Tracing of interest and payroll tax grouping
A payroll tax grouping may exist when an entity has a controlling interest in a corporation. View an example of tracing of interest.
For payroll tax purposes, businesses can be grouped with other businesses if there is a link between the businesses. This can include non-employing businesses.
Grouping can occur regardless of where a business operates in New South Wales (NSW) or interstate.
When businesses are grouped only one member of the group can claim the tax-free annual threshold. Read the thresholds and rates page for more details.
What is tracing of interest?
Tracing of interest is a type of payroll tax grouping.
An “entity” and a corporation form part of a payroll tax group if the entity has a controlling interest in the corporation. See section 73 of the Payroll Tax Act 2007 (PTA).
An entity’s controlling interest in a corporation may be:
- direct
- indirect, or
- through aggregate interest.
See Division 3 Part 5 of the PTA.
In practical terms, the tracing provisions are engaged to group an entity with a corporation if that entity:
- has a direct interest in the corporation of less than 50%, and
- an indirect interest which together with the direct interest takes its interest in the corporation to more than 50% thereby forming a controlling interest in that corporation.
When an entity is grouped with corporations, and becomes the common member to those groups, all members (including the entity) are subsumed into one group. Section 73 of the PTA applies regardless of whether the corporation or entity is carrying on a business.
Beau has a direct interest of 80% in Cola Pty Ltd, and 50% in Soda Pty Ltd.
Since Cola owns 40% of Lemonade Pty Ltd, and Lemonade Pty Ltd owns 50% of Soda Pty Ltd, Beau also has an indirect interest in Soda Pty Ltd of 16%.
The indirect interest is calculated using the following formula:
Beau’s ownership of Cola Pty Ltd x Cola Pty Ltd’s ownership of Lemonade Pty Ltd x Lemonade Pty Ltd’s ownership of Soda Pty Ltd
80% x 40% x 50% = 16%
By adding Beau’s direct and indirect ownership in Soda Pty Ltd, Beau has an aggregate interest in Soda Pty Ltd of 66% (50% direct + 16% indirect).
Cola Pty Ltd and Soda Pty Ltd are grouped because Beau has an interest of greater than 50% in both businesses.
Lemonade Pty Ltd is not part of the group as the level of Beau’s interest is not more than 50% (80% x 40% = 32%).
Diagram 1
This diagram is a visual depiction of the relationships in the example.
Direct interest
An entity, as defined under section 73 of the PTA, has a direct interest in a corporation if the person or persons who are associated persons can directly or indirectly control the voting power attached to any voting shares issued by the corporation. See section 76 of the PTA.
Persons are associated persons if they are “related persons”
See section 73(4)(a) of the PTA).
Rabbit Pty Ltd is a trustee of Reindeer Trust.
Adam controls 40% of the voting rights in Alpaca Pty Ltd. He is also a beneficiary of Reindeer Trust.
Rabbit Pty Ltd controls 20% of the voting rights in Alpaca Pty Ltd.
Rabbit Pty Ltd and Adam form an “entity” as they are “associated persons” under the definition of “related person” in section 73(4)(d) of the PTA.
Therefore, Adam, Rabbit Pty Ltd and Alpaca Pty Ltd form part of a payroll tax group under section 73(1) of the PTA.
Diagram 2
This diagram is a visual depiction of the relationships in the example.
Alicia is a director of Denim Pty Ltd. She is also a beneficiary of Satin Trust.
Silk Pty Ltd is a trustee of Satin Trust.
Denim Pty Ltd controls 30% of the voting rights in Tweed Pty Ltd.
Silk Pty Ltd is trustee of Satin Trust and controls 25% of the voting rights in Tweed Pty Ltd.
Denim Pty Ltd and Silk Pty Ltd are “associated persons” under the definition of “related person” in section 73(4)(e) of the PTA.
The “Denim Pty Ltd and Silk Pty Ltd” entity has a controlling interest of 55% in Tweed Pty Ltd.
Therefore, Tweed Pty Ltd, Denim Pty Ltd and Silk Pty Ltd form part of a group under section 73(1) of the PTA.
Diagram 3
This diagram is a visual depiction of the relationships in the example.
Almond Pty Ltd is the trustee of Macadamia Trust, and Ali and Bryce are beneficiaries of the trust.
Walnut Pty Ltd is trustee of Pecan Trust, and Ali and Bryce are also beneficiaries of Pecan Trust.
Almond Pty Ltd as trustee of Macadamia Trust controls 25% of the voting rights in Peanut Pty Ltd.
Walnut Pty Ltd as trustee of Pecan Trust controls 30% of the voting rights in Peanut Pty Ltd.
Walnut Pty Ltd and Almond Pty Ltd are an “entity” under the definition of “associated person” in section 73(4)(d) of the PTA because they are trustees of trusts which have common beneficiaries, Ali and Bryce.
Therefore, Almond Pty Ltd, Walnut Pty Ltd and Peanut Pty Ltd form part of a group under section 73(1) of the PTA.
Diagram 4
This diagram is a visual depiction of the relationships in the example.
A private company and a trustee are associated persons if a related body corporate of the company is a beneficiary of the trust of which the trustee is a trustee
See section 73(4)(e) of the PTA.
Albatross Pty Ltd and Galah Pty Ltd are related bodies corporate under section 50 of the Corporations Act 2001.
Toucan Pty Ltd is a trustee of Turkey Trust.
