Payroll Tax Implications for Arrangements Between Related Companies
A recent case in New South Wales has highlighted an important payroll tax risk for businesses operating through related companies. The decision in Chief Commissioner of State Revenue v E Group Security Pty Ltd (No 2) [2022] NSWCA 259 demonstrates how arrangements within corporate groups can trigger payroll tax liabilities under the Payroll Tax Act 2007 (NSW).
Background
The case centred around E Group Security Pty Ltd, which supplied security personnel to clients. However, the way in which this was done was key. E Group was part of a broader corporate group. The security personnel were not directly engaged by the entity that had the contracts with the clients. Instead, E Group had separate arrangements with the security personnel where one entity in the group supplied the security personnel (Contracting Entity), and another contracted with the clients (Operating Entity).
How the related party arrangement led to payroll tax
The New South Wales Court of Appeal found that these arrangements between related companies fell within the broad definition of an "employment agency contract" under the Payroll Tax Act 2007 (NSW).
The way that the corporate group was structured meant that the provision of workers by the Contracting Entity to the Operating Entity was subject to payroll tax. If the security personnel contractors had been engaged by the Operating Entity, the employment agency provisions would not have applied. The relevant contract provisions in the Payroll Tax Act 2007 (NSW) would have applied, and one or more of the exclusions for the relevant contract provisions would have been satisfied.
Approach of Revenue NSW since decision
We have seen Revenue NSW increasingly apply the approach in Chief Commissioner of State Revenue v E Group Security Pty Ltd to related party arrangements since the decision was handed down, even where the broader arrangements with the clients are clearly not labour hire in nature.
Key Takeaways
Inter-company contracts matter: If your business operates through related companies and one of them supplies workers to clients (or even to another company within the group), it’s crucial to examine how these arrangements are structured as they can have unintended outcomes, including payroll tax.
Payroll tax exposure: Businesses need to be aware that payroll tax may apply to payments made within corporate groups, especially when there are contracts for the provision of workers. The Chief Commissioner’s approach in E-Group applies a broad interpretation of the "employment agency" provisions.
Removal of exclusions for relevant contracts: A crucial outcome of this case is the removal of many exclusions under the "relevant contracts" provisions that businesses often rely on to exclude arrangements from payroll tax. This means that even arrangements that might have previously qualified for a relevant contract exclusion may no longer be excluded from payroll tax, significantly broadening the types of contracts caught by these provisions.
Join our seminar on the Implications of the case
To help businesses navigate these changes and understand the full impact of the case, we will be holding a seminar discussing the implications of Chief Commissioner of State Revenue v E Group Security Pty Ltd. The seminar will cover practical strategies for assessing your current arrangements, ensuring compliance with payroll tax laws and reducing potential risks. Registration details for this seminar can be found here.
Take Action
For businesses operating through multiple entities or related companies, the implications of this case are clear: the way you structure your contracts and relationships could significantly affect your payroll tax liabilities. A careful review of how your business provides labour, both internally and to clients, is essential in light of this decision.
The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.
contact
Matthew McKee
Partner
E mpm@bwslawyers.com.au
P 02 9394 1032
Marianne dakhoul
Senior Associate
E mxd@bwslawyers.com.au
P 02 9394 1033