Payroll tax push fails to recognise different aggregator models

Revenue NSW hampered by 'poorly drafted' legislation, says tax lawyer

Payroll tax push fails to recognise different aggregator models

A tax litigation specialist is voicing his concerns about broker aggregation businesses being held accountable for NSW payroll tax, saying the original provisions don’t contemplate current arrangements.

Jack Aquilina (pictured above), senior associate at national commercial law firm Holding Redlich, said the commissioner of State Revenue Scott Johnston (who heads up Revenue NSW) misunderstood how the aggregation sector operated. Federal legislation never contemplated this type of outcome, and conversations are needed across all levels of government around its intended application, he said.

Aggregators and the two peak industry bodies, the MFAA and FBAA, have been vocal in their concerns about the application of the tax. The MFAA is seeking a written commitment to a moratorium on the application of payroll tax to the mortgage and finance broking industry.

As the law remains unclear, MFAA CEO Anja Pannek told MPA that the MFAA was asking for “all activities against the mortgage and finance broking sector to be paused until the law can be clarified”.

A campaign launched by the MFAA earlier this month has resulted in over 1,180 brokers taking action using the DoGooder platform. The MFAA confirmed that broker support had increased steadily, and that its members and brokers had been reaching out directly to local MPs.

Drawing from his experience in payroll tax matters, Aquilina told MPA the commissioner of state revenue’s argument about whether aggregators were liable to be charged payroll tax misinterpreted the true legal and commercial nature of the aggregator sector.

“We think it puts the aggregation sector at risk in ways the Federal Parliament never intended when enacting the National Consumer Credit Protection Act,” Aquilina said.

Acknowledging he had to be fair to the system, Aquilina, who specialises in tax disputes and litigation practice and is representing an aggregation business on the issue, said while there were legitimate criticisms of the commissioner’s position, it was unfair to say that his actions were unlawful.

“The commissioner has the benefit of very poorly drafted and very broad relevant contractor provisions,” Aquilina said.

Whilst intended to only capture employer and employee-like relationships, Aquilina said that when legislation was drafted very broadly, the courts would apply the legislation itself. This means that sometimes arrangements that fall outside that intent “are and have been captured”, he said.

“We’re seeing that in other contexts with [certain] medical centre arrangements, where GPs and medical centres are being charged payroll tax for their relationships with supercentres, and we’ve seen a moratorium placed in Queensland on those types of arrangements,” Aquilina said.

Lack of distinction between aggregator models

Commenting on whether aggregators operating a franchise model were more exposed than those operating a wholesale model, Aquilina said while wholesale aggregators operated “completely at arm’s length” of brokers and banks, the commissioner did not appear to appreciate or understand the distinction between the two models.

Aquilina acknowledged that wholesale aggregators provided a facilitation arrangement for the payment of commissions from the banks to brokers. He noted that banks did not want to deal with thousands of brokers independently or individually, and that the role of the aggregator was therefore to “facilitate that commercial flow of money”.

In the “overwhelming majority of instances”, Aquilina also said that for most wholesale aggregators he was aware of, 100% of the commission was passed on and commissions weren’t clipped on the way through.  Like any service provider, the customer (or in this case, the broker) pays for the services upfront, usually the flat fee model approach, which is becoming the industry standard, he said.

Aquilina said in his view, the wholesale model was clearly an example of a “one directional flow of services” – from the aggregator to the broker to their customer.

“The commissioner says that because of the nature of the relationship, when commissions are paid in that way and because of the National Consumer Credit Protection Act (NCCP) provisions (particularly section 64), that the relationship between the broker and the aggregator is such that the broker is actually providing services to the aggregator, and the aggregator’s passing on of the lender’s commissions is payment for services,” Aquilina said.

“We struggle to see how that bears true in terms of reference to the general understanding of what aggregators do at the wholesale level, and the relevant agreements which specifically provide that they are not agents.”

Furthermore, Aquilina said that the explanatory memorandum to the NCCP provisions specifically stated that the provisions were not intended to create any agency relationship between a mortgage intermediary and a mortgage broker.

“A mortgage broker can only ever be agent for one person or transaction and that’s their customer which is the borrower, which makes complete sense to me,” Aquilina said.

Reference to payroll tax as a ‘retrospective tax’ incorrect

Aquilina said that various media reports describing NSW payroll tax as a “retrospective tax” reflected misconceptions about how the tax system operated.

Industry leaders have previously told MPA that in some cases, NSW Payroll tax assessments on aggregators are backdated up to eight years (plus penalties and interest), although in its written response, Revenue NSW said the review period was generally limited to the last five years.

Referring to the tax system as a “self-assessment system”, Aquilina said people were obligated to report their tax situation to the commissioner of state revenue in NSW each year.  Unless something comes to the commissioner’s attention to change that position, reports are taken on face value.

“In a self-assessment system, it is necessary to have amendment periods, otherwise people could misrepresent their tax affairs and there would be no way in which the commissioner could fix those errors,” Aquilina said.

He said the commissioner had come to a view on how these relevant contract provisions applied to aggregator arrangements and was seeking to “apply that consistent approach” across previous years in which he had the authority to do so.

“That is five years, unless there is reason for him to believe there was not full and frank disclosure of all the material facts in the earlier years,” Aquilina said.

While he understood that the commissioner had limited himself to five years over a number of cases, Aquilina said he was aware of some situations where assessments included up to six or seven years.

Provisions likely to apply Australia-wide

More widely, Aquilina said there were two main misconceptions about the application of NSW payroll tax.

Firstly, with the exception of Western Australia, this is an Australia-wide issue: payroll tax provisions are likely to be uniform across all seaboard states, he said.

Secondly, unlike commercial disputes, where there is a more class-based approach, every tax case has its individual facts, Aquilina said.  This means that decisions and outcomes may not necessarily be the same for each aggregation business.

“The law doesn’t apply in a mathematical way: every case turns on its individual facts and that’s why is very important that the industry protect their individual positions, get individual advice and start preparing now,” Aquilina said.

The way forward

From a policy perspective, Aquilina suggested the state government carefully consider whether it would like payroll tax to apply to aggregator arrangements in a way that might undermine (intentionally or unintentionally) the financial services industry.

It was clear that the federal legislation never contemplated this type of outcome, and there is clearly a disconnect between the two, he said.

Rather than being looked at through the revenue focus of collecting tax, Aquilina acknowledged that there were bigger issues at stake, requiring conversation across all levels of government.

“In my view, if it were in any way to harm or hinder the operations of aggregators, which ultimately hurt brokers, not only would we be destroying small businesses, but we would be watering down a system that ultimately is designed to protect consumers, Aquilina said.

Pending legislative change and/or the courts coming to a favourable view, Aquilina suggested that aggregators get frank advice on their arrangements from tax litigation experts to help them respond to Revenue NSW’s position and protect their interests.

“Aggregators need to prepare now to do what they can to alter or update their arrangements to protect themselves from payroll tax risk into the future,” Aquilina said.

MFAA CEO Anja Pannek said the MFAA had met with the NSW government, NSW Treasury, the shadow treasurer and Revenue NSW, and it would continue to engage with all parties.

“We believe all of these stakeholders now understand the criticality of this issue for the mortgage and finance broking industry and why we are calling for moratorium,”  Pannek said.