Understanding Payroll Tax Grouping by RevenueWA

So What is Payroll Tax Grouping?

In the complex world of taxation, understanding nuances such as payroll tax grouping is paramount, especially for businesses in Perth. It’s about ensuring compliance and optimizing operations, financial planning, and preventing potentially significant liabilities. Here, we delve deeper into how Perth tax accountants can be your beacon in navigating payroll tax grouping as laid out by RevenueWA. 

A Closer Look at Payroll Tax 

For businesses to truly appreciate the potential implications of payroll tax grouping, it’s essential to understand what payroll tax entails thoroughly. Payroll tax is a state-based tax, levied on wages paid or payable by employers to employees. This tax only applies once the total wage bill of an employer (or a group of associated businesses) exceeds a threshold defined by the state. 

RevenueWA, the regulatory authority in Western Australia, administers and ensures that businesses meet their payroll tax responsibilities.  They consider the payroll tax implications of employing staff in Perth and Western Australia.  

Diving Deeper into Payroll Tax Grouping 

RevenueWA introduced the concept of payroll tax grouping to prevent businesses from circumventing tax obligations by fragmenting their operations into separate entities. By this logic, even if each entity falls below the threshold individually, their combined wage bill could exceed it, thus incurring payroll tax. 

For instance, imagine a Perth-based entrepreneur, Mr. Green, who operates three distinct businesses – a bookstore, a recruitment agency, and a farm. While each entity might individually have a wage bill under the threshold, their combined wages might be well over it. If RevenueWA recognises a connection between these businesses, they would be grouped for payroll tax. 

The impact of grouping these businesses is that they will not individually enjoy the small business reduction.  Further, as payroll tax is a marginal rate of tax, the grouping will push Mr Green’s marginal payroll tax rate into a higher rate of tax on the total payroll.  

Grouping provisions for payroll tax exist to ensure businesses don’t bypass tax obligations by fragmenting operations. RevenueWA, like many other tax authorities, employs various criteria to determine whether businesses should be grouped. Let’s delve into these provisions: 

  • Related Bodies Corporate 

A corporation can be related to another in multiple ways: 

Holding Company: If Company A holds over 50% of the shares in Company B, A is the holding company, and B is the subsidiary. 

Example: If Perth Publishing Ltd. owns 60% of shares in West Writers Ltd., both would be grouped under the related bodies corporate provision. 

Both Subsidiaries of a Common Holding Company: If Companies C and D are both owned more than 50% by Company A, they are related. 

Example: Imagine Perth Media Holdings Ltd. owns 70% of Radio Perth Ltd. and 80% of Perth TV Ltd. The radio and TV companies would be grouped due to their common holding company. 

  • Common Employees 

Entities that share the employment of an individual or individuals can be grouped if they are commonly controlled or if an agreement for shared employment is designed to reduce tax. 

Example: If Mr. Smith works at Perth Groceries Ltd. and Perth Organic Ltd., and a single entity or person has a controlling interest in both companies, they may be grouped for payroll tax purposes. 

  • Controlling Interest 

Controlling interest exists where a person can influence or control a business’s internal and external operations. Two types are recognized: 

Direct Tracing: Involves a person having a direct controlling interest in multiple businesses. This can be through direct ownership of shares or voting rights. The businesses will be grouped if a person holds more than 50% interest. 

Example: If Mrs. Jones holds 55% shares in both Perth Apparel Ltd. and Perth Shoes Ltd., these companies are grouped due to her direct controlling interest in both. 

Indirect Tracing: This pertains to a scenario where a person has a controlling interest in a business, which in turn has a controlling interest in another business. This creates a chain of control, leading to grouping. 

Example: Mrs. White holds 60% in Alpha Ltd., which holds 65% in Beta Ltd. Through indirect tracing, both companies can be grouped as Mrs. White indirectly controls Beta Ltd. via her dominant position in Alpha Ltd. 

  • Subsuming Provisions 

Sometimes, two entities might not be grouped based on the above criteria, but due to other interconnected interests and operations, they might still fall under grouping provisions. This provision ensures that businesses in a larger, interwoven structure are appropriately grouped for payroll tax. 

