The NSW Productivity Commission (the Commission) has presented its conclusions from its review of the administration of payroll tax (PRT)—Review of Payroll Tax Administration (the Review). The NSW Government has, basically, accepted all of the Commission’s recommendations in its Government Response (the Response).
The outcomes of the Review are summarised below in the order dealt with by the Commission. While most of these are relevant to our readers in so far as PRT applies in the not-for-profit sector, we would like to highlight outcomes 4 to 7 and (to a lesser extent) outcomes 1 and 3. Outcome 13 is also portent of future direction of the administration of PRT.
Review outcomes and recommendations
1: A shift in administrative focus from audit to education
The Review recommends that Revenue NSW should place more emphasis on education rather than audit. The existing audit practice is to review the current year and the four previous years. You can expect promotion of the need for registration, particularly to employers that are approaching the registration threshold (Note: The current threshold is $850,000 for 2018-19 but will progressively increase over the next few years). Employer knowledge (and compliance) will be enhanced through annual or bi-annual interaction with revenue officers; the aim is to assist employers who seek to comply rather than to punish such employers for non-compliance through audit.
The Response agreed with the Commission’s view.
2: Common accounting software should ‘flag’ imminent PRT obligations
It has been recommended that the NSW Government, in consultation with other jurisdictions, should explore prospects to incorporate alerts in accounting software used by businesses in order to make employers aware of the need to consider PRT. Challenges to achieving this object include the complexity of different (and changing) threshold and rate regimes across jurisdictions and the commercial disincentive of a relatively small market (compared to various Commonwealth taxes) for software development.
In responding, the Government concurred with the recommendation.
3: Discounting penalties as an incentive to comply
The Commission found that in cases of failure to register for PRT, Revenue NSW rarely exercised its power to remit penalties on the ground of reduced culpability. In order to encourage employers to act on the envisaged greater degree of educational communication from Revenue NSW, the Review recommends that the Commissioner should have a discretion to halve the penalties for failure to register for PRT where a business registers for the first time and lodges a PRT return within three months of Revenue NSW communicating the employer’s potential obligations. In other words, employers need to actively listen to the education recommended in outcome 1.
The Response accepted the recommendation and foreshadowed legislative implementation.
4: Simplifying the PRT return lodgement and payment process
The Commission concluded that:
- the current legislative obligation to calculate monthly PRT instalments based on actual wages was burdensome for small and medium-sized businesses; and
- the threshold (currently $12,000) below which annual lodgements apply was too low.
The Commission recommended that employers should be classified based on the particular employer’s previous year’s PRT liability uplifted by 3% (Uplifted Amount).
- Employers with an Uplifted Amount which does not exceed $20,000 (Tier 1 Employer) would be able to choose to report and pay PRT annually. The Commission proposed that the Commissioner could require a Tier 1 Employer to report and pay monthly where there was evidence of previous non-compliance with PRT obligations.
- Employers with an Uplifted Amount of more than $20,000 and not exceeding $150,000 (Tier 2 Employer) would be able to choose to make and report monthly instalments of PRT (calculated as a proportion of the Uplifted Amount, rather than calculated on actual wages paid during the relevant month) and provide an annual reconciliation.
- Employers with an Uplifted Amount of more than $150,000 (Tier 3 Employer) would need to make and report monthly instalments calculated on the relevant month’s actual wages and provide an annual reconciliation.
The Commission proposes that the tiered approach outlined above will apply from the 2020-21 tax year onwards.
It is not entirely clear how the Uplifted Amount will apply to businesses which do not have a PRT liability in the previous year (say, year 1). Note that the test is concerned with the PRT liability for the previous year increased by 3% rather than considering previous year’s wages increased by 3%. Arguably, a Tier 1 Employer could include an employer who did not have any PRT liability in year 1 and whose wages exceed the relevant annual liability threshold for a year (i.e. year 2). This appears to be the case even though the excess is such that the employer would have actual wages for that year which will lead to the employer being a Tier 2 Employer (or even a Tier 3 Employer) in the next year (i.e. year 3). The scenario envisages rapid growth through business acquisitions/business amalgamations. (On an alternative view, which we surmise is incorrect, if there is not any Uplifted Amount, the precondition to choose to be treated as a Tier 1 Employer does not exist and, in default, the employer is a Tier 3 Employer.)
