A taxing issue: Brokers v payroll tax

Is a single operator broker an employee of an aggregator? Ask that question to anyone in industry and the answer would be a resounding no. But Revenue NSW – the tax collection office for Australia’s most populous state – has a different opinion.

For the past few years, Revenue NSW has been seeking to retrospectively apply a payroll tax on commissions paid to mortgage and finance brokers.

While payroll tax is self-assessed, the body has argued that aggregators should have been paying payroll tax for years. And it has come knocking.

The Adviser understands that the Revenue NSW office is seeking backdated payroll tax from several aggregators from up to eight years ago, amounting to tens of millions of dollars.

The issue does not seem limited to any particular pass-through model.

While there are seven exemptions (including if two or more people perform the work required under the contract in the financial year and each worker performs work that is not de minimis), the commissioner of state revenue has taken the position that aggregators are liable to retrospectively pay single operator brokers.

In effect, this would therefore result in taxes being levied on “the smallest of small businesses” (i.e. sole traders) and would see aggregation groups that have a high proportion of single operator brokers facing high payroll tax bills.

What is Revenue NSW’s argument?

According to Revenue NSW, businesses are required to register for payroll tax when their total Australian wages are above the NSW payroll tax threshold.

The payroll tax rate for the financial year 2022–23 was 5.45 per cent of taxable wages above the threshold of $1.2 million, for example.

Where it is estimated a customer will be liable for more than $20,000 for the financial year, they are required to pay monthly. For customers with an expected liability of less than $20,000 for the financial year, they can pay annually.

According to Revenue NSW, an AFS licensee or an AC licensee (including an aggregator) that is supplied with services and also supplies services under a contract with an agent is therefore taken to be an employer.

As such, the licensee may be liable for payroll tax.

It has provided several examples of how the payroll tax might apply to mortgage broker aggregators, including the following:

ABC Ltd is a licensee and engages Joe as an AR (authorised representative) for the 2018–19 financial year. Joe worked exclusively as an AR for ABC Ltd during FY18–19 and none of the exemptions under the relevant contracts provisions applied for FY18–19.

ABC Ltd pays upfront commissions to Joe during 2018–19 and also pays trail commissions in subsequent years on the anniversary of the contracts arranged by Joe in accordance with the terms of the contracts.

ABC must include the upfront commissions in its annual payroll tax return for 2018–19 and it must include the trail commission in its annual returns for the 2019–20 and subsequent financial years.

Aggregators head to court

According to the industry, the tax is not only irrelevant to broking, but has no legal basis and could destroy the entire industry. Indeed, finding tens of millions of dollars to pay the bill would be a hard ask for any company – let alone those that already have small margins.

Aggregators have been challenging Revenue NSW’s reading, flagging that brokers are customers, not employees, of the groups. Indeed, they highlight that lenders are actually the ones that pay commissions to aggregators, which in turn pay those commissions (minus their cut for their services) to brokers.

Major aggregation and brokerage group Loan Market Group was one of the first aggregators to be contacted by Revenue NSW for backdated payroll tax and took the office to court last year (the case was still awaiting judgment at the time of writing).

Loan Market executive chairman Sam White told The Adviser last year: “This is an aggregation challenge and we want to fight for brokers and aggregators in this space because what it tries to do is, effectively, take money out of the system and pay the government.

“But in some cases, payroll tax is more than what aggregators charge their brokers. So it’s a significant impost. And we fundamentally disagree with how it’s been interpreted.”

Finsure Group has also now confirmed it is taking court action against Revenue NSW regarding its position on payroll tax application.

Finsure said it was defending the assessments in the Supreme Court to “stand up” for single broker operators who would otherwise bear the brunt of the costs of the tax.

Finsure chief executive Simon Bednar said in January: “If Revenue NSW is successful, payroll tax would be applicable to all aggregators on commissions paid to brokerages with less than two brokers. This could be the tip of the iceberg and have ramifications across the mortgage broking industry nationwide.

“This payroll tax money grab impacts all mortgage aggregators in the market, not just Finsure.”

Mr Bednar said Finsure was confident the group could stop the payroll tax impost.

“Our opinion is that Finsure will be successful,” he said.

“If this tax is successful, then the last thing Finsure or any other aggregator wants to do is pass on the costs of the tax to brokers.

“But we don’t anticipate this will occur as we are of the opinion this payroll tax move is unlikely to succeed.”

What do the associations think?

Both the Finance Brokers Association of Australasia (FBAA) and the Mortgage & Finance Association of Australia (MFAA) have told The Adviser that they are working to engage with Revenue NSW and the state government on the matter.

FBAA managing director Peter White said: “We’ve been engaging with aggregators on this matter for several years; this is not new; it’s been a problem for a while that is being dealt with in legal forums.

“We are looking at assisting at the moment … because we are very much against where the [revenue office] is landing on this. We don’t believe it’s appropriate, we don’t believe it fits within the legislation as to how payroll tax is meant to be applied.

“Brokers are not employees…

“This, to me, feels very much like a state revenue grab; more taxes more income.”

However, he added that “brokers and anyone need to be careful with what they say publicly on this as it could prejudice the case/s at hand, and that would not be helpful to anyone or the industry”.

“The broader industry needs to leave the matter between those involved in court action and the association’s relationship management with the politicians and regulators. The wrong step or wrong comment could lead to an adverse path or outcome, and we don’t want that,” he said.

Mr White advised FBAA members to reach out to him via email if they wanted to make a statement to politicians or regulators, flagging that he was in “regular contact with the State Government”.

MFAA CEO Anja Pannek has also said the association does not agree with the interpretation and approach taken by Revenue NSW in its application of the Payroll Tax Act to the industry.

“Our main concern on this issue is the approach is effectively an additional and inappropriately levied tax on the smallest of small businesses in our industry,” she said.

“The way Revenue NSW has been seeking to apply payroll tax fails to recognise a broker is running their own business – they are not an employee of their aggregator, and also neglects the fact that commissions are not a broker’s salary, rather it is business income.

“This tax threatens the viability of broking businesses and the industry – and will likely lead to less access to credit, choice and competition for consumers and business owners.”

Ms Pannek flagged that the association had met with Revenue NSW and both sides of government last year “to explain the consequences if payroll tax is applied to broker arrangements” and highlighted that the “lack of clarity at law would lead to years of litigation and associated costs for NSW taxpayers and we are now seeing this play out with this new court action”.

“Our advocacy campaign last year, which thousands of brokers participated in, got the attention of government and Revenue NSW, and successfully secured a stop-action on any new audits until the outcome of a legal case being heard at that time was known,” Ms Pannek continued,

“In 2024 payroll tax remains a key focus for the MFAA. We’re continuing to advocate for a common sense approach that reflects how the industry operates.

“The MFAA is ready to defend the industry if the outcome of the two legal cases before the courts is unfavourable.

“Broker participation in our campaign will once again be crucial and we’ll be making it easy for our members to contact their local MP and add their voice.”

[Related: Revenue NSW responds to aggregator payroll tax alarm]

Written by Annie Kane

Last Updated: 07 February 2024

Published: 09 February 2024