It is well understood that breach of the Superannuation Industry (Supervision) Act 1993 (“SISA”) or either Income Tax Assessment Act 1936 or 1997 (together “ITAA”) can have significant consequences for SMSF trustees and advisers, and result in penalties against the SMSF or trustees and director. However, in a recent Queensland case a SMSF that had engaged in a number of related party dealings was ‘grouped’ for payroll tax purposes, even though the SMSF did not itself employ persons or carry on business activities. This meant the Fund was jointly and severally liable for the payroll tax debts of its group members.
All states in Australia have a form of payroll tax. Payroll tax is covered by state legislation, and is levied against business entities operating within that state, based on a business’ total employee wages.
In Queensland, the applicable legislation is the Payroll Tax Act 1971 (“the PTA”). A summary of how it operates is as follows:
Other Australian states contain similar grouping provisions.
Steven Scott and Cheryl Bird were the trustees for the Mewcastle Superannuation Fund (“the Fund”), which is an SMSF operated under SISA. The Fund owned a commercial property through a custodian trust under a limited recourse borrowing arrangement, which it leased to a number of its related business entities (“the Mewcastle Group”).
Importantly, the Rent that was charged by the Fund to the Mewcastle Group members on this property varied, and appeared to be significantly above the market rent.
On 16 April 2015, the Commissioner advised the trustees of the Fund and the trustees of the custodian trust, as well as other members of the Mewcastle Group, that they were considered ‘grouped’ for the purposes of the PTA. The effect of this was:
Around the same time, the Commissioner issued assessment notices to two of the members of the Mewcastle Group for tax liabilities exceeding $2.6 million.
The Commissioner subsequently issued garnishee notices in relation to property proposed to be sold by the custodian trust.
The Fund and the custodian trust applied to the Commissioner to be excluded from the Mewcastle Group for payroll tax purposes.
The Commissioner subsequently refused to exclude the Fund and custodian trust from the Mewcastle Group. Two separate cases were then initiated by the trustees of the Fund and the trustee of the custodian trust, being:
I have only focused on the case concerning de-grouping in this article.
The Supreme Court upheld the Commissioner’s decision that the Fund should be included in the Mewcastle Group. The primary reason for this decision was that the business carried on by the Fund was not considered to be independent of the other Mewcastle Group entities’ businesses because:
Based on the facts of this case, the Supreme Court supported the Commissioner’s view that the grouping of the Fund was consistent with the legislative purpose of the PTA. This was notwithstanding that the Fund was an SMSF and, as argued (unsuccessfully) by the trustees of the Fund, carried on for the purpose of providing retirement benefits to members.
The Supreme Court also upheld the Commissioner’s decision that the custodian trust should be included in the Mewcastle Group under the PTA. The primary reason for this decision was that the custodian trust was not carried on independently of the business carried on by the Fund, which (as discussed above) was considered to be a member of the Mewcastle Group.
The case did not consider whether there were breaches of SISA and the ITAA. However, based on the inconsistent rent and uncommercial loans, there is a possibility that:
This case contains a number of facts that supported grouping of the Fund with the Mewcastle Group under the PTA. Unfortunately, it is not clear whether the Fund and custodian trust would have been grouped under the PTA had all transactions between the Fund and the Mewcastle Group members been on arm’s length and commercial terms. There is a possibility that even if the Fund had engaged in all transactions on arm’s length and commercial terms, it may still have been grouped under the PTA given the number of dealings between the Fund and the Mewcastle Group members.
In the absence of any further clear direction, trustees and advisers should always be mindful to the primary purposes for which SMSF transactions are being entered into, and consider not only SISA and ITAA compliance, but also whether the transaction or the combined effect of a number of transactions places the SMSF at risk of being grouped under any other tax legislation. This could have drastic consequences for estate planning and asset protection purposes, where traditionally SMSFs have been considered a safe haven.
If you have any questions regarding payroll tax or SMSFs, please don’t hesitate to contact me.