Payroll tax grouping is one of the areas where a business can be compliant in its own records, yet still face an unexpected liability because of its links with another entity. A separate company, trust, partnership or sole trader business may look independent commercially, but payroll tax law can treat the entities as one group.
For business owners, this matters because grouping can affect access to the payroll tax-free threshold or deduction, reporting obligations, interstate calculations and, in some jurisdictions, responsibility for another group member’s unpaid payroll tax. Getting the structure wrong can lead to amended assessments, interest and penalty tax.
What payroll tax grouping means
Payroll tax is imposed by states and territories, not by the ATO. Although the grouping rules are broadly harmonised, each jurisdiction has its own legislation, administrative processes, thresholds, rates and rulings. A business operating across borders must consider the rules in every state or territory where it employs people or pays taxable wages.
Grouping provisions are designed to stop connected businesses from receiving multiple payroll tax thresholds merely because activities are divided between different legal entities. The rules can apply to companies, trusts, partnerships, sole traders and other bodies.
In practical terms, where entities are grouped:
- their relevant wages may need to be considered together when working out the group’s payroll tax position;
- generally, only one threshold or deduction is available to the group in a jurisdiction;
- one member may be nominated to lodge or manage reporting for the group, depending on the jurisdiction;
- interstate wages can affect the threshold or deduction available in the state or territory concerned; and
- group members can face broader exposure if another member does not meet its payroll tax obligations.
Grouping is not limited to entities that pay wages. A holding company, trustee, dormant entity or service entity may still be relevant to the analysis where it has ownership, control or operational links with employing businesses.
The key point is that payroll tax grouping follows the legal and practical relationships between businesses, not simply the labels business owners give them.
The main ways a payroll tax group can arise
While the wording differs between jurisdictions, several common grouping triggers appear across Australian payroll tax legislation.
Related corporations
Companies can be grouped where they are related bodies corporate under the Corporations Act. Broadly, this can arise through a holding company and subsidiary relationship, or where companies share a common holding company.
This is an area that can catch business owners who assume separate Australian companies are independent because they have different ABNs, bank accounts, trading names or staff. If they sit under the same corporate ownership chain, they may still form a payroll tax group.
It can also affect Australian subsidiaries of an overseas parent. A local company may have no direct dealings with another Australian entity, yet the entities may be related through a common parent company.
Common control
Common control is often the most difficult trigger for privately owned businesses. A group may arise where the same person, or the same set of people, has a controlling interest in more than one business.
The analysis can differ depending on whether the business is carried on through:
- a company;
- a partnership;
- a trust;
- a sole trader structure; or
- an incorporated or unincorporated body.
For companies, shareholdings, voting rights, directorships and the ability to control board decisions can be relevant. For partnerships, profit or capital entitlements can matter. Trusts require particular care because the terms of the trust deed, the trustee’s powers and beneficiary entitlements can all affect the outcome.
Discretionary trusts are a frequent source of surprises. In some jurisdictions, a person who may benefit under a discretionary trust can be treated as having a controlling interest for grouping purposes. That means a family trust should not be assessed only by looking at who received distributions in the most recent year.
Common employees and shared staff
A group can also arise where employees of one business perform duties for another business, or where employment arrangements are connected with services being provided to another entity.
This can occur in common commercial arrangements, including where:
- a management company employs administration staff used by operating businesses;
- a warehouse entity employs staff who work under the direction of another group business;
- one business employs a manager who performs duties across several entities;
- a professional practice uses a separate administration business; or
- staff are formally employed by one entity but regularly perform work in another business.
Not every outsourced service arrangement creates payroll tax grouping. The facts matter. A genuine independent supplier relationship may be different from an arrangement where one business’s employees are effectively working in, or under the direction of, another business.
Businesses should look beyond employment contracts. Timesheets, reporting lines, service agreements, job descriptions, invoicing practices and day-to-day management arrangements can all be relevant.
Tracing interests and overlapping groups
Payroll tax grouping can extend through indirect ownership interests. An entity may have a direct or indirect controlling interest in a corporation, and those interests may need to be traced through other entities.
Separate groups can also combine where they share a member or where members of an existing group together control another business. This is sometimes called subsuming or amalgamation of groups.
These rules mean a business cannot safely assess each entity in isolation. A structure chart that stops at the immediate shareholder or trustee may miss the relationships that matter.
Why grouping creates costly compliance problems
The most obvious consequence of grouping is that connected businesses cannot each claim a separate payroll tax threshold or deduction. However, the financial impact can go further than that.
A group may be required to take account of the wages paid by all relevant members, including wages paid in other Australian jurisdictions. This can change the amount of threshold or deduction available in the state or territory where a business employs staff.
For example, a business with employees in one state may believe its local wages fall below that state’s payroll tax threshold. If it is grouped with an interstate entity that also pays wages, the group’s overall position may be very different.
There can also be administrative consequences. Depending on the jurisdiction and the group’s circumstances, members may need to register, nominate a designated group employer, lodge returns in a particular way and notify the revenue authority when the group changes.
Importantly, payroll tax grouping is not a once-only exercise completed when a business is first registered. It needs to be reviewed when there is a change in ownership, directorships, trust beneficiaries, staffing arrangements, acquisitions, restructures or interstate expansion.
A business may have started as a simple sole trader operation, then added a company for a new venture, a family trust to hold investments and a service entity to employ staff. Each step may make commercial sense, but together they can create a payroll tax grouping issue.
