As an employer in the real estate industry, you must meet your payroll tax obligations.
Here are some common errors made by real estate businesses when lodging their payroll tax returns.
Any payments to contractors are liable for payroll tax. Exemptions may apply if the contract meets one of the seven exemptions.
Businesses can be grouped for payroll tax purposes because they have a common controlling interest (more than 50 per cent) via directorship, shareholdings or beneficiaries. Grouping can also apply if businesses are related corporations (parent companies/subsidiaries) or use common employees. A group can only claim one payroll tax threshold.
Use the correct FBT formula when calculating fringe benefits that are liable for payroll tax. Use the amounts from the FBT return you lodged with the ATO during the financial year.
Allowances paid to employees are liable for payroll tax. However, overnight accommodation and motor vehicle allowances are not taxable unless the amounts paid exceed the exempt component.
There are specific rules that apply to motor vehicle allowances for real estate sales agents.
For more information read Revenue Ruling PTA 025.
Real estate businesses often make mistakes with conjunction arrangements and these mistakes can have significant payroll tax consequences.
A conjunction arrangement is when real estate agents share commissions on the sale of a property. The arrangement is common and widely accepted within the industry. We distinguish between two broad types of conjunction arrangements:
An external conjunction arrangement involves agents from independent and unrelated real estate businesses working together to sell a property. The vendor of the property usually enters into an agency agreement and pays commission to one agent. The listing agent enters into a separate sub-agency or conjunction agreement with another agent. The agreement covers the transfer of rights to sell the property and how commissions are split.
A key characteristic of an external conjunction arrangement is that it involves a business-to-business or commercial relationship. There’s no ongoing or regular relationship between the parties. Once the property is sold, the agents split the commission and the conjunction arrangement ends.
Agency A Pty Ltd entered into an exclusive agency agreement with a property vendor for the sale of their property. The property was on the market for a long time without much interest, so the vendor instructed the agent to reduce the price.|
Soon after, the agent was contacted by an agent from Agency B Pty Ltd with an offer to market the property. The terms of the arrangement were agreed on and a written sub-agency agreement for the property was drawn up.
A buyer was found by Agency B and following price negotiations the vendor agreed to the sale. A deposit was paid and held by Agency A in its trust account. At settlement, each real estate business received their share of the sales commission, and the arrangement ended.
An internal conjunction arrangement is between a real estate business and an agent who routinely works for that business. There’s often a formal contract between the business and the agent that sets out the terms of an ongoing arrangement. The main objective of the arrangement is for the real estate business to use the services of a licensed real estate agent.
In agency agreements with vendors, both the real estate business and the agent are usually listed together as ‘Agent’. All statutory requirements, including the handling of trust money, are managed by the real estate business. The real estate business pays commission to the agent at a pre-determined rate.
In an internal conjunction arrangement there’s often little or no distinction between the business and the agent, with the agent usually working or representing themselves under the brand name of the real estate business. Both the business and agent are highly dependent when it comes to their core income-producing activities.
The Best Agency Pty Ltd is a real estate sales and property management business. The business made an offer to an existing sales agent to work for them as an internal conjunction agent.
A formal contract was drawn up, which set out the terms of the new arrangement. Under the new contract, the commission paid for each property sale increased by 10 per cent. The agent was required to set-up a company and get a corporate real estate licence. All commissions from that point forward were paid to the agent’s company directly from the Best Agency trust account.
The agent continued to be represented under the brand name and work exclusively for the Best Agency. In turn, the agency managed all statutory requirements and covered all costs associated with running the real estate business.
Generally, there are no payroll tax consequences for the commission paid under an external conjunction arrangement. However, there can be significant payroll tax consequences if an internal conjunction arrangement is treated incorrectly.
Most real estate businesses exempt commissions under internal conjunction arrangements using the seven contractor exemptions. However, our audits find most internal conjunction arrangements do not meet the required criteria. In these cases, the commissions paid to the agent should be declared as taxable in your payroll tax returns.
There are four contractor exemptions real estate businesses commonly claim for the commissions paid to agents under internal conjunction arrangements. Our current practice is to accept an exemption where all the required criteria are met:
This exemption would not apply to an internal conjunction arrangement. Selling property on behalf of vendors is essential for real estate businesses to continue operations. The services provided by a real estate sales agent would therefore be ordinarily required throughout the year. For more detailed information read Revenue Ruling PTA 020 and Commissioner’s Practice Note CPN 007.
This exemption can only be claimed if the real estate business can show that a sales agent worked for no more than 90 days in a year. Any type of work performed by an agent counts as a day worked. This could include taking a call from a prospective buyer, attending a property inspection or meeting with a vendor to sign an agency agreement.
Most real estate businesses do not actively monitor or keep records of the hours/days worked by agents engaged under internal conjunction arrangements. In this case, this exemption would not be available to the hiring real estate business.
This exemption can only be claimed if the sales agent sells property on behalf of vendors for more than one real estate business during the year. The real estate businesses would need to be independent and unrelated for the exemption to apply.
It’s common industry practice for sales agents to work predominately or exclusively for one real estate business. In this case, the exemption would not be available to the hiring real estate business.
This exemption can only be claimed if there were two or more workers who performed real estate services/sales work under an internal conjunction arrangement. To qualify for the exemption:
*General administrative work would not meet this criteria. Sales support work (commonly performed by a sales assistant or salesperson) may meet this criteria if the work was directly related and a significant part of the real estate services/sales contract.
You can read our case studies to find out more.
The payroll tax contractor exemptions were intended for contracts between independent businesses. Although our current practice is to accept an exemption where all the criteria are met, we may consider applying the payroll tax anti-avoidance provisions in certain cases.
We may apply the anti-avoidance provisions to an internal conjunction arrangement when:
We disregard the arrangement, including contracts, if the anti-avoidance provisions apply. The real estate business then becomes the employer and all commissions (and any other payments) for the services of the sales agent are taxable wages. We’ll send out a notice with all the details.
At a minimum, you should keep the following records in relation to your internal conjunction arrangements:
We may request these records, and others, during an audit to validate any contractor exemptions.
You should conduct an internal review of your real estate business to determine the correct payroll tax treatment of payments made to conjunction agents and other common errors.
If your taxable wages exceed the monthly payroll tax threshold in the current financial year, or the last four financial years, you must register for payroll tax.
If you have not declared all liable amounts in your monthly payroll tax return for the current financial year, include these additional amounts in your annual reconciliation return. Please note the due date for the 2019/20 Payroll Tax annual reconciliation has been extended to 30 October 2020.
If you did not declare all liable amounts in previous financial years, contact us to make a voluntary disclosure. Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify the understatement.
If you have a question about the real estate industry and cannot find the answer on this website, contact us.