PAYROLL TAX (NEXUS) AMENDMENT BILL

Committee Stage

In committee.

(Continued from 23 June 2010.)

Clause 1.

The Hon. R.I. LUCAS: I thank the minister for the reply to the questions that were provided on his behalf last evening in response to the second reading. That answers a significant number of the questions I had, so that will shorten the committee stage.

I make only one brief comment about the advisory group called the State Taxes Liaison Group, which was formerly the Accountants and Solicitors Consulting Group, the name of which escaped me during my second reading contribution. The minister notes that that body was not consulted on this particular occasion, and the government has given the reason, that is, there had been a national agreement.

In my view, that group, over many years under both Labor and Liberal governments, has provided sound advice to treasurers and Treasury officers in relation to tax legislation and, on a number of occasions, has managed to pick up loopholes, problems or concerns that the industry might have and, through that process, has assisted in the proper drafting of legislation.

It is my view—which I will just place on the record—that, even in circumstances where there has been a national discussion of officers, it does not always mean, with the greatest respect to officers in other jurisdictions, that they are also the font of all wisdom and will always be 100 per cent accurate.

As tax law nationally in other states would demonstrate quite well, there are always loopholes and problems, no matter which jurisdiction it happens to exist in, because there are clever lawyers and accountants. To get advice in a confidential manner—which has been the normal process—I think is sound policy, even in the circumstances that confronted the government on this occasion and will potentially confront the government in future.

Payroll tax harmonisation and stamp duty harmonisation have been debated for many years, probably decades, and will continue to be debated. We will continue to have examples where officers from all jurisdictions get together to agree on what needs to be done. I think some process ought to be developed in the future which would allow some continuing role for that advisory group, given the confidential advice it has provided in the past. Those are the only comments I make on clause 1.

The Hon. P. HOLLOWAY: The government accepts that the State Taxes Liaison Group performs an important function in any matters relating to changes to tax law. The group would normally be consulted, and its input is valued. The members of that group, of course, strongly support a harmonised approach across Australia, as do all industry bodies.

While I accept that not all wisdom might rely on one particular state, I guess the problem is that, if we are to have harmonised legislation—and it is important that we do for the example that was set out last night—we have to have a solution that is consistent across all states. Ultimately, that has to be the outcome.

If you are to avoid the sorts of situations that were set out in the example last night, where you have national companies operating across borders, then you need a harmonised approach. Sometimes, that will mean that some jurisdictions will have to agree to legislation that might not, in other circumstances, be agreed to.

Harmonisation is a very important principle and, as the example given last night illustrates, there are often significant consequences if you do not have harmonisation. That is really the dilemma that the government faces. As was pointed out last night, the government would normally consult with the State Taxes Liaison Group in matters of taxation changes, particularly if they were peculiar to this state. I suppose that, if one were to go through a new process of harmonisation, at some point there would be consultation about that but, presumably, the sort of people who would be represented on this tax liaison group would be involved in those discussions with their colleagues across the country anyway. I think that is the outcome that you nearly always get; there is agreement on harmonisation by the industry bodies even though there might be some differences as to how they harmonise. Generally, the feeling is that harmonisation in itself is so important that you have to agree to some common denominator rather than oppose harmonisation per se just because you have minor differences.

Clause passed.

Clauses 2 to 4 passed.

Clause 5.

The Hon. R.I. LUCAS: I would like to clarify the practical impact of this particular clause. It has been teased out through the debate in the House of Assembly and also in the second reading here, but I would like to clarify it. In the set of circumstances where we have in South Australia an interstate employer, with an employee from an interstate contract—say, a Victorian contractor—working here on a South Australian project for the whole of one particular month, I take it there is no issue in relation to both the past payroll tax law and now the current payroll tax law regarding where the payroll tax is payable?

The Hon. P. HOLLOWAY: My advice is that there is no problem in that instance; all the payroll tax would be payable in South Australia because the services were performed wholly within South Australia.

The Hon. R.I. LUCAS: So in this case, where we have the Victorian contractor, an employee, working for the whole of that month in South Australia on a particular project, irrespective of whether the employee has his or her bank account or principal place of residence in Melbourne, the payroll tax on that project for that month is completely collectable in South Australia.

The Hon. P. HOLLOWAY: My advice is that that is correct.

The Hon. R.I. LUCAS: Further clarifying that, what we are talking about—and it is stated in the second reading explanation—is where the employee has provided services in more than one jurisdiction in a month; so, there is a situation where this employee worked for three weeks in South Australia and one week in Victoria. It is only in that particular set of circumstances that the problem has been identified, which this legislation is directed towards resolving.

The Hon. P. HOLLOWAY: My advice is that that is correct.

The Hon. R.I. LUCAS: Thank you for that clarification. So in relation to the set of circumstances we are talking about, the Victorian contractor in South Australia, if they were working here full time there would obviously be some elements to that employee's remuneration package which relate directly to their hours of work and their monthly wage or salary, and there may be other elements by way of bonuses, for example, which are paid over the performance of the year. So let us take bonuses, for example; there may be other parts of a remuneration package that could be looked at which relate to the work of an employee over a 12 month period. If there are employees who are working for, say, the month of June in South Australia but for other months in other states, and in some months it is intermingled, and there are issues such as an annual or performance bonus payable, can the minister indicate what the state taxation office does in practical terms in relation to that element of a remuneration package?

The Hon. P. HOLLOWAY: The relevant fact sheet states that where wages relate to services performed by an employee over several months—that is, an annual bonus—payroll tax is payable in the jurisdiction where the services were performed in the month that the wages were paid or payable. So the payroll tax would be paid where the services were performed; if a person were working in a particular state, that is where the payroll tax would be payable. However, if that person were to work in more than one state in the month when the payment is made, that is when you look at where the principal place of residence of the employee is in determining the liability.

The Hon. R.I. LUCAS: That is not clear to me. Let us take an annual performance bonus—although, clearly, bonuses are sometimes paid quarterly or twice a year—where an employee has worked in South Australia for part of the time, in full months, and in Victoria for some full months, and in some of the months they worked in both Victoria and South Australia. At the end of the year, in July of the following financial year, an annual performance bonus is paid to that employee for the work that they have conducted across jurisdictions.

This Victoria-based employee, who lives in Victoria and has a bank account in Victoria, has worked for nine months in South Australia. Is the minister saying that, if the bonus is paid into that employee's bank account in Victoria, the payroll tax is collected on that annual bonus in hindsight—the bonus is paid at the end of the financial year—or is he saying that the state tax offices are going to pro rata divide that up, go back over the 12 months and say there was nine months worked in South Australia, three months worked in Victoria, and it is