Authorised representatives of Australian Financial Service License (AFSL) holders and credit representatives of Australian Credit Licence (ACL) holders may be deemed "contractors" for payroll tax purposes, following a recent ruling by the Supreme Court of NSW.
Background
The proceedings involved a franchisor in the consumer and home loans market (Franchisor) and concerned whether the Franchisor was liable for payroll tax in the seven financial years ending 30 June to 2012 to 30 June 2018 in respect of payments made to individual mortgage brokers pursuant to "Broker Agreements". Specifically, the court deliberated on whether the agreements constituted "relevant contracts" under the Payroll Tax Act 2007 (NSW).
The Franchisor argued that payroll tax should not be payable because:
- The Franchisor provided contracted services to brokers by enabling them to conduct their own mortgage broking business;
- The brokers only provided services to their clients; and
- Whilst brokers received commissions for these services, the commissions had no connection to any service provided by the brokers to the Franchisor.
Justice Richmond disagreed and held that the Franchisor does receive "services" from the brokers as a result of requirements under the Broker Agreement and that brokers adopt practices and procedures mandated by the Franchisor. His Honour ruled in favour of the NSW State Revenue and determined that payroll tax applied on the basis that:
- the commission payments were sufficiently connected to the services provided under the Broker Agreements; and
- the Broker Agreements were "relevant contracts".
Impact of decision
Payroll tax is generally payable by employers on wages and other benefits provided to employees. However, the judgment indicates that payroll tax may well be payable on payments made by entities, such as ACL and AFSL holders, to contractors, like authorised representatives.
What will the State Revenue Offices do next?
- Payroll tax is the most harmonised state tax across Australia. The decision will therefore be relevant to all States and Territories except for Western Australia, which does not impose payroll tax on contractors.
- State Revenue Offices may issue public guidance on the payroll tax treatment of commissions paid to brokers and representatives of ACL and AFSL holders.
- State Revenue Offices may carry out investigations into how ACL and AFSL holders applied payroll tax over multiple financial years.
What should AFSL and ACL holders do next?
AFSL and ACL holders should consider their existing representative arrangement terms and examine whether any of the essential elements discussed in the Franchisor case exist.
In the interim, the Franchisor decision suggests that payroll tax is applicable in any circumstance where:
- AFSL or ACL holders appoint authorised representatives who have agreements which require them to conduct their business in an approved manner; and
- AFSL or ACL holders make payments to authorised representatives pursuant to the representative agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.