Albatross Pty Ltd is a beneficiary of Turkey Trust.
Galah Pty Ltd owns 30% of Lark Pty Ltd.
Toucan Pty Ltd as trustee of Turkey Trust, owns 25% of Lark Pty Ltd.
Albatross Pty Ltd and Galah Pty Ltd form a group under section 70 of the PTA, and they are also “associated” under the definition of “related person” in section 73(4)(b) of the PTA.
Galah Pty Ltd and Toucan Pty Ltd are an “entity” under of the definition of “associated person” in section 73(4)(e) of the PTA.
The “Galah Pty Ltd and Toucan Pty Ltd” entity has a 55% controlling interest in Lark Pty Ltd.
Therefore, Galah Pty Ltd, Toucan Pty Ltd and Lark Pty Ltd form part of a group under section 73(1) of the PTA.
Galah Pty Ltd is a member of both groups. As a result, Albatross Pty Ltd, Galah Pty Ltd, Toucan Pty Ltd and Lark Pty Ltd are subsumed into 1 large payroll tax group under section 74(1) of the PTA.
Diagram 5
This diagram is a visual depiction of the relationships in the example.
Indirect interest
An “entity”, as defined under section 73 of the PTA, can be grouped with a corporation if:
- the entity has an indirect interest in another corporation, and
- the value of that indirect interest exceeds 50%.
As explained in the definitions above, an “entity” within section 73 of the PTA can be defined as a collection of more than one person or business, where specific scenarios exist. This is important as it impacts the tracing of indirect interests.
Indirect interest can be determined when an entity:
- has a direct interest in a corporation, and
- that corporation has ownership in another corporation or chain of corporations.
See section 77 of the PTA.
Earth Pty Ltd is the trustee of Astronomy Trust. Abigail and Bai are beneficiaries of the trust.
Neptune Pty Ltd is trustee of Pluto Trust. Abigail and Bai are beneficiaries of the trust.
The 2 trustee companies, Earth Pty Ltd and Neptune Pty Ltd, are an “entity” under the definition of “associated person” in section 73(4)(d) of the PTA. This is because they are trustees of trusts that have common beneficiaries, Abigail and Bai.
The “Earth Pty Ltd and Neptune Pty Ltd” entity has a direct controlling interest of 60% in Saturn Pty Ltd under section 73(2)(a) of the PTA.
Saturn Pty Ltd has a direct controlling interest of 90% in Jupiter Pty Ltd.
As a result, the entity “Earth Pty and Neptune Pty Ltd” has an indirect controlling interest of 54% (60% x 90%) in Jupiter Pty Ltd under section 73(2)(b) of the PTA.
Therefore, Saturn Pty Ltd, Jupiter Pty Ltd, Earth Pty Ltd and Neptune Pty Ltd form a group under section 74(1) of the PTA.
Diagram 6
This diagram is a visual depiction of the relationships in the example.
Aggregate interest
An entity, as defined under section 73 of the PTA, can be grouped with a corporation if:
- the entity has an aggregate interest in another corporation, and
- the value of that aggregate interest exceeds 50%.
An aggregate interest is determined by adding an entity’s direct and indirect interest in one or more corporations.
Amethyst Pty Ltd and Sapphire Pty Ltd are related corporations and grouped under section 70 of the PTA.
Amber Pty Ltd is a trustee of Emerald Trust.
Amethyst Pty Ltd is a beneficiary of Emerald Trust.
Sapphire Pty Ltd and Amber Pty Ltd are an “entity” under the definition of “associated person” in section 73(4)(e) of the PTA.
The “Sapphire Pty Ltd and Amber Pty Ltd” entity has a 60% controlling interest in Opal Pty Ltd under section 73(2)(a) of the PTA.
As a result, Sapphire Pty Ltd, Amber Pty Ltd and Opal Pty Ltd form a group under section 73(1) of the PTA.
Opal Pty Ltd has a 40% interest in Jade Pty Ltd.
The “Sapphire Pty Ltd and Amber Pty Ltd” entity has a 30% interest in Jade Pty Ltd under section 73(2)(a) of the PTA.
As a result, the “Sapphire Pty Ltd and Amber Pty Ltd” entity has an aggregate interest of 54% [30% direct interest + (60% x 40%) indirect interest = 54%] in Jade Pty Ltd under section 73(2)(c) of the PTA.
As Sapphire Pty Ltd is a member of all 3 groups, all the members including Amethyst Pty Ltd, Sapphire Pty Ltd, Amber Pty Ltd, Opal Pty Ltd and Jade Pty Ltd form part of a group under section 74(1) of the PTA.
Diagram 7
This diagram is a visual depiction of the relationships in the example.
Common errors with tracing of interest
Audits show that customers often make errors in their payroll tax returns because they are unaware of or misunderstand the tracing provisions in the PTA.
Some examples of customer errors include:
- Incorrectly calculating the traced interest, including direct, indirect and aggregate interests.
- Omitting indirect and aggregate interests when disclosing group members, without understanding that grouping can occur under tracing provisions when either direct, indirect, or aggregate interest exceeds 50%.
- Not knowing that an “entity” exists which impacts the grouping. Typically this occurs because an “entity” can be defined quite broadly for payroll tax purposes, and can apply to a range of business structures.
- Failing to understand that a grouping with an “entity” and corporation under the tracing provisions will affect:
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
Related information
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