NSW Supreme Court rules LMG liable for payroll tax

UPDATED: The NSW Supreme Court has delivered its decision in LMG’s appeal against the imposition of payroll tax, announcing that Australia’s biggest aggregator is liable to pay the tax but has granted it a number of exemptions.

The decision will have major implications for brokers and aggregators not just in NSW but across the nation, as other states look to apply the payroll tax.

Sam White (pictured above left), chairman of LMG, said it was not the victory the company had hoped for, but the outcome wouldn’t cripple the industry. He described the court’s decision as a “partial win” due to the breadth of exemptions.

MFAA CEO Anja Pannek (pictured above centre) said the industry body was disappointed by the ruling and the court’s  finding highlighted that “payroll tax legislation is flawed, poorly written and needs to be changed”.

FBAA managing director Peter White (pictured above right) accused Revenue NSW of a “blatant money grab”, and said the court's decision to uphold the decision by Revenue NSW to charge Loan Market payroll tax retrospectively to 2012 set a dangerous precedent for aggregators and other states.

LMG would now study the judgment and all the ramifications for its brokers before making any decision about whether to appeal. LMG and Revenue NSW both have 28 days to decide whether to appeal the supreme court’s ruling.

It’s the latest chapter in the mortgage and finance industry’s ongoing battle to fight the decision by Revenue NSW to charge aggregators payroll tax, classifying them as “employers” of brokers.

The court case involves a Revenue NSW assessment which applied payroll tax for Loan Market brokers between the period of June 30, 2012, and June 30, 2018.

The State Revenue chief commissioner had assessed the payroll tax to be payable under the Payroll Tax Act 2007 in respect of commissions paid by LML, via LMG, to the authorised brokers who had contractual relationships with LML, under the broker agreements during the relevant period.

The commissioner argued that that tax was payable because the broker agreements were ‘relevant contracts’ under the Act, under which one person supplies work-related services to another person in the course of that second person’s business.

In a letter sent out to all its brokers today informing them of the NSW Supreme Court’s decision,  LMG said it believed Revenue NSW’s position was “completely wrong - our brokers are our customers, not our employees”.

LMG, the parent company of Loan Market, launched an appeal against the payroll tax in May 2023, claiming payroll tax should not be payable, arguing that brokers were customers of aggregators, not employees.

It said in the letter, that if the court disagreed with this interpretation, “we sought to get clarity on how the exemptions could work”.

Now the NSW Supreme Court, in a judgment handed down by Justice Richmond late on Friday afternoon, has a ruled that a ‘relevant contract’ does exist between Loan Market and the brokers that use its aggregation services.

It stated that Loan Market Pty Ltd (LML) was a party to agreements with individual mortgage brokers (broker agreements), which meant in return for various fees paid by the broker, LML provided them with various services to set up and operate their broking business.

“That business involved the broker applying to lenders for loans on behalf of their clients using systems provided by LML and, when those loans were approved, brokers became entitled to part of the commission paid by the lender,” the NSW Supreme Court judgment read.

“Lenders pay the commission on loans originated by the brokers to a related company of LMG and LML called eMOCA Pty Ltd (eMOCA) and the commission is then paid on to the individual mortgage brokers by LML.”

In the judgment, Justice Richmond said the conclusion that the broker agreements constitute a relevant contract under section 32 “may be seen as a harsh outcome for LML [Loan Market] because the contractor provisions now found in s32 were originally introduced as an anti-avoidance measure which was not intended to catch ‘bona fide independent contractors’.”

However, while the ruling means the payroll tax will apply to all individual broker operators, whether they are incorporated or not, the court has clarified and broadened exemptions to the payroll tax.

The new payroll tax exemptions

The court has allowed three new exemptions:

• engaging an offshore loan processor, such as BrokerForce or LMG outsource;
• engaging a family member in the business, on the basis that it can be shown that the family member is doing genuine work for the business. Examples of evidence would include a job description and an ability to show consideration being made to that person in exchange for their services; and
• engaging another business as a genuine service provider - again evidence of a contract may be necessary to establish this.

Existing exemptions

The following exemptions existed prior to the court’s decision:

• the application of the less than 90 day exemption (brokers performing work for less than 90 days) as it relates to upfront commissions paid in a financial year;
• the application of the two or more exemption where a broker engages the services of a loan writer; and
• an agreed reduction on the total commissions to reflect the proportion paid in relation to non-labour components of a business.

LMG, in its letter to brokers, said the judgment appeared to apply equally to individuals that hold an ACL or are a credit representative of an ACL held by an aggregator.

The payroll tax also only extended to active brokers, not inactive ones.

Justice Richmond said the potential difficulty for a taxpayer “is that the exclusions are very specific and may leave a subset of relationships such as those in the present case where the contractor is a genuine independent contractor but may not come within any of the exclusions.”

LMG reaction to payroll tax court ruling

Speaking to MPA after the court ruled on its appeal, White said LMG was disappointed with the finding that there was a relevant contract between brokers and aggregators and that payroll tax was payable.

