Payroll tax calculations and obligations differ from state to state, and payroll tax grouping further complicates the issue. In this article, we discuss the ins and outs of payroll tax, payroll tax grouping, and how this can have an effect on the amount of tax your business pays.
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Understanding payroll tax
Payroll tax is a self-assessed tax that your business pays based on the total amount of money you spend on employee wages. Payroll tax is structured independently for each state and territory, which means different tax-free thresholds exist depending on where the bulk of your employees are located.
Before payroll tax grouping provisions came into play, this system allowed businesses to structure their business dealings into different company groups across different states. This way, they could safely claim the payroll tax threshold for different business entities, despite all actually being part of the same group.
Estimating your business' payroll tax
Read our previous article on how to estimate payroll taxes for your business in your state.
Payroll tax grouping
Payroll tax grouping was established as a way to combat payroll tax avoidance.
Under the payroll tax provisions, your payroll tax obligations cover all business dealings in which you have a stake, regardless of which state they’re in. You then combine the total sum of all your employee wages, salaries, and other benefits, and are taxed on this combined amount in each state in which you do business.
Under these provisions, all members of a business group are required to pay payroll tax as though they’re employed by a single employer.
Under the Payroll Tax Act 2007 (the Act) there are five key provisions that determine what is or isn’t considered a group. These are:
- Corporations related to each other under Section 50 or the Corporations Act 2001
- An employer group where one business employs one or more employees employed by another employer within the group
- Businesses that are owned or controlled by the same person or group of people
- Corporations that are owned or controlled by the same person or group of people, whether personally or through share ownership
- Groups of businesses that form into a larger business group
However, the tests used to determine whether or not a business is considered part of a group are quite broad, and depend on the discretion of your state’s Chief Commissioner. This can result in businesses with independent operations actually being deemed as part of a group.
The result of payroll tax grouping
If one or more businesses have been determined to be part of a group for payroll tax purposes, a single payroll tax threshold will be applied to this group. This occurs regardless of which state they are in. This results in payroll tax liability increasing dramatically, depending on the number of businesses involved.
Under the grouping, this is now considered one entity for tax purposes, so each business involved is jointly liable for the entire group’s payroll tax liabilities.
If your state’s revenue office determines a business grouping for payroll tax purposes, this can also apply retrospectively. This will result in penalties for non-payment, and a large payable tax debt — with the accumulated years' interest included.
How to prevent payroll tax grouping
While payroll tax grouping itself isn’t necessarily a bad thing, it can come as a shock if this wasn’t something you were aware of. Due to the nature of the grouping provisions and their associated tests, this sometimes can result in unintended payroll tax business groupings.
However, if this does happen to your business, there are ways you can handle this situation.
Applying to be excluded from grouping provisions
If your business operates independently from the other businesses with which you’re grouped, without any connection at all, then there’s been a clear error. You can apply to your relevant state’s Chief Commissioner or Revenue Office to be excluded from their grouping provisions.
You just need to demonstrate your evidence. If you can prove to your state’s Chief Commissioner that your business operates independently of those grouped, then you stand a chance of succeeding.
Once you send your application to the relevant decision-maker, there are a number of factors they’ll take into account when determining your grouping decision:
- Whether the businesses work together or share common premises, resources, or employees
- The nature of each business, and the degree of ownership and control
- Common control or management of the businesses
- Owners of the associated business
- The financial relationships between the businesses, including loans between them
Applying to be excluded from a business grouping assumes that you’re grouped together in the first place. If you proactively apply to be excluded from a business grouping, a thorough review will be undertaken by your Chief Commissioner.
If you’re not within a business grouping for payroll tax purposes, but your assessment determines that you are, you'll then be considered part of that group. So it’s crucial to carefully consider the basis for any potential grouping determination, and whether you’re able to challenge it.
If your business is grouped for payroll tax purposes, but you don’t believe this should be the case, we recommend seeking professional legal and accounting advice to discuss your options.
The final word
Payroll tax exists to ensure that businesses are paying the necessary tax on the wages of their employees. So if you operate multiple businesses in multiple states, it’s imperative that you seek professional advice to determine whether or not your business will be grouped for payroll tax purposes.
Your payroll tax obligations will differ depending on which state you’re in, so it’s critical that you assess your necessary state or territory threshold carefully. Getting the right advice ensures that your business stays on the right side of your state’s payroll tax obligations and that you’re actually paying the correct amount.