Hi everyone, though Proowrx has highlighted many core topics of outsourcing, accounting, etc till now, in this blog, we will talk about the current payroll tax pain of mortgage brokers.
What you will find in this blog:
Key Highlights
- On April 12, 2024, the case Loan Market Group Pty Ltd v. Chief Commissioner of State Revenue [2024] NSWSC 390. According to Justice Richmond’s ruling, payroll taxes on commissions given to mortgage brokers must be paid by mortgage aggregators.
- The decision emphasises how the payroll tax laws have a broad application that goes beyond typical employee-employer and conventional contractor arrangements.
- Payroll tax may influence a business, thus any entity or individual paying money to another entity under a contractor, service agreement, or other similar arrangement should consider this.
The case, which has far-reaching implications for the entire broking industry as well as other payroll tax court cases, such as the Finsure case, focused on the fiscal years ending June 30, 2012, and June 30, 2018 (before the aggregation group implementing its Bring Your Brand model and acquiring Plan, Choice, and FAST).
In March 2023, the MFAA launched a campaign calling for a ‘ stop action’ on fresh audits until the law is clear. Following the campaign, Revenue NSW confirmed that no further payroll tax audits involving aggregators will be conducted.
During this period, several aggregators filed court lawsuits against Revenue NSW.
In this case, the Supreme Court of New South Wales decided that mortgage broker commissions are covered by applicable contractor sections of payroll tax legislation, based on agreements between Loan Market and its brokers.
The court further clarified the statute, particularly the exclusions available for customary arrangements employed in broking operations, such as offshore loan processing, to decrease the payroll tax burden.
Both parties have 28 days to decide whether they would appeal the ruling.
LML may feel harshly treated by the finding that the Broker Agreements have relevance under s. 32. The contractor provisions found in s. 32 were not meant to catch “bona fide independent contractors” when they were first introduced as an anti-avoidance measure.”
Although the judge stated that in certain cases, individual brokers would be required to pay payroll tax, there are several exclusions.
The court ruled that a “relevant contract” existed between the mortgage aggregator taxpayer and the mortgage brokers who provided loan origination services to loan applicants/borrowers while using the taxpayer’s aggregation services (unless special exclusions applied).
Mortgage brokers and aggregators face a new economic hurdle as a result of a significant court ruling on tax duties.
Mortgage Aggregators Foot the Bill for Mortgage Brokers’ Commissions
As per the ruling in the recent NSW Supreme Court case Loan Market Group Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 390 (Loan Market Group), mortgage brokers were considered employees for the applicable contractor provisions. Additionally, a mortgage aggregator was deemed by the Court to be an employer subject to payroll taxes on commissions given to mortgage brokers.
The Court determined that there was a pertinent contract. Payroll tax was applied to the commissions because “for or about the performance of work relating to a relevant contract.”
Expanding upon our earlier conversation, this section focuses on the scope of the word “services.”
By the term “service” court mean a comprehensive definition includes “an act of valuable activity,” “the action of assisting or doing work for someone,” and “an act of support.”
The judge explicitly remarked that the judgement may be perceived as severe given that the relevant contractor laws were originally enacted as anti-avoidance measures rather than to target “bona fide independent contractors”. However, legislators have cast a wide net in determining what constitutes a significant contract.
The next part of the blog will speak about the insights. Essential Facts Revealed on Mortgage Broker Payroll Tax
Certain Facts
Loan Market Group, like all mortgage broking businesses and aggregator relationships, entered into an arrangement with individual mortgage brokers.
Using the technologies supplied by Loan Market Group, the brokers would apply for loans from different lenders. If the loans were approved by the lenders, the brokers would be eligible for commission. The commission was given to a business that Loan Market Group owned.
Following the lender’s payment of the commission, Loan Market Group’s affiliated business paid the broker the commission amount.
Because this structure is somewhat typical when working with mortgage brokers and aggregators, the choice that is made below will have a significant effect on the mortgage business.
Let’s discuss the decision and its impact.
Decision
According to Justice Richmond, Loan Market Group’s operations consisted of signing and carrying out different “broker agreements.” In other words, the company cannot and was not described as merely offering the brokers’ services.
The broker agreements were deemed to be a “relevant contract.” This is due to a pertinent contract’s requirement that a designated individual have rendered services for or in connection with the completion of work.