Example: Suppose Perth Tech Ltd. and Perth Software Ltd. aren’t directly or indirectly controlled by a single entity. Still, they share resources, infrastructure, management, or have intertwined operations, they might be grouped under the subsuming provision. 

Understanding the Implications of Grouping 

The direct consequence of payroll tax grouping is a larger tax liability. Consider the previous example. If Mr. Green’s bookstore had an annual wage bill of $650,000, the recruitment agency $600,000, and the farm $500,000, individually, they might fall below the illustrative threshold of $1,000,000.  

However, they reach $1,750,000 combined, making them liable for payroll tax on this cumulative amount.  How payroll tax is calculated means that grouping will increase a business’s tax liability.  

This can be a substantial unforeseen expense for businesses, potentially impacting liquidity, and financial planning. 

Strategies to Avert Payroll Tax Grouping 

Preventing involuntary payroll tax grouping primarily revolves around establishing clear distinctions between businesses regarding ownership, control, management, and operations. 

  • Distinct Ownership and Management: Ensure each entity has a separate ownership structure or managerial teams. 
  • Operational Independence: Avoid overlapping functions. If one business borrows resources or employees from another, it strengthens the case for grouping. 
  • Financial Separation: Maintain separate financial books, bank accounts, and transactions to underline each business’s individuality further. 

Many businesses often have interwoven staff – especially from an administrative and accounting perspective.  So, having robust cloud accounting platforms to show legally separate activities is essential compared to one ledger running all entities combined.  

The Exclusion Process from Grouping 

For businesses that believe they’ve been wrongly grouped, there’s a mechanism to challenge this grouping by applying for de-grouping. This, however, necessitates significant evidence showcasing the independence of each business entity. 

Documentation, operational proofs, financial records, and other pertinent evidence need to be presented. This is a complex process, and Perth tax accountants play a pivotal role in gathering, preparing, and presenting this data to RevenueWA. 

This strategy mustn’t be a “paper-based” strategy to prevent payroll tax.  It will require actual activities to be separate so that the intent and purpose of the legislation are achieved.  And given that the payroll tax savings will be a yearly ongoing saving it is worthwhile investing time and resources to enjoy the exclusion from payroll tax grouping.  

The Advantage of Strategic Tax Law Structuring 

At the heart of avoiding unnecessary tax implications lies effective tax law structuring. An experienced Perth tax accountant can ensure that a family business in Perth, or any other city like Melbourne, is structured optimally right from its inception. 

For example, let’s consider ‘Perth Treasures’, a family-owned business that’s diversified into retail, online sales, and event management. An accountant can guide this business to operate each division as a standalone entity with unique operational guidelines, financial processes, and even separate branding if necessary. The right documentation, clear separation of functions, and distinct financial planning can shield ‘Perth Treasures’ from unintentional grouping. 

The Indispensable Role of Perth Tax Accountants 

Having a Perth tax accountant is akin to having a navigator in the intricate seas of taxation. From ensuring businesses are structured right, to keeping abreast of the evolving tax laws and liaising with RevenueWA, their role is crucial. 

Moreover, they ensure that during audits or any challenges from RevenueWA, businesses have all their records aligned, taxes filed appropriately, and any disputes can be addressed with clarity and promptness. 

Payroll tax grouping exclusions Australia wide 

Excluding an employer from payroll tax grouping is not restricted to Perth or Melbourne alone.  Across all Australian states exists mechanisms to exclude payroll tax grouping – however, the mechanisms are slightly different on a state-by-state basis.  So, engaging with a tax law advisor with a network of firms across the country, like the GGI Global network, is essential to ensure you enjoy a single source of advice across your payroll tax position.  

In Conclusion 

While payroll tax grouping is essential for ensuring tax fairness, it can pose challenges for the uninformed Perth business owner. The complexities of this regulation can often lead to inadvertent pitfalls. However, with the proper guidance, awareness, and planning – aided by the expertise of Perth tax accountants – navigating the waters of payroll tax grouping becomes manageable and strategically advantageous. 

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