Payroll tax grouping in NSW

Payroll tax grouping is the set of rules in Part 5 of the Payroll Tax Act 2007 (NSW) that treats related businesses as one group for payroll tax. A group shares one tax-free threshold, and every member can be made liable for payroll tax that another member doesn't pay.

Businesses are often grouped without anyone intending it: a shared employee, a family trust or a director who controls the boards of two companies can be enough. We advise on grouping, exclusion applications and objections as part of our work on NSW payroll tax, land tax and duty disputes. Unless we say otherwise, section references are to the Payroll Tax Act 2007 (NSW).

Why does payroll tax grouping matter?

• One threshold for the whole group. Generally, only one member, usually the group's designated group employer, can claim the tax-free threshold, and the other members pay tax on all of their NSW taxable wages (s 80, Sch 1 Pt 3).
• Registration. Each employer in the group must apply to register within 7 days after the end of a month in which the group's combined wages, counting wages paid anywhere, exceed the weekly threshold, even if its own wages are small (s 86(1)(b), (2)).
• Shared liability. If a member fails to pay payroll tax, every member is jointly and severally liable for it, with interest, penalty tax and recovery costs, even a member that wasn't an employer in the period. Revenue NSW can recover the whole amount from any one of them, and a member that pays has such rights of contribution or indemnity from the others as are just (s 81(1)–(5)).

The Court of Appeal has described the mischief the grouping provisions are aimed at as the artificial splitting of business activity to take advantage of the threshold (Chief Commissioner of State Revenue v Elanor Operations Pty Ltd [2022] NSWCA 222 at [49]). But the grouping tests themselves don't depend on any avoidance purpose.

For example, suppose two companies each pay $900,000 a year in NSW wages and have no interstate wages. Separately, each is under the $1.2 million annual threshold and pays no payroll tax. If they are grouped, the group's wages are $1.8 million, and tax at 5.45% on the $600,000 above the threshold is about $32,700 a year (rate and threshold from Sch 1 cl 1). If Revenue NSW picks this up years later, it can generally assess the earlier years, with interest and penalty tax (Taxation Administration Act 1996 (NSW) (NSW TAA) ss 21, 26). Penalty tax is generally reduced if the business discloses the problem to Revenue NSW in writing before being told of an investigation (NSW TAA s 28).

How are businesses grouped for payroll tax?

The payroll tax grouping provisions set out several separate tests, and a business can be grouped under any of them (s 68). "Business" is defined widely: it includes carrying on a trust (even a dormant one) and holding property used in another business (s 67), so a trust that owns a business's premises can be a group member.

Related companies (s 70)

Companies form a group if they are related bodies corporate under the Corporations Act 2001 (Cth): broadly, a holding company and its subsidiaries, and subsidiaries of the same holding company.

Shared employees (s 71)

An employer and another person form a group if the employer's employees:

1. perform duties for or in connection with one or more businesses carried on by the employer and the other person (s 71(1)),
2. are employed solely or mainly to perform duties for or in connection with the other person's business (s 71(2)), or
3. perform duties for or in connection with the other person's business under an agreement, arrangement or undertaking, formal or informal, to provide services to that person (s 71(3)–(4)).

One employee is enough. A common example is a service entity that employs the staff for several related businesses.

Common control (s 72)

If a person or set of persons has a controlling interest in each of two businesses, the people carrying on those businesses form a group (s 72(1)). A controlling interest includes (s 72(2)):

• being the sole owner of the business, whether or not as trustee,
• for a company, being a director or directors entitled to exercise more than 50% of the votes at directors' meetings, or being able to exercise, control or substantially influence more than 50% of the votes attached to its voting shares, or to any class of them,
• for a partnership, owning more than 50% of the capital or being entitled to more than 50% of the profits, and
• for a trust, being the beneficiary of more than 50% of the value of the interests in it.

Control can also be traced through related companies, trusts and partnerships (s 72(3)–(5), (7)–(8)).

A person who may benefit from a discretionary trust is taken to be the beneficiary of more than 50% of it (s 72(6)). With a typical family trust deed, every potential beneficiary is treated as controlling the trust's business.

