Pay-roll Tax Case Study – the receding exemption?

by | Jun 22, 2015

An organisation contacts you to discuss its Pay-roll Tax (‘PRT’) status.

The organisation is a not-for-profit and has objects that qualify it as a charitable institution.

Activities undertaken by the organisation are consistent with the objects save for the conduct of a commercial enterprise the profits of which are applied in pursuit of the charitable objects.

A quick check with the ACNC website and the ABR confirms the organisation is appropriately registered as a charitable institution and is endorsed as income tax exempt.

Question: On that basis are we safe to assume all wages paid by it will be exempt from PRT?

Answer: Depends.

Yes, the answer is depends. By that we mean it depends on:

  • which State/Territory (‘State’) PRT law applies;
  • the mix of wages paid by the organisation; and
  • when the wages are paid as the ground in this area is shifting and the historical scope of exemption is receding. This answer this year may not be the answer next year!

Below we highlight some of the issues that arise with the obvious conclusion being that the matter requires some specific attention under the relevant State law and nothing should be taken for granted:

The taxing State law?

Each State PRT law contains an exemption that prima facie exempts wages paid by a non-profit organization having a sole or dominant charitable purpose. (see for example section 48 of the NSW and Victorian PRT law).

However, each State’s law may differ as to whether all wages paid by the organization are exempt.

See for example section 48(3) of the Victorian law which provides that wages are exempt if paid or payable to a person engaged exclusively in work of charitable nature for the non-profit organization.

So how does this impact a person in the fund raising arm?

Conceptually the fund raising arm is likely to be argued as incidental to the purposes of the charity and as such no basis exists to “split” wages between the charitable activities and other activities.

This outcome seems at odds with the intended effect of section 48(3).

Victorian Revenue Ruling PTX 2/12 gives us an insight into how it attempts to deal with the situation.

Whilst accepting that fund raising arms may be incidental and part of the charitable purposes (termed ‘directly related commercial activities’) it takes the position wages paid to persons engaged exclusively in ‘unrelated commercial activities’ are not within the exemption. It describes these type of activities as “…intrinsically non-charitable…regardless of whether the proceeds from those activities are applied to further the charitable purpose…”.

Where an individual employee’s wages relate to work that is both charitable and to the unrelated commercial activities the Ruling provides all of the wages will be treated as exempt where “…the duties and responsibilities of that person are directed towards the charitable work”.

Whilst the NSW OSR Ruling PT 009 dealing with similar issue proposes an outcome the same as Victoria, interestingly the NSW law was not changed as a result of the Word Investment decision.

The mix of wages

Where an organisation’s total wages exceed a State PRT threshold but there is a mix of taxable and exempt wages how does the PRT law apply in that State?

It can be expected that the exempt wages will be disregarded (for example see section 10(2) of the NSW and Victorian PRT law) such that only where the taxable wages exceed the State PRT threshold will a PRT liability arise.

Care should be taken to confirm the actual position in each State.

This situation is also complicated where the organisation pays wages that are potentially subject to PRT in more than one State and where the organization may be a member of a PRT group. In a group scenario whilst the organisation’s taxable wages may not be above the PRT threshold on a single entity basis, group taxable wages may exceed the threshold.

The receding exemption

The Word Investment case has changed the game in this area and specific consideration is required in each State/ Territory as to exactly what the law provides and how this ties up to what the organisation’s employees do and hence whether the exemption applies.

The Victorian PRT was amended to protect the PRT base following the Word Investment decision with changes to the section 48(3) wording and Revenue Ruling PTX 2/12 setting out the position post 1 July 2012.

The WA State Revenue Department gave us another glimpse into the future as to how State Government’s might manage who can access PRT tax exemptions.

In a decision by the WA State Administrative Tribunal, the WA State Revenue Department lost an argument that the Chamber of Commerce and Industry of Western Australia was not a charity. It was therefore eligible for State tax concessions, most notably pay-roll tax exemption.

Whilst unhappy with the decision, the State Revenue Department was seemingly left with nowhere to turn given centuries of case law protecting within the concept of a ‘’charity’, a not-for-profit organisations that exist for “…other purposes beneficial to the community”. This group of NFPs are referred to as 4th limb charities.

This rather loose concept of a 4th limb charity is not one that sat well with the WA State Revenue Department. The WA Government reacted with the introduction of legislation that gives it the opportunity to restrict eligibility to State tax concessions to organisations that may qualify as a 4th limb charity.

The Northern Territory Budget includes reforms similar to WA intended to become effective in NT on 1 July 2015.

Like WA, the NT are moving to target specific types of 4th limb charities when it comes to determining whether they can access NT PRT exemption.

The NT Government has used the new approach to target 4th limb charities established and carried on as “professional associations” or “for the promotion of trade, industry or commerce”.

More significantly the proposed legislative change also seeks to deny PRT exemption for wages paid by employees of non-profit charitable organisations where the employees are engaged in an activity defined as a “commercial or competitive activity”. This concept extends to “an activity carried on in competition with a business carried on by another person”.

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