The NSW Government has agreed with the need to reduce compliance and foreshadowed legislative action. However, the Response did not specifically advert to the implementation timing. The NSW Government expects Revenue NSW to modify its systems and educate employers on changes.
5: NSW practice of separate payment reference numbers for each month to be reviewed
The Commission recommended (and the NSW Government agreed) that Revenue NSW should further investigate allocating each employer a single payment reference number for use in making all monthly payments to reduce administrative complexity. Other jurisdictions already adopt this approach.
The Commission noted that Revenue NSW had system difficulties in allocating a single payment reference number that would apply for all monthly payments rather than each monthly payment being allocated a unique number.
6: Grouping and Contractor provisions should be clarified
The Commission recommended Revenue NSW consult with other revenue offices in relation to ‘relevant contract provisions’ to develop legislation which more clearly deals with the modern business practice of outsourcing work to independent contractors and reduces the administrative evidentiary burden currently placed on businesses using contractors. Pending legislative change being agreed across the jurisdictions, the Commission recommended that Revenue NSW issued more detailed administrative guidance in relation to operation of the ‘relevant contract’ provisions.
The recommendation envisaged considering modernising the definition of a relevant contract. In particular, the current legislative approach of ‘catching’ all contractors with exclusion for exceptions is problematic (such as the shortcomings in relation to part-time/seasonal employees). Perhaps not surprisingly given the administrative focus of the Review, the criticism presented to the Commission was framed as lack of clarity in producing the intended outcome of the legislation, rather than bringing about a change in outcome.
In a case study on financial planning considered by the Commissioner, a financial planner provides services to a customer and governing legislation required the fees to be paid to the financial services licensee. The licensee, who does not provide any service to the customer, distributes the fee to the contractor less an amount retained for services provided to the contractor. The proponent of the case study contended there was not a relevant contract and noted the lack of clarity in relation to the status of the financial planner extended to other industries such as real estate agency and mortgage broking. The Commission recognised the broader movement to use of independent contractors in other areas (including transport, postal, warehousing, administrative and support services, and retail trade) and the associated need for legislative clarity in relation to the PRT treatment of such contractors.
The Commission also recommended clarification of, and reduction of administrative burden in applying, the PRT grouping provisions. In a move likely to be particularly welcomed by the for-profit sector, the Commission favoured removal of ambiguity in the mechanism by which discretionary trusts are grouped on the basis of shared beneficiaries. We interpolate that, given the ardency of general revenue office views, this may verge on reform rather than clarification. The further action of removal of ambiguity in provisions for grouping of entities through sharing employees will be welcomed more widely.
The NSW Government agreed that Revenue NSW should consult with other revenue offices and provide a recommendation for legislative amendments which the NSW Government could refer to the Board of Treasurers, with a view to harmonised changes being enacted across all jurisdictions. In the interim, the NSW Government agreed that Revenue NSW should provide practical case examples on grouping and contractor arrangements showing both instances of where the existing legislation applied, and where it did not apply, on a sector by sector basis.
7: Extended deadline for submission of annual PRT reconciliation
The Commission recommended (and the NSW Government accepted) that lodgement of the annual PRT reconciliation (and the timetable for associated payment) should be extended from 21 July to 28 July. It was also recommended (and accepted) that Revenue NSW should engage with the other PRT jurisdictions to enable the NSW Government to refer an extended deadline to the Board of Treasurers so that a legislatively harmonised extended deadline exists.
8: Improvements to the auditing process
The Commission recommended (and the NSW Government agreed) that Revenue NSW should:
- more clearly inform the taxpayer of the rationale for the audit (in particular, identify the legislative provision which triggered the audit); and
- request evidence (only) related to the identified trigger and explain the manner in which provision of that information will assist the taxpayer’s case.