For example, suppose one person is the sole director of a company that runs a café and a potential beneficiary of a discretionary family trust that runs a cleaning business. That person has a controlling interest in both, so the businesses are grouped (s 72(1)) even though they have nothing else in common. Whether one can be excluded is a separate question.

Tracing interests in companies (s 73)

An "entity" and a company form part of a group if the entity's direct, indirect or aggregate interest in the company's voting shares is more than 50% (s 73(1)–(2)). Indirect interests are multiplied down a chain of companies: in the Act's own example, 80% of company A, which holds 70% of company B, is a 56% interest in B (s 77(5)).

An entity can be two or more "associated persons", such as spouses or domestic partners, parents and children, or siblings, whose interests are added together (s 73(4), s 76(2)(b)). The definition also links a person with a private company of which they are a director or majority shareholder, and with a trust of which they are a beneficiary (s 73(4)).

Smaller groups combined (s 74)

If a person, such as a company or a trustee, is a member of two or more groups, the members of all those groups form one group (s 74(1)). If two or more members of a group together have a controlling interest in another business, whoever carries on that business joins the group too (s 74(2)). One shared link can pull an unrelated business into a much larger group.

Former entities (s 74A)

Since 4 September 2023, a rule has grouped a "successor" with a "former entity" where both are or were "sufficiently influenced" by the same third person (s 74A(1)). An entity is sufficiently influenced if it is accustomed or obliged, or might reasonably be expected, to act on that person's directions, instructions or wishes (s 74A(2)). A former entity includes a deregistered company, a former trustee, and a company in administration, being wound up or under a deed of company arrangement whose tax the Chief Commissioner is satisfied can't be recovered from it (s 74A(5)). Each member is then jointly and severally liable for the former entity's unpaid payroll tax, even if it arose before the group existed (s 81(6)–(7)).

Who claims the threshold in a payroll tax group?

With the Chief Commissioner's approval, the members can designate a qualified member as the designated group employer, by written notice executed by or for every member and served on the Chief Commissioner (s 80(1), (6)–(7)). Broadly, a member qualifies if its own wages exceeded the annual threshold last financial year or are likely to this year. If none does but the combined wages do, any member can be designated (s 80(2)–(3)). If the members don't designate within 7 days after the end of the month in which the group is established, the Chief Commissioner may do so, but doesn't have to (s 80(4)). A designation ends from the first day of the return period in which the group's membership changes or the members revoke it (s 80(5)).

The designated group employer claims the group's threshold (Sch 1 Pt 3). With no designated group employer, each member generally pays tax on all its taxable wages with no threshold (Sch 1 Pt 4). In practice, where no member's own wages exceed the threshold, Revenue NSW has one member lodge returns for the whole group as "group single lodger" and claim the threshold, and says the group's total tax is the same either way.

If group members also pay wages in other states, the group's NSW threshold is generally reduced to the NSW share of the group's total Australian wages. For example, if NSW wages are half of the group's Australian wages, the group gets half the NSW threshold.

Can a business be excluded from a payroll tax group?

Yes, in some cases. The Chief Commissioner may, by written order, determine that a person is not a member of a group (s 79(1)), often called "de-grouping". This is only possible if the Chief Commissioner is satisfied that the person's business is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of the group, having regard to the nature and degree of ownership and control, the nature of the businesses and any other relevant matters (s 79(2)).

Grouping provision	Can a member be excluded under s 79, if the s 79(2) test is met?
Related companies (s 70)	No, if the company is related under Corporations Act s 50 to another member (s 79(3))
Shared employees (s 71)	Yes
Common control (s 72)	Yes
Tracing interests (s 73)	Yes
Combined groups (s 74)	Yes (s 79(4))
Former entities (s 74A)	No: s 79 doesn't apply to a member of a s 74A group (s 79(8)). A separate determination is possible if the third person's influence wasn't intended to avoid tax or other commercial obligations (s 74A(4))

An exclusion can be backdated (s 79(5)). It can also be revoked, again with backdated effect, if the business stops meeting the test (s 79(6)–(7)).

What have the courts said about exclusion?

