Grouping, and how it can affect your payroll tax debt

As you probably know, a company is a discrete legal entity that limits the liability of its owners and directors. That’s why companies are often used to run businesses instead of individuals. And as the business grows, so does its structure with different corporate entities and related parties within the group, such as corporate partnerships, joint ventures, asset holding entities, etc.

So in an insolvency situation, directors and other associated entities (e.g. related companies) aren’t automatically liable for the company’s unpaid debts. Mind you, it doesn’t necessarily mean they’re in the clear either—any number of claims may arise from a liquidator.

And then there’s the State Revenue office, which is often overlooked as a creditor/risk area during an insolvency situation. And that can lead to problems, because while Australia’s States and Territories may have different legislation for payroll tax they all share a common element—grouping.

What is ‘grouping’?

Grouping gives a single entity within a group the benefit of a tax-free threshold. Only one entity in the group can benefit from this—the others must pay payroll tax on all taxable wages.

Here are the payroll tax thresholds for taxable wages and rates in each Australian State and Territory as at 20 November 2015.

Is your entity part of a group?

Of course this raises the obvious question, “Is my entity part of a group?” With the legislation for each state and territory varying slightly, there are no hard and fast rules. But here’s a general set of criteria that can help you determine whether or not a given entity is a member of a group.

• Related companies—If two or more companies are:
  • holding and/or subsidiaries of one another
  • both subsidiaries of the same holding company.
• Common employees—An agreement for services between two or more businesses results in the employees of one business performing duties as an employee for another business.
• Common control—Two businesses controlled by the same entity have a controlling interest of more than 50% across different entities.
• Tracing of interests—If an entity has a direct, indirect or aggregate interest of more than 50% in any corporation, that corporation is grouped with the entity.
• Subsuming—A larger group can be formed out of multiple smaller groups if:
  • a business is a member of two or more groups at the same time
  • the members of a group collectively have a controlling interest in another business.

As we said there are no hard and fast rules, and certain exclusions apply to these grouping provisions. So if you have any doubts about whether the exclusions apply to you or your business, contact a qualified tax agent.

What to do if one of your businesses is failing

In an insolvency/liquidation scenario, if one entity within a group fails then the other entities may be jointly and individually liable for any payroll tax debts incurred by the members of that group.

Putting the insolvent entity into liquidation may well stop the State Revenue Office enforcing action against that particular entity. However, the joint and individual liability that attaches the debt to each entity within the group could mean more than one entity in the group is actually insolvent.

As you can see, the concept of grouping isn’t always straightforward. But if your company has multiple entities, it’s vital that you find out whether it applies in your particular circumstances.

If you’d like to know more about grouping, or you’re facing financial difficulties due to payroll tax or the grouping provisions, get in touch with the team here at Rapsey Griffiths. We can talk about your situation, come up with a range of options, and help you choose the one that’s best for you.