It was also recommended (and agreed) that the education/training envisaged by outcome 1 should include information on action to avoid instigation of an audit through being a best practice compliant business and, in the event that an audit is commenced, what the taxpayer can expect.
9: Simplifying de-grouping requests
The Commission recommended (and the NSW Government agreed) that Revenue NSW should investigate streamlining the information requirements for Revenue NSW to consider a request for an entity to be excluded from a PRT group. The investigation will include the prospect of using a SmartForm, which is currently utilised in some jurisdictions. More broadly, it was proposed that Revenue NSW should consult with other jurisdictions in simplifying the de-grouping information requirements. The NSW Government intends to refer harmonisation opportunities to the Board of Treasurers.
10: Use of cross-jurisdictional forms
The Commission recommended (and the NSW Government agreed) that Revenue NSW would work with other jurisdictions to explore creation of standardised monthly and annual reconciliation PRT returns to reduce the administrative burden on business. The Commission noted that the forms could contain standardised information requirements, supplemented by a section at the end of the form which collects any state/territory-specific information.
11: Timing of rate and threshold changes
The Commission recommended (and the NSW Government agreed ‘in principle’) that, in the absence of exceptional circumstances, any changes to the NSW PRT threshold and rates should take effect from the beginning of a financial year to avoid increasing administrative burden. This would avoid the need for employers to account for PRT at different rates in different parts of the year and avoid complicating the reconciliation process. We observe that the practical effect of this approach may be that tax reductions are deferred, as it is difficult to anticipate these would be made retrospective to the beginning of a financial year and create complexity.
12: Aligning the definitions for PRT and for other State Government purposes (such as worker injury insurance)
The Commission recommended (and the NSW Government agreed) that an appropriate independent body should investigate better aligning the different definitions of ‘employee’ and ‘contractor’ in various items of NSW legislation. The NSW Government noted that work on the definition of ‘contractor’ should occur in conjunction with the work on ‘relevant contracts’ outlined in outcome 6.
It was also proposed (and agreed) that, in the longer term, Revenue NSW should consult with revenue authorities of other states/territories in relation to the PRT definitions generally (and, in particular, definitions of employee and contractor) being further aligned across jurisdictions. The NSW Government intends to refer harmonisation opportunities to the Board of Treasurers.
13: Alignment of PRT with Single Touch Payroll
The Commission noted that all state/territory revenue offices have been in discussion with the ATO regarding utilising employee remuneration data collected by the ATO through the Single Touch Payroll (‘STP’) system. The Commission’s report identifies advantages and shortcomings of STP for collection of PRT (especially pre-population of monthly or annual reconciliation PRT returns). It notes that integration of PRT and STP is a medium-term goal (i.e. 5-10 years).
The Commission suggested that further consideration of a strategy to utilise STP in connection with PRT collection be revisited in 12 to 18 months (i.e. late 2019/mid-2020). This would allow the STP system more time to become firmly established. In the interim, existing forums for communication between state/territory and Commonwealth jurisdictions could explore overcoming obstacles that have been identified.
The Response does not address this topic, presumably because the Commission did not make a formal recommendation.
We note that STP provides a detailed, although limited (e.g. non-contractor) insight into the nature of employer’s businesses. One might anticipate it will be a catalyst for audit activity.
14: A role for the NSW Ombudsman in reviewing PRT administrative decisions?
The Law Society of New South Wales questioned the impartiality of internal reviews of PRT decisions by Revenue NSW. The Commission considered the issue was outside the scope of its review.
However, the Commission canvassed the prospect of seeking the Ombudsman’s assistance under the existing legislative regime, noting that Revenue NSW publicised the option for external review by the Ombudsman on Revenue NSW website. It also suggested the NSW Government ‘could consider investigating whether there are any opportunities to expand the remit of the Ombudsman to handle a broad range of complaints relating to payroll tax administration’, while observing that the Ombudsman has not published any specific guidance on the Ombudsman’s role in connection with PRT. It noted the Ombudsman’s role would not extend to technical challenges such as might be pursued through the objection/appeal process.