Loan Market Group received a set of commitments from the mortgage brokers regarding how each mortgage broker would run their business. Loan Group Market’s primary commitment was to adhere to the policies, branding, and process. As a result, there was a corresponding contract in place and these services fell under its requirements.
The payroll tax was then applied to the commissions received under the broker agreements, which were deemed taxable salaries as soon as they were deemed to be relevant contracts.
However because there was no presumed employer-employee connection, it was decided that trailing commissions after the broker arrangement was ended are not taxable pay.
Fortunately, Justice Richmond determined that, even though the data entry assistant was only paid $100 per week, there was at least one incident where many people completed the same task that was essential to the work-related services provided by a mortgage broker. When mortgage brokers use third parties to complete tasks that are essential to their job, this might help to offer a little respite.
Loan Market Group had contractual relationships with its brokers; as a result, commissions paid out were subject to payroll tax, while commissions paid out after a broker’s resignation were not.
Impact
Numerous mortgage brokers are suffering from payroll taxes; a recent ruling by the Supreme Court has confirmed that mortgage aggregators are subject to payroll tax regulations.
Mortgage Brokers that pay employees through a contractor, service agreement, or other such structure ought to evaluate their contracts and take payroll tax into account.
As the revenue offices work to expand payroll tax into new areas, there will probably be a plethora of more payroll tax cases in various regions. It may help to mitigate future pain that your agreements may create if you review and modify a structure and take action early on.
Learning & Key Exemptions
Many other areas whose services are delivered to independent contractors and through intermediaries will be subject to the extensive applicable contractor regulations.
Payroll tax implications of payments made to independent contractors under a services agreement should be carefully studied by entities.
Whether they are incorporated or not, individual operators are subject to payroll tax unless they can prove an exemption.
- Where a business (for example an aggregator) is making payments to another business (for example a broking business) that has two or more people performing the work required under the contract between those two entities.
The work that both people are performing must not ‘de minimis’. De minimis means that the work undertaken by both people must be of a certain threshold.
- The judgement in the Loan Market case has clarified and broadened Revenue NSW’s interpretation of the exemptions, to include common arrangements used in broking businesses,
a. Offshore loan processing
b. Engagement of contractors, including family members, to help with administrative tasks in a broking business.
Proowrx can offer competent personnel for handling offshore loans and may also be able to assist individual brokers.
We’ll keep our members updated on any developments regarding payroll taxes, and should the need arise, we’ll launch a campaign to protect our sector’s future and guarantee that Australians can continue to get the vital advice and assistance our members offer.
Mortgage Broking Industry’s Response
Mortgage broking groups have vigorously opposed the decision.
They feel it must be made clear that this ruling only relates to the specific instance concerning the Loan Market. It might also affect new players in the broking industry and set the stage for other states to try to extort comparable sums of money.
The head of the FBAA is now pleading with the NSW government to step in.
However, they used a strong hand in this instance, and it’s hard to see this as anything other than a chance to leverage the loan market to generate additional money.
Payroll Tax FAQs
Who is exempt from the payroll tax?
Whether they are incorporated or not, individual operators are subject to payroll tax unless they can prove an exemption.
Businesses that have determined for themselves that they must pay payroll tax are eligible for several exemptions. This covers situations in which a company (like an aggregator) pays money to another company (like a brokerage firm) that employs two or more persons to carry out the tasks stipulated in the agreement between those two companies.
Note: Complex payroll taxes may be challenging! Are you unclear about any exclusions for off-roll employees who oversee your company? Proowrx can assist! We make sure you are taking advantage of all available exemptions. Let us handle the details so you can concentrate on managing your company
Who pays the tax?
It’s conceivable that you will pay the tax, depending on how your aggregator is affected and decides to handle any additional taxes. You cannot pass the tax down since lenders pay you; your clients do not.
Is there an impact for me if my business is in another state?
We are afraid that if Revenue NSW successfully implements payroll tax in NSW, other states will want to do the same.
Except for Western Australia, all jurisdictions have unified payroll tax legislation.
Which brokers will be impacted?
While there may not be a direct impact on salaried brokers, this levy on the sector will lead many small brokerage firms to fail. This implies fewer broker enterprises in NSW, which will result in fewer future job chances.
Revenue NSW is imposing this tax responsibility on aggregator firms; the tax will be paid on the commissions generated by brokers for commercial activities, decreasing their total commission payouts. The tax will likely be passed on to others in some form.