Broking industry unpacks the payroll tax case

The webcast, partnered by the industry association the Mortgage & Finance Association of Australia (MFAA), law firm Dentons, and aggregator LMG, was held after the Supreme Court of NSW found that payroll tax should be paid on commissions and payments to brokers in certain instances (as per the precedent-setting Loan Market court case).

However, the industry has been fighting the interpretation and is working to determine exactly how and why this tax is being applied to aggregators and some of their brokers.

Indeed, while a judgment has been handed down for the Loan Market case, final orders have been delayed until September and an appeals process extends for 28 days after the final orders are issued. As such, the case could be challenged further.

What is the payroll tax liability?

Currently, the payroll tax rate in NSW is 5.45 per cent applied to the wages amount above the threshold of $1.2 million.

Explaining who is caught under the payroll tax liability as per the recent judgment, Sam White, the executive chairman of LMG, said the aggregator would not necessarily need to pay payroll tax for all broker members.

It largely centres on whether brokers are working under a ‘relevant contract’ where payroll tax applies (as per section 32 of the Payroll Tax Act 2007 NSW).

Payroll tax, as applied to the provisions of Loan Market’s specific aggregation model in the case, will likely apply if a broker does not have any staff or contractors (subject to a de minimis threshold) or cannot prove any other exemption.

White said: “It’s the smaller businesses and the bigger businesses that we think may have a problem. This is largely because the small businesses may not be eligible for an exemption and larger businesses may have their own business payroll tax liabilities.

“In the middle (‘the Goldilocks’) where ... you have more than one staff member but you’re not big enough to go over the tax thresholds; they’re the ones that [we may not need to pay] payroll tax on.”

However, there are a range of exemptions that apply.

“The important thing, I think, is that it’s those exemptions we now have clarity on,” the LMG executive chairman said.

All aggregators should sit up and take notice

According to Adam Nicholas, a partner for employment tax at PwC Australia, while the test case focuses on Loan Market’s offering, “every aggregator needs to look at this”.

He said: “I don’t think there’s anything in this case that suggests to me that they’re [Revenue NSW] going to take a back-step in terms of [which aggregators] they consider to be under the rules.

“There is a risk assessment for aggregators to make here, because [in contrast to an aggregator coming forward to volunteer liability] a revenue office coming to you and then concluding you have a liability comes with the tax, interest and penalty.

“I think all signs are pointing to: ‘don’t put your head in the sand on this matter’. Understand where you stand and make a risk-based assessment of what you need to do next.

“[Aggregators] need to understand the case, they need to vet what that case means for them. And if there’s a need to look at the exemptions, they need to start understanding what the exemptions are, because ... the sooner they understand that, the sooner they’re going to be in a position to deal with it.”

Proving an exemption will be key

Speaking from a legal standpoint, Jack Aquilina, the managing associate for tax law at Dentons, said: “Every case turns on its facts.”

He said that the Loan Market case assessed the franchise model of aggregators, highlighting that there was an integration between the businesses of the brokers and the aggregator from a branding perspective.

“There are differences between models and there is an open question about whether that will be material,” Aquilina said.

However, he said that the current position of law from Revenue NSW’s perspective “appears to be that, regardless of your model, it [payroll tax] applies”.

The lawyer said: “So, what brokers need to do is work with their aggregators to help them substantiate exemptions. And what I mean by substantiation is evidence.

“If you’re a single operator, but you might have administrative support in your business or you outsource aspects of your business – the ‘two or more’ exemption, as we call it – how can we prove that? Do you have documents that look at what these people do in your business and what role they play in the delivery of those services?

“Thinking about how you might substantiate that there are two or more people involved in your business; that will help the aggregator fight for an exemption.

“Everything turns on documents.”

He said that another exemption was for brokers who operate less than 90 days a year.

“Obviously, there’s records the aggregator will have around you being paid, but what can you do to make that easy and prove that you’ve been operating for less than 90 days in a relevant year?” he said.

“Depending on which business model you operate under, which aggregator you’re aggregating with, you might need to be attentive to different types of information to help substantiate an exemption.

“So I think it’s about working together … If you can make [your aggregator’s] life easier by giving them the information that they need and working together to identify that, I think it’ll just make the industry a lot more secure while we shoulder the burden of this risk until the law is more certain down the track.”

However, he said that he disagreed with the interpretation of the law.

“I think the application of this tax to these circumstances is not correct. I think that the legal basis for it being applied is something yet to be tested fully. And we support the brokering and aggregation industries [in their fight],” he said.

“Industry must work together because the cost of this is going to flow through, one way or another.”

A NSW case with a national impact

Speaking about the ramifications of the new payroll tax burden on the broking industry as a whole and why the association is fighting it, the CEO of the MFAA, Anja Pannek, said: “This is a significant issue for industry.

“While most of the activity that we’ve seen (and also the recent court case with Loan Market) has been based in New South Wales, what we know about payroll tax legislation is that it is harmonised right across the country, with the exception of WA.”

However, PwC’s Nicholas said that even though the way Western Australia approaches payroll tax is different, Western Australian-based aggregators may still be caught by the law.

He said: “Payroll tax is payable by a company in the state, generally, that their workers are based.

“So, if you’re a WA-based aggregator but you have brokers based in New South Wales or other states, then you need to apply the rules of those other states.”

Pannek therefore said: “This isn’t just a New South Wales issue … some of the consequences that could be coming out of the recent court case and the activity of Revenue New South Wales means it really is a national issue.”

The MFAA CEO said that the crux of the problem came down to the fact that payroll tax was “an incredibly ambiguous piece of legislation when it comes to application of arrangements between aggregators and brokers in the mortgage and finance broking industry”.

She reiterated that the association “do[es] not agree with the application of payroll tax to this industry”.

Pannek said the association is now pursuing a range of outcomes, should this law apply, including:

• No retrospectivity of the application of payroll tax. Pannek said it would be “incredibly harsh and incredibly unfair” to apply the tax retrospectively.
• A moratorium to give industry time to establish required processes and systems.
• Having “pragmatic guidance” from the NSW Commissioner (and any other relevant revenue offices across the country), developed in tandem with industry.

You can watch the full webcast on payroll tax and why brokers need to be preparing for it in The Adviser Live video here.

Information included in this article and webinar does not constitute legal advice and should not be used as such. Formal legal advice should be sought for specific legal matters.

[Related: Doctors’ payroll tax amnesty provides hope for broking]