The Supreme Court of NSW (Court) recently handed down its decision in the matter of Loan Market Group Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 390, which examined whether amounts paid by a mortgage aggregator were liable for payroll tax on commissions paid to mortgage brokers under the Payroll Tax Act 2007 (NSW) (Act).
This decision may have significant and far-reaching consequences for financial service businesses, particularly mortgage aggregators who have been treating their authorised mortgage brokers as independent contractors for payroll tax.
Payroll tax is a state-based tax administered by the States and Territories. Although there are some differences between jurisdictions, as the legislation is relatively harmonised, we can expect to see other Revenue Authorities sitting up and taking notice of this recent decision (as we recently saw with the knock-on effects from the payroll tax position for medical practitioners).
Impact
This decision is particularly interesting to financial services businesses operated on a national basis and irrespective of whether they appoint credit representatives or authorised representatives, and could also extend to networks of general insurance brokers, stockbrokers, credit intermediaries and financial advisors who operate a dealer group model and have non-employed advisors (including where those services are offered using similar branding and/or trading names).
What happened?
- Loan Market Group Pty Ltd and Loan Market Pty Ltd (together, the Taxpayers) were issued Notices of Assessment by the Chief Commissioner of State Revenue (Commissioner), in relation to commissions paid by Loan Market Pty Ltd (LML) to mortgage brokers authorised under LML’s Australian Credit Licence (ACL) for the financial years ended 30 June 2012 to 30 June 2018 (Relevant Period).
- Over the Relevant Period, the Taxpayers had entered into broker agreements with individual brokers, under which the Taxpayers would assist the broker in setting up and running their mortgage broking business, in return for various fees to be paid by the broker.
- The broker agreements provided that the brokers were permitted to engage in credit activities by assisting clients in applying to lenders for loans on behalf of those clients.
- When the loans applied for were approved, lenders would pay a commission on the loans originated by the broker to a related company of the Taxpayers, eMOCA Pty Ltd (eMOCA). eMOCA would then pay the broker the commission, less any fees payable to the Taxpayers under the broker agreements (i.e. the balance of the commission, after deduction of the Taxpayers fees).
- The Commissioner assessed payroll tax to be payable under the Act, in relation to commissions paid to the brokers.
- The Taxpayers sought a review of the Payroll Tax Notices of Assessment primarily on the basis that, the Broker Agreements were not “relevant contracts” under the Act and the commissions paid to the brokers by eMOCA under the broker agreements were not “wages” under the Act.
What did the Court decide?
Central to the case was the interpretation of whether the broker agreements were a “relevant contract” under the Act. The definition of “relevant contract” is very broad and includes:
“…a contract under which a person (the designated person) during that financial year, in the course of a business carried on by the designated person:
- supplies to another person services for or in relation to the performance of work; or
- has supplied to the designated person the services of persons for or in relation to the performance of work; or
- gives out goods to natural persons for work to be performed by those persons in respect of those goods and for re-supply of the goods to the designated person or, where the designated person is a member of a group, to another member of that group.”
The Taxpayers argued that the broker agreements were not “relevant contracts” on the basis that the agreements fell within one of the “relevant contract” exemptions (Exemptions).
The Commissioner’s position was that none of the Exemptions applied to the broker agreements and therefore they were relevant contracts and the Taxpayers were subject to payroll tax on the commissions paid.
When determining whether the broker agreements were “relevant contracts”, the Court considered the services provided by the brokers to the Taxpayers under the agreements and the manner in which the business was conducted, including the provision of services by the brokers to the Taxpayers (as many of the brokers were acting on behalf of the Taxpayers’ credit representative).
After undertaking analysis of the services provided between the brokers and the Taxpayers and the terms of the broker agreements, the Court found that the broker agreements were relevant contracts and as none of the Exemptions would apply, amounts payable under the broker agreements would be subject to payroll tax.
What does the decision mean for Australian Financial Services Licensees (AFSL) or Credit Licensees?
If you are an Australian Financial Services Licence (AFSL), ACL holder or mortgage aggregator who authorises representatives on your behalf, this decision is of significant importance.
The relationship between an Aggregator and the mortgage brokers who provide services to the Aggregator and the Broker’s clients closely resembles the relationship that AFSLs have with their authorised representatives and ACLs have with their Credit Licensees and who in turn provide services to their clients relying on the resources of the dealer group.
Further, many authorised representatives and credit representatives are either sole traders or single employees of a corporate representative.
In addition to commissions paid to representatives, advice fees paid by clients of authorised representatives and credit representatives to their AFSLs and Credit Licensees respectively, closely parallel the broker agreements considered in the Court’s decision. This means “authorised representative agreements” or “credit representative agreements” between AFSLs and their authorised representatives and Credit Licensees and their credit representatives may be considered relevant contracts and therefore subject to payroll tax, unless an Exemption applies.
Arrangements which are structured to support an individual to obtain a more preferential tax treatment or to split income with the beneficiaries of a family trust, may be scrutinised more closely even where the parties expressly state that their relationship is as independent contractors.
What you need to do
It is too early to understand the full impact this decision will have on the financial services industry, however taking into account the turmoil caused for medical practitioners, the financial consequences are likely to be significant. We would recommend undertaking the following steps.
- Review your agreements
If you are an AFSL or Credit Licensee, it is important that you review the authorised representative agreements and credit representative agreements you currently have in place. If you are claiming the agreement is not a relevant contract as it falls within an Exemption, a record should be kept (including the Exemption which you are relying upon).
- Consider the payroll tax treatment for each arrangement
An agreement may state that the parties are “independent contractors” or the relationship may be a contractor arrangement for the purposes of PAYG or the superannuation guarantee legislation. Payroll tax may still be payable in circumstances where the parties are treated as a contractor for other taxes.
- Seek legal advice on your particular situation
The payroll tax legislation is complex and its application and procedures differ between States and Territories. Specialist legal advice should be sought if you are unsure how the relevant payroll tax legislation applies in your situation, or you have concerns about the outcome of this decision.
- Make a voluntary disclosure
Taxpayers have a positive obligation to accurately self-assess, register and lodge returns and pay any payroll tax. This includes an obligation to report an underpayment of payroll tax. Where Revenue Authorities suspect there may be an underpayment of payroll tax, they may commence a review or investigation of a taxpayers affairs and will generally go back up to 5 years when issuing reassessments.
If there has been an underpayment of payroll tax, we would strongly recommend considering making a voluntary disclosure to manage any penalty taxes or interest which may be applied to any shortfall. In most cases, where a voluntary disclosure is made prior to the commencement of a review or investigation, it is often possible for any penalty tax to be remitted in full.
For more information on the case, payroll taxes or whether your contractual arrangements may be “relevant contracts” under the payroll tax legislation in your state please contact Charmian Holmes, Damien Bourke, Catherine Nufer and Glenjon Aligiannis.
