noted that the work and evidence provided by many NSW brokers in the case had helped secure a better outcome.

“The joint effort between us and our brokers has significantly helped the future of all brokers,” he said.

A precedent-setting ruling

The executive chairman also flagged that the group was seeking clarification on how the case applies to Loan Market’s other service plans, seeing as it now offers plans where brokers do not use the Loan Market brand and where the group does not share in commissions (for example the Member and Partner/Bring Your Own Brand businesses.

“We believe there is still some ambiguity in how broadly this case applies to other LMG service plans,” he said.

White also highlighted that the ruling was “precedent-setting”, affecting not only LMG but all aggregators in NSW and potentially other states, except Western Australia.

“We are concerned about this,” he said.

Speaking to The Adviser, he added: “This is a new tax the government has imposed on our industry. I think all of us want to know how we minimise this new expense without our framework.

“We’ll be working with all of our agreement holders to explain the new law and what this new expense does. But we need to have a series of discussions with our business owners about that.”

The aggregator will be hosting a series of webinars over the coming week for all of its different broker members, partners, and franchisees to explain the ramifications of the court case and answer broker questions.

The big questions that need answering

While the judgment is still open to appeal, there are several big questions that now remain:

1. This judgment focuses on Loan Market branded brokers. How will the tax apply to the group’s new service plans where commissions are not split and where brokers do not operate under the Loan Market brand (for example, its member and partner brokers)?
2. How will this judgment impact other payroll tax court cases moving forward (such as the Finsure case)?
3. Will Revenue NSW now start seeking backdated payroll tax from other aggregation groups now that this case has been ruled in its favour?
4. As the judgment establishes a new tax liability on the broking industry, will other states with similar payroll tax laws (excluding Western Australia) look to impose a similar tax burden on the industry?
5. How will aggregator groups cover the costs of this new tax burden?

You can find out an overview of the payroll tax issue in the February 2024 feature from The Adviser magazine, A taxing issue: Brokers v payroll tax, or hear more about the case from the In Focus podcast with Sam White from August 2023.

[Related: A taxing issue: Brokers v payroll tax]