SMSF Alert – Related party transactions and payroll tax grouping

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Key points of this article

  • A recent Queensland Supreme Court decision means that self-managed superannuation funds (“SMSFs”) with related party dealings can potentially be grouped for payroll tax purposes. This has potentially significant consequences for anyone using SMSF as an asset protection strategy when assets are related to a business
  • If a SMSF is grouped with other business entities for payroll tax purposes, the SMSF becomes liable for the payroll tax debt of the other group members.  In the Mewcastle Case, the SMSF became liable for the $2.6 million payroll tax debt of its group members.
  • A SMSF is more at risk of being grouped for payroll tax if it engaged in related party dealings that are not on “arm’s length” terms, but there is no certainty that it won’t apply to dealings that are on arm’s length terms.
  • SMSF trustees and advisers need to consider the potential effects of this case; related party dealings are no longer only a concern for SMSF and tax compliance purposes, but also estate planning and asset protection.

Here is a detailed article written by Tom Wood, Associate Director on this very important case. Please contact Tom if you have any questions about this.


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.

Payroll Tax Grouping – A Brief Background

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:

  1. If persons or an entity (“the Employer”) is carrying on a business, they may be liable for payroll tax where the total wages paid by the Employer in a financial year are more than $1.1 million.
  1. There are anti-avoidance provisions in the PTA which aim to stop Employers from splitting either their business or employees across multiple entities in order to avoid or minimise their payroll tax liability. These are commonly referred to as ‘grouping provisions’, and are contained in sections 69 to 72, and 74A to 74G of the PTA.  These provisions focus on there being a common ‘controlling interest’.  Where entities are grouped, the group’s payroll tax amount is calculated based on the combined taxable wages paid by all group members.
  1. Under section 74 of the PTA, the Commissioner for State Revenue (“the Commissioner”) has the discretion to exclude an entity that would automatically be caught by the grouping provisions, if the Commissioner is satisfied that “the business carried on is independent of, and not connected with the carrying on of, a business carried on by any other member of the group”.

Other Australian states contain similar grouping provisions.

The case – Scott and Bird & others v Commissioner of State Revenue

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:

  1. The Fund and the custodian trust were jointly and severally liable for the payroll tax debt of the Mewcastle Group, in accordance with s 51A of the PTA.
  1. The Commissioner could look to take action against the Fund and the custodian trust for recovery of the payroll tax debt under the PTA and Tax Administration Act 2001.

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.

Application for Exclusion from the Group

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:

  1. The main case, applying for judicial review of the de-grouping application.
  1. A secondary case to set aside the garnishee notices which had been issued by the Commissioner against the Fund and the custodian trust, where the custodian trust intended to dispose of the property.

I have only focused on the case concerning de-grouping in this article.

Why was the de-grouping application unsuccessful?

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:

  1. The trustees of the Fund had control over all of the Mewcastle Group entities.
  1. The trustees of the Fund entered into lease arrangements with a number of Mewcastle Group entities, which were not arm’s length commercial transactions, as demonstrated by inconsistent rent amounts paid by the lessees, which in any event were in excess of market rent.
  1. The trustees had lent money to an associate of a Mewcastle Group member, and this loan was not at arm’s length or on commercial terms. The loan funds were applied by the associate to another Mewcastle Group member.
  1. The trustees of the Fund lent money to a number of Mewcastle Group members.

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.

Breach of SISA and the ITAA

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:

  1. The trustees of the Fund have breached the sole purpose test under section 62 of SISA.
  1. The trustees of the Fund have breached the non-arm’s length income provisions in section 295-550 the ITAA 1997.


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.

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