The payroll tax grouping rules are complex and many business owners are unaware of the rules’ existence or their obligations under these rules.

Accordingly, you may easily assume that payroll tax grouping does not apply to your businesses. However, on review of these rules it is evident that businesses which appear not to be related, can easily be deemed to be related and grouped for payroll tax purposes.

What is Payroll Tax?

Payroll tax is a state- or territory-based tax payable by employers as a percentage of total wages paid to employees. However, payroll tax only becomes payable by an employer when the total of all its employees’ wages exceeds a general deduction threshold.

In Victoria, the deduction threshold for 2016/2017 is $575,000 per year or $47,916 per month.

What is Grouping?

Part 5 of the Payroll Tax Act 2007 (Vic) (Payroll Act) seeks to aggregate multiple entities for the purpose of determining their payroll tax liability. Where entities are grouped, the threshold deduction applies to the group as a whole and all entities in the group are jointly and severally liable for any outstanding payroll tax.

Since 2012, all the States and Territories have enacted harmonised payroll tax legislation, which means that although they each continue to have different general deduction thresholds, they have similar aligned provisions within their individual acts.

When will Businesses be Grouped?

Businesses will be grouped for payroll tax purposes if the grouping definitions are met and none of the exemptions are applicable.

A group can be formed under the Payroll Act in the following circumstances:

  • if the entities are Related Bodies Corporate;
  • if the entities use common employees;
  • where there is common control of the entities; or
  • where a tracing of interests is established.

Related Body Corporates

Under section 70 of the Payroll Act, entities that are related bodies corporate within the meaning of section 50 of the Corporations Act 2001 (Cth) constitute a group.

This can include instances where a corporation has a direct holding/subsidiary relationship, including where a corporation:

  • holds more than 50% of the issued share capital of that other corporation;
  • has a controlling interest over the composition of the board of directors of that other corporation; or
  • can cast, or control the casting of, more than 50% of the votes which can be cast at a general meeting of that other corporation,

and also where there is an indirect relationship, including a corporation with a:

  • common holding company; or
  • common ultimate holding company.

Use of Common Employees

Section 71 of the Payroll Act sets out the circumstances in which use of common employees can result in an employer being be grouped with the person(s) carrying on another business or other businesses. The grouping of two entities under this provision applies in the following circumstances:

  • if an employee performs duties for both their employer and another party, the two parties may be considered a group;
  • if an employee of one party mainly or solely performs duties for the business of another party as part of their employment, the two parties may be considered a group; or
  • if an employee of one party fulfils their employer’s obligation to provide services to the business of another party under an arrangement (formal or informal), the two parties may be considered a group.

One far-reaching implication of these provisions is that two parties with no common ownership or control, and with no practical similarity between their businesses, could be grouped under this provision.

Fortunately case law has provided some guidance on the matter. The Supreme Court considered the application of these grouping provisions in Commissioner of State Revenue v Liquid Rock Constructions Pty Ltd [2012] VSC 329. The court held that for these provisions to be effective, the other party or parties in the above scenarios must have some practical ability to direct the employee’s performance of their duties or obligations.

Common Control

Entities may be grouped on the basis of ‘common control’ where a person, or set of persons together, have a controlling interest (i.e. more than 50%) in two or more businesses. In such circumstances, it is the entities/persons conducting the businesses that are grouped, and not the persons who have the controlling interest in the businesses.

Examples of where a person or sets of persons have a controlling interest are set out in section 72 of the Payroll Act and include:

  • Company: where one or more shareholders have more than 50% of the voting power of the Company, or one or more directors with more than 50% of voting power at directors’ meetings.
  • Trust: where a person or sets of persons are beneficiaries of more than 50% of the value of the interests in the trust (under a discretionary trust, all beneficiaries are deemed to have a controlling interest).
  • Partnership: where a person or set of persons are entitled to more than 50% profits or capital of the partnership.

Traces of Interest

Tracing establishes control in a ‘chain of businesses’. A relevant entity will control a corporation if it controls more than 50% of the voting shares held either directly, indirectly or through an aggregation of direct and indirect interests.

  • Direct interest – this exists where an entity can (directly or indirectly) exercise, control or influence the voting power attached to voting shares in another corporation, where the level of the interest is expressed as the percentage of the corporation’s voting shares that the entity controls or influences.