“We fought hard for that and we don’t believe that’s the right way to perceive the relationship between a broke and aggregator,” White said.

“But we're very happy with the way that judge has approached exemptions and has understood how that's worked. You saw that reflected in his judgment, where he said it could be viewed as a harsh outcome and the exemptions where was needed to ameliorate that interpretation.”

White said Loan Market had changed a lot since 2018 and the payroll tax wouldn’t apply to the vast majority of Loan Market broker businesses as they would have exemptions.

“For those that that aren't exempt, we now have a clear understanding from the judges as to what's required to make that happen. We will be educating all about brokers on this decision in the coming weeks.

“It's subject to appeal. So we'll probably need to wait until that process has run its course. But we do now know, subject to that appeal, what the rules are and we're very confident why brokers have grown their businesses and helped look after customers that the vast majority will be exempt.”

White said while the court’s decision was complex and would take some time to digest, the fact there was clarity on exemptions was welcome news.

“We're confident that the way broker businesses are evolving and the way that they're engaging teams and their communities,  and becoming more and more sophisticated, this extra costs won't need to be borne by a lot of brokers.”

LMG was in the process of paying the required payroll tax for the period between 2012 and 2018.

White said the court’s ruling on payroll imposed new costs on the industry but also set the exemptions under which those costs wouldn’t apply.

“We are reviewing the decision and our view is that, on a go-forward basis,  if the government is imposing a new cost on a particular segment of the industry, we are going to need to work out how to share that costs with those individuals, but at this stage it’s a little too early to tell,” White said.

He remained confident that brokers, whether they were part of Loan Market, PLAN Australia, FAST or Choice, or another aggregation group, that the exemptions established “mean we can all manage this without it being an industry killer.”

MFAA reaction

MFAA CEO Anja Pannek labelled the court ruling “disappointing”.

“We fundamentally disagree that mortgage brokers, as small business owners, should be subject to payroll tax – this is an unfair tax on the smallest of small businesses,” said Pannek.

“The court has ruled that in this matter based on the agreements between Loan Market and its brokers, mortgage broker commissions are captured under relevant contractor provisions of payroll tax legislation. We are disappointed with this outcome.”

Pannek said the court had also provided clarity on the legislation – in particular, the exemptions that can be applied allowing common arrangements used in broking businesses such as offshore loan processing to reduce the payroll tax liability.

“This is a complex case and with payroll tax laws harmonised across most Australian states and territories, this is not a NSW issue, it is a national issue,” she said.

In regards to a possible appeal, Pannek said the MFAA would be working very closely with LMG to understand their go-forward position.

Pannek said Revenue NSW have been pursuing aggregators with payroll tax audits for a number of years, including retrospective application of fines and penalties.

The MFAA successfully secured a stop action from Revenue NSW in March 2023 on new payroll tax audits while this case was before the court.

The relevant contract aspects of the payroll tax legislation were originally introduced as anti-avoidance provisions.

“Our industry has not been avoiding paying relevant taxes,” Pannek said. “This legislation is unclear, and over many years and across the industry, legal advice has been sought with even experts struggling to understand it. It is clear that the law must be overhauled.”

“Having an ambiguous law applied retrospectively is incredibly unfair. The NSW government needs to step in and address this.

“Earlier this month, the NSW Premier said that where there are poorly designed taxes weighing down on small businesses, that they want to change that. This is a perfect example of such a tax.”

The MFAA has been actively advocating on behalf of the industry and Ms Pannek said they would continue to meet with the government and advocate for legislative changes that make the law clear and appropriate.

“We will continue to keep our members informed on any movement that occurs on payroll tax, and will mount a campaign if it is required to secure the future of our industry and ensure Australians retain access to the crucial guidance and support our members provide.”

FBAA reaction

FBAA managing director Peter White accused Revenue NSW of a “blatant money grab” and called on the NSW government to finally intervene.

“To this point the government has taken a ‘wait and see approach’ while the legal action was underway," White said.

“However, now that the court has basically stated that the law was wrong but that they have to uphold it, it’s time for the government to fix the problem.”

White said aggregators were working with the issue of payroll tax moving forward but it was unfair to go back 12 years retrospectively, particularly as aggregators were acting on high quality, independent advice.

“We must be clear that this decision applies only to the case at hand involving Loan Market, however my concern is the impact this may have on new entrants to the broking sector and the precedent for other states to attempt a similar money grab.”

Whhite a reasonable approach by Revenue NSW would have been to help aggregators prepare for any change of interpretation of payroll tax eligibility and set the course for the future.

“But in this case they took a big stick approach and it’s difficult to see this as anything but an opportunity to use Loan Market to raise extra revenue.”

While Loan Market is a large company, White said the ramifications could impact small businesses.

“I will be talking to the NSW Premier and asking his government to draft whatever legislation is necessary to change law that led to this decision and protect small business,” he said. “Both sides of politics must now come together and fix this mess.”

What do you think of the court’s decision on payroll tax? Comment below