Common mistakes business owners make
Payroll tax grouping mistakes are often caused by assumptions rather than deliberate non-compliance. The following issues regularly deserve attention.
Treating separate ABNs as separate payroll tax businesses
An ABN is important for many tax and commercial purposes, but it does not decide payroll tax grouping. Two entities with separate ABNs may still be grouped because of common ownership, control or employees.
Reviewing only companies and overlooking trusts
Business owners often identify company shareholdings but do not review trusts with the same level of care. This can be risky, particularly where a discretionary trust is part of a family business structure.
The trust deed, appointor role, trustee, beneficiaries, distribution history and practical control arrangements may all need to be considered.
Assuming different industries prevent grouping
A café, a property business, a consultancy and an online retail business may be commercially unrelated. That does not necessarily prevent grouping if the relevant control, ownership or employee-use tests are met.
The nature of the businesses can become important in an application for an exclusion, but it does not automatically stop a group from arising in the first place.
Overlooking shared employees
Shared reception staff, bookkeepers, operational managers and executive employees can create payroll tax risk where the arrangement is not documented or reviewed carefully.
This is especially common where a central administration entity employs staff for convenience, then charges management or service fees to operating entities. The payroll tax outcome depends on the full arrangement, not just the wording of the invoice.
Ignoring interstate operations
A business may have only a small number of employees in another state or territory, or use a related interstate entity for a particular function. That does not make the relationship irrelevant.
Interstate wages and group members can affect local payroll tax calculations. The reporting approach may also differ between jurisdictions, so a group arrangement that works in one state should not simply be copied into another.
Waiting until the annual reconciliation
Payroll tax issues are easier to manage when identified as they arise. Discovering a new group relationship during an annual reconciliation can leave limited time to correct registrations, update returns and assemble supporting documents.
A practical example of how grouping can develop
Consider a business owner who operates a growing allied health practice through a company. As the practice expands, a separate company is formed to employ administration staff and provide management services. The owner’s family trust later invests in a second practice, and a close family member becomes involved in managing both businesses.
Each entity has a different ABN, separate accounts and its own commercial purpose. However, the payroll tax review identifies several matters requiring closer analysis:
- there are overlapping ownership and control interests;
- administration employees work across more than one practice;
- the service company invoices the operating entities for staff and management support;
- the trust deed includes a broad class of potential beneficiaries; and
- wages are paid in more than one state.
The correct result will depend on the relevant jurisdiction and detailed facts. The important lesson is that the group question should be investigated before payroll tax returns are lodged, rather than after a revenue authority makes enquiries.
Can a business be excluded from a payroll tax group?
In some circumstances, a revenue authority may have discretion to exclude a business from a group. This is not automatic, and it should not be viewed as a simple solution for entities that share ownership or family connections.
The exact rules vary by jurisdiction. In New South Wales, Victoria and Queensland, revenue authority guidance makes clear that an exclusion is not available for businesses grouped solely because they are related corporations. For other forms of grouping, an exclusion may be considered where the business seeking exclusion is carried on independently of, and is not substantially connected with, the other group businesses.
An application generally needs strong evidence. Relevant material may include:
- organisational charts and ownership records;
- company constitutions and trust deeds;
- financial statements and tax records;
- service agreements and lease arrangements;
- details of loans, guarantees and common banking arrangements;
- evidence of separate management and decision-making;
- staff records and information about shared employees;
- customer and supplier records; and
- information about transactions between the entities.
Revenue authorities commonly consider the nature and degree of ownership and control, the nature of the businesses and other relevant matters. Shared management, financial dependence, common customers, trading between entities, shared premises or equipment, and family influence can all affect the outcome.
An exclusion application should be prepared carefully. A statement that businesses are “run separately” may not be enough if documents and day-to-day practices show substantial operational connections.
A sensible payroll tax grouping review process
A structured review can identify problems early and make annual compliance far more straightforward. It should be completed when the business is established and revisited whenever the group structure changes.
A practical process includes the following steps:
Map every relevant entity. Include companies, trusts, partnerships, sole traders, holding entities and service entities, even where they do not currently employ staff.
Identify owners and controllers. Review share registers, directorships, voting rights, partnership interests, trust deeds, appointors, trustees and beneficiaries.
Document staff arrangements. Record which entity employs each person, where they work, who directs them and whether their duties benefit another business.
Review service and funding arrangements. Consider management fees, staff recharges, loans, guarantees, shared premises, equipment and common systems.
Check all operating jurisdictions. Identify where each entity pays wages and confirm the relevant state or territory payroll tax obligations.
Assess threshold and reporting consequences. Once the group is identified, determine the appropriate registration, nominated group employer and return-lodgement approach for each jurisdiction.
Keep the analysis current. Update it after acquisitions, new entities, ownership changes, new trusts, staffing changes or expansion interstate.
This review should sit alongside, rather than replace, separate reviews of contractor payments, employment agency arrangements, fringe benefits and taxable wages. These areas can interact, but they involve different legal tests.
The key takeaway
Payroll tax grouping is not just a concern for large corporate groups. It can affect family businesses, professional practices, growing sole trader businesses, service entities and businesses that operate in more than one state or territory.
The safest approach is to review the full ownership, control and staffing picture before assuming each entity can be treated separately. Early advice can help identify registration, reporting and documentation requirements before they become a costly compliance issue.
This article is general information only and is not personal financial or tax advice. Payroll tax grouping depends on the legislation and facts in the relevant state or territory, so speak with a registered tax agent or accountant, such as, about your specific circumstances.