• The test is the statutory test, not fairness. It isn't enough that grouping is harsh or exclusion would be just and reasonable. The Chief Commissioner must be satisfied that the business isn't connected with another member's business (Seovic Engineering Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCA 242 at [20]–[22]).
• The connection must be material. Not every connection rules out exclusion. It must be material, not insignificant or inconsequential, and affect the business in some real or practical sense. That was the Supreme Court's statement of the test in Elanor, and the parties didn't dispute it on appeal (Elanor at [24]). Decisions under s 79 are invariably fact sensitive (Elanor at [6]).

In Seovic, a company supplied contract workers, and all or most of the day-to-day management and administrative staff, to its only two customers, both group members. The Tribunal's Appeal Panel found the businesses were connected even though there was no common ownership or control between them, and the Court of Appeal refused leave to appeal (Seovic at [28]–[32], [34]).

In Elanor, 16 companies with a common sole director were grouped, and one company employed the staff who managed the others' businesses. The Supreme Court still found that the businesses in each of four managed-fund sub-groups were carried on independently of the other sub-groups: each fund had largely separate investors, and the director's legal duties to each fund's investors much constrained his ability to control its businesses. The Court of Appeal dismissed the Chief Commissioner's appeal (Elanor at [5], [12], [14], [26], [52], [64]). The Chief Commissioner had acknowledged that the application presented a unique set of facts ([15]).

What evidence supports an exclusion application?

An application must deal with every other member of the group. It usually covers:

• who owns and controls each business, and who makes its decisions,
• separate managers, staff, premises, systems, bank accounts and branding,
• how much of the business depends on other members as customers or suppliers, and
• every dealing between members, and whether it is documented and at market rates. In Elanor, the primary judge accepted that undocumented fee arrangements arguably not at arm's length tended towards connection, though on those facts gave this little weight ([26], [59]), and the Court of Appeal said a common service provider doesn't by itself make businesses connected ([60]).

How do you object to a payroll tax grouping decision?

Payroll tax disputes follow Part 10 of the NSW TAA, the same process as for land tax and duty. You can object to an assessment shown in a notice of assessment, or to another decision of the Chief Commissioner under a taxation law, which generally includes refusing an exclusion (NSW TAA s 86(1)).

The objection must be lodged within 60 days after the notice of assessment, or the decision, is served on you (s 89(1)), with the grounds stated fully and in detail, in writing (s 87), and you carry the onus of proof (s 88). If you are dissatisfied with the objection decision, or it isn't made within 90 days, you can generally apply to the NSW Civil and Administrative Tribunal or the Supreme Court, but not both (ss 96–97). Tax can still be recovered while an objection or review is pending, unless a stay is granted (ss 94, 103). Our guide to Revenue NSW objections and reviews sets out the late objection rules and the review deadlines in full.

Revenue NSW can generally reassess within 5 years of the initial assessment, and later in some cases, including where the facts weren't fully and truly disclosed and the tax was assessed too low as a result (NSW TAA s 9(3)). A payroll tax assessment is generally made when Revenue NSW calculates the tax from a return (s 8(3)), so the 5-year limit may not help a group member that never registered or lodged returns. For the objection steps in more detail, see our guides to land tax objections and stamp duty disputes.

Do other states have payroll tax grouping?

Payroll tax law has been largely harmonised, so the grouping tests in the other states and territories are broadly similar. But the details differ. Thresholds and rates differ, and so can the way a group's threshold is shared between members. Not every state has an equivalent of the NSW former entities rule (s 74A). Each revenue office applies its own Act and decides its own exclusion applications, so check the rules in each state where the group pays wages.

How we help

• Map the group and apply for exclusion. We work through shareholdings, trust deeds, directors and staff to see which tests apply, and prepare s 79 applications with the evidence the test calls for.
• Object. We act in Revenue NSW reviews and objections, including on related issues such as payroll tax on contractors.
• Work with your accountant. We work alongside the accountant and keep them informed: see how we work with accountants.

Next step

Send us a structure chart (or a list of each entity with its shareholders, directors, trustees and beneficiaries) and a short note on how staff, premises and management are shared between them. Include any Revenue NSW letters, assessments, decisions or objection decisions, with the date each was issued and served, because the 60-day time limits run from those dates. We'll tell you which grouping tests apply and whether an exclusion application or objection is realistic.