What’s emerging? Payroll tax: New law to deter non-compliance and avoidance in NSW

What’s emerging? Payroll tax: New law to deter non-compliance and avoidance in NSW

27 May 2022

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New law in New South Wales (State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022) brings important changes to several NSW-based tax obligations, including Payroll Tax, effective from 19 May 2022. In brief, and of relevance to Payroll Tax, the new law will:

1. Double the rate of NSW-based penalty tax payable for employers that are Significant Global Entities (SGEs);

2. Permit Revenue NSW to disclose tax information to an investigative or law enforcement agency (both State/Territory and Commonwealth) for the purpose of investigations, law enforcement and tax clearance checks;

3. Introduce tax avoidance provisions where a scheme has the sole or dominant purpose of enabling a NSW tax liability to be avoided (or deferred); and

4. Provide for heavy penalties to be imposed on a person that ‘promotes’ a NSW tax avoidance scheme;

These rules should prompt employers to consider their approach to their Payroll Tax compliance framework - not only to ensure existing governance measures are appropriate, but to also ensure those governance measures adequately address organisational compliance processes that are connected to information gathered by Revenue NSW, throughout their investigations. 

Furthermore, it is clear that any person or organisation that advises employers should review and understand these new amendments in detail, especially given the introduction of promoter penalties and the range of circumstances which could be affected by those provisions. Further detail is set out below. 

Increased penalty rate for SGEs

The NSW Taxation Administration Act 1996 (TAA) provides for the imposition of penalties for organisations under certain circumstances. The base rate of penalty in NSW where a tax default arises is 25% of the tax shortfall - this base rate may be increased or decreased under certain circumstances. 

Under the new law, the base rate of penalty applicable to a tax default is now doubled for SGEs. We note the following, which is critical to understanding the impact of this change:

1. An SGE is defined according to the income tax law and is broadly an entity or member of an accounting consolidated group with consolidated annual global income of AUD 1 billion or more, or that would be included in a consolidated accounting group with annual global income of AUD 1 billion or more if certain assumptions were made. This test should be familiar to some organisations already, given its relevance to certain laws administered by the Australian Taxation Office (including for example, income tax, fringe benefits tax and superannuation guarantee);
   
2. The penalty applicable to SGEs for NSW Payroll Tax purposes will be based on the amount of the tax default;
   
3. The meaning of tax default includes any underpayment (in whole or part) of a tax liability, whether intentional or unintentional. Of course, the circumstances giving rise to the underpayment may affect the extent of adjustment (by way of increase or decrease) of the base penalty. 

In understanding the various rates of penalty that may apply, the Chief Commissioner has previously set out in Revenue Ruling PTA 036v3 (the Ruling) his interpretation and policy on the rates of penalty to be imposed under previous law and the extent of any remission of those penalties, under particular circumstances. We understand this Ruling is expected to be updated to reflect the Amendments, including the increase of the base penalty rate from 25% to 50% of the amount of the tax shortfall, for SGEs. 

Disclosure of tax information to investigative and law enforcement agencies

Revenue NSW will now be permitted to disclose tax information it has obtained under, or in relation to, the administration of a taxation law (such as Payroll Tax), to an investigative or law enforcement agency (both State/Territory and Commonwealth) for the purpose of investigations, law enforcement and tax clearance checks. 

Both the extent of stakeholders with which information may be shared and the nature of the information that may be shared, are very broad. More specifically: 

• Investigative or law enforcement agencies with which tax information may be shared include a government agency or government official, of a State, a Territory or the Commonwealth, that has investigative, complaint handling or law enforcement functions.

• Information collated by Revenue NSW throughout the course of a Payroll Tax investigation is often broad, ranging from data/information relating to payroll and other employee remuneration, vendors and suppliers (including contractors), and group structures and restructures.

