Penalties and interest likely to continue, says tax lawyer
A tax litigation specialist is urging aggregators and the mortgage and finance industry to remain focused on resolving NSW payroll tax, and to ensure they are prepared.
Despite confirmation of a payroll tax stop action granted by Revenue NSW, Jack Aquilina, senior associate at national law firm Holding Redlich, said for audits already underway it should not be assumed that penalties and interest wouldn’t continue.
Aquilina (pictured above) also said that there was also no evidence to suggest a commitment from Revenue NSW had been made to leave past years behind and focus solely on the future.
The two peak industry bodies, the MFAA and FBAA, have continued to voice their concerns about the application of NSW payroll tax, saying it threatens the financial stability of the industry and would also reduce choice and competition for borrowers.
In March, Aquilina said that the commissioner of state revenue did not appear to understand the operational aspect of the aggregation sector, and that conversations were needed “across all levels of government”.
Following confirmation from the MFAA that Revenue NSW had confirmed no new action would be taken against aggregators, Aquilina told MPA that while this was good news, it did not automatically clear aggregators undergoing existing audits of any current or future liability.
“I’ve seen no evidence of a commitment by the commissioner for there to be a blanket relief of penalties and interest whilst the situation unfolds and ultimately either statutorily through Parliament or through the courts,” Aquilina said.
While dialogue between the commissioner and the industry was to be encouraged and congratulated, Aquilina said that ultimately, taxpayers should not be complacent. There were a number of audits currently being pursued by the commissioner with some significant aggregators, representing a large portion of the industry, he said.
“Those who have not had audits commenced must be very cautious not to be complacent and use the time and the opportunity they have now to prepare for a future audit,” Aquilina said.
Penalties and interest assumed to be ongoing
Under the Taxation Administration Act, the commissioner is able to impose penalties and interest, but there is equally broad discretion to remit penalties and interest, in which case submissions can be made, he said.
“The test for penalties applying is whether the taxpayer took reasonable care in preparing their tax return, and if reasonable care was taken in respect of this payroll tax issue, there should be no penalties,” Aquilina said.
Calculated as a percentage of the total tax payable, Aquilina confirmed that penalties could be as high as the primary tax liability. The penalty applies across the years in dispute, which he confirmed would be applied as a percentage to the total tax shortfall.
“In these cases, they’ve tended to reduce them [penalties] down to 20%, which is appropriate, but 20% of a large sum is still [significant],” Aquilina said.
Aggregators currently under audit (before the stop action was granted) were generally required to pay penalties on at least five years’ worth of assessments. For aggregators not yet audited, Aquilina said those years were at risk once the audit takes place, as well as any future years they decide to include.
He confirmed that penalties were generally part of the payroll tax bill, and that interest was accrued on the amount payable.
“There’s a market rate component (designed to compensate the taxpayers for not having had that money) and a penalty amount of interest that’s also applied, which can go upwards of 8%,” Aquilina said.
Early preparation advised
As penalties and interest were based on exercises of discretion, Aquilina re-emphasised the importance of aggregators preparing early, working out their position and strategically approaching the commissioner.
Approaches could be made proactively by making a voluntary disclosure (entitling the applicant to an automatic discount) or by being prepared to defend their position in a way that will limit exposure to unwarranted penalties and interest, he said.
“The best time to prepare for an audit is when there’s no audit on foot,” Aquilina said. “Once the clock starts ticking, you’re stuck in a situation where you need to engage the commissioner according to statutory deadlines and you can never get your house in order perfectly when an audit kicks off.”
If they had not already done so, Aquilina suggested that aggregators seek robust, honest and objective legal advice.
“Prepare early and based on that frank assessment, work out whether or not it might be strategically in their interest to make voluntary disclosures on aspects of their case now, or prepare for audit and be prepared to defend their positions in the same way that others in the industry are doing,” Aquilina said. “The benefits of doing that will always depend on the nature of the facts and the strength of their position.”
Aquilina suggested aggregators also be proactive internally, review their arrangements and work out competitive and/or commercial weaknesses in their structure, fee models and approaches to engaging brokers.
A silver lining of the payroll tax issue is the opportunity for the sector to find “new and innovative ways” to engage its broker base commercially and become more competitive, Aquilina said.
“As inconvenient as the tax issue is, I think this Is a great opportunity for the industry … working with your advisers and legal and non-legal at all levels – and internally with your own expertise to seize the moment – will be really important for the sector,” he said.
Government encouraged to continue consultation
Congratulating Chris Minns, who has now been sworn in as NSW Premier, Aquilina said he called upon and encouraged the state government to continue its consultation with the sector, and to further its understanding of how mortgage aggregation ultimately protects consumers.
“I call upon governments at every level to again work together to consider whether or not payroll tax should apply to this industry and what changes need to be made to ensure that the National Credit Consumer Protection Act provisions are enhanced not undermined, and that there’s a coordinated approach to the future of the regulation of this sector,” Aquilina said.
Acknowledging that aggregators were a “protector of standards” within the banking and finance sector, a national conversation would achieve sensible solutions, he said.
In a further update to MPA, MFAA CEO Anja Pannek (pictured immediately below) said that the March campaign in which brokers were invited to take action on the NSW payroll tax issue was “incredibly successful”.
Thousands of brokers, both in NSW and nationally joined the campaign and made their voices heard, writing to their local MPs and candidates in the lead up to the NSW election, she said.
“The ‘stop action’ from Revenue NSW, secured as a result of our campaign, gives the industry the opportunity to continue discussions with government and regulators so the law can be clarified and there is certainty for industry,” Pannek said.
“The way this tax was being applied, and the use of retrospective fines and penalties, is harmful to our industry, to our members, their businesses and to their clients' access to credit.”