  • Indirect interest – this exists where an entity has a direct interest in a corporation (as above) which is linked to another corporation, in which the entity has the indirect interest. This can occur if the entity is part of a chain of corporations where each link in the chain has a direct interest in the next corporation in the chain. The value of the entity’s indirect interest is determined by multiplying the value of the entity’s direct interest in the first corporation by the value of each subsequent direct interest in the chain.

Further provisions and exceptions also apply to how entities are grouped and how payroll tax is determined.


Pursuant to section 74 of the Payroll Act, where two or more groups exist, and at least one member of each group is common to each, the members of the groups are amalgamated and treated as one large group.

Geographical Application

The grouping provisions apply to entities regardless of where those entities are located. This is particularly relevant to Australian subsidiaries of an overseas parent company. The grouping provisions could apply to group these entities even if the Australian subsidiaries are unaware of each other’s existence.

Therefore it is important that an entity with an overseas parent company contact this parent company to determine if there are other subsidiaries operating in Australia.


Pursuant to section 79 of the Payroll Act the Chief Commissioner may determine that two or more entities (who would ordinarily be grouped) be excluded from a particular group. However, this exclusion from grouping is not available to companies grouped under the provisions for Related Body Corporates.

While a number of conditions will need to be met in order for the exclusion to be granted, pursuant to section 79(2) of the Payroll Act an exclusion determination can only be made when the Chief Commissioner is satisfied that the business is being carried on independently of, and is not connected with the carrying on of, the businesses of other members of that group.

When deciding whether or not to exercise his discretion, the Chief Commissioner is to have regard to:

  • the nature and degree of ownership and control of the businesses;
  • the nature of the businesses; and
  • any other matters the Chief Commissioner considers relevant.

When determining whether two or more businesses are significantly independent and not connected the Chief Commissioner will commonly consider the following practical considerations:

  • commercial transactions between the businesses, including whether they are conducted on arms length terms, and the level of trade between the two entities;
  • sharing of resources between the group members, including premises, staff, management and accounting services, and whether there are fees associated with the provision of such resources;
  • common management of the businesses, including where the control of managerial decisions and day to day administration lies and if the decisions of the entities are intertwined;
  • common financial arrangements between the businesses, including whether they have intra-group loans and common banking facilities, and whether the terms attached to such agreements are arm’s length;
  • common customers and suppliers of the businesses, including whether one of the businesses add value to goods or services provided by the other business;
  • connection between the nature of the business or the members of the group; and
  • connection between the ultimate business owners, including whether they are the same people or related.

Note that the above is not an exhaustive list.

By way of example

Consider the following situation in Victoria…

  • Company A has four employees with total remuneration per year of $500,000;
  • Company B has three employees with total remuneration per year of $430,000; and
  • Company C has only one employee with total remuneration per year of $150,000.

Individually each of these companies would fall below the general deduction threshold and payroll tax would not be applicable.

However, what if:

  • Scenario 1: Company C holds a 70% shareholding in Company A;
  • Scenario 2: Company A and Company B share a common shareholder who holds 75% in each of the Companies;
  • Scenario 3: an employee of Company C performs duties (as part of his/her employment with Company C) solely for Company B, or
  • Scenario 4: Company A holds a direct interest in Company B of 25% and Company C of 40%, Company B holds a direct interest in Company C of 50%.

In all of the above scenarios the grouping provisions would apply, such that each of the grouped company’s yearly total remuneration would be added together. This would result in the companies exceeding the general deduction threshold and being liable for payroll tax.


  • Scenario 1: Company C and Company A would be grouped as they would be considered related body corporates (total remuneration of $650,000).
  • Scenario 2: Company A and Company B would be grouped as they share a shareholder with a common controlling interest (total remuneration of $930,000).
  • Scenario 3: Company C and Company B may be grouped by virtue of ‘use of a common employee’ (total remuneration of $580,000).
  • Scenario 4: Company A and Company B would be grouped by virtue of traces of interest as Company A has a direct interest in Company B (40%) and an indirect interest through Company C in Company B (50% x 25% = 12.5%), which together exceeds a 50% interest in Company B (total remuneration of $930,000) .

Take away points…

Generally, there will be a significant difference between what a business will pay in payroll tax as a single company and what it will pay as part of a group. Therefore, it is important to always be aware of your total employee wages expenditure, business structure, relationships with other persons/entities and corresponding payroll tax liability.

If it appears that your businesses would be grouped for payroll tax purposes, assess whether there is a potential for the businesses to be eligible for exclusion from the rules.

Conduct regular reviews of your business structure as continuous changes in business conditions could affect your payroll tax obligations.

And of course always ensure that you obtain professional advice where necessary.