Employers should by now be familiar with, and cognisant of, the increase in data sharing between government agencies. The amendments continue this trend, allowing for other agencies to leverage the rich data set accessible to Revenue NSW to improve the efficiency of these agencies’ operationally (i.e. by increasing access to relevant information), whilst simultaneously providing greater insight into instances of taxpayer non-compliance. This, in turn, further escalates the need for organisations to focus on good governance. 

Avoidance provisions

Two key avoidance measures also now apply. These are broadly adapted from Federal taxation laws and cover:

1. An avoidance provision which allows for ‘tax avoidance schemes’ to, in effect, be ‘disregarded’ for the purpose of determining a taxpayer’s liability; and
2. Penalties for persons that promote a tax avoidance scheme, by marketing the scheme, or otherwise encouraging the growth of the scheme or interest in it. 

Tax avoidance schemes

A ‘tax avoidance scheme’ is a scheme that a person, whether alone or with others, enters into, makes or carries out for the sole or dominant purpose of enabling a tax liability to be avoided. A reduction in tax, or a deferral in the payment of tax, can constitute tax avoidance. In determining whether such a scheme exists, the law establishes a range of criteria, including, but not limited to, the form and substance of the arrangement, the purpose of the law, and the expected outcomes of the scheme. The avoided tax liability will be taken to have arisen at the time that it would have, but for the presence of the tax avoidance scheme, meaning that both interest and penalties can apply. 

It should be noted that the Payroll Tax Act 2007 (PTA), prior to the new law changes, already contained existing provisions which provided the Chief Commissioner power to disregard an arrangement which is considered to have the effect of reducing, or avoiding, Payroll Tax. Importantly, this existing provision does not include a ‘sole or dominant purpose’ test, and as such, has the potential to be applied to a very broad range of circumstances.

In addition, specific to the employer to which the ‘avoided’ tax liability relates, while the new measures provide for the ‘tax avoidance scheme’ to be disregarded, it is relevant that a higher rate of penalty is generally applied where circumstances are concluded as being the result of an intentional disregard of the law. 

Nonetheless, the changes highlight a desire to enhance compliance with NSW State obligations such as Payroll Tax, and to strengthen the breadth of measures designed to deter non-compliance.

Promoter penalties

New rules will operate to penalise a person that ‘promotes’ ‘tax avoidance schemes’. Having leveraged an existing penalty regime that currently applies to tax avoidance schemes under Federal taxation laws, NSW has formalised its ability to penalise persons beyond the taxpayer whose tax liability is affected by the tax avoidance scheme. 

A person will be taken to be a ‘promoter’ if the person markets the scheme or otherwise encourages the growth of the scheme or interest in it. However, providing advice in respect of the scheme, or distributing information prepared by another person, may not in itself result in a person being a ‘promoter’. Examples of persons that should familiarise themselves with these rules include:

• advisers in relation to advice provided to their clients

• a group member that holds responsibility for the day-to-day Payroll Tax compliance of another group member, in relation to recommended tax positions it makes

• an industry body or association in relation to advice it promoted to its members. 

Persons found to have promoted a tax avoidance scheme can face civil penalties of up to 50,450 penalty units (up to $5,549,500) for a corporation, or 10,090 penalty units (up to $1,109,900) for an individual. The Chief Commissioner may also seek an injunction against the ‘promoter’, or seek/accept a voluntary undertaking from the ‘promoter’, so as to avoid a civil penalty. 

When do the rules take effect?

The changes take effect from 19 May 2022, subject to transitional rules. This includes a transitional measure which prevents the avoidance provisions referenced above from applying to an arrangement where the tax avoided, but for the tax avoidance scheme, would have arisen before 19 May 2022. 

Will other States and Territories follow?

It is unclear whether other States and Territories will follow. However, we understand that a report on the effectiveness of the new measures must be tabled in NSW Parliament, after the two-year anniversary of the amending legislation. The appetite of other States and Territories to adopt similar rules may depend on the outcome of this report. 

If you have any questions about your Payroll Tax obligations, please reach out to your PwC Employment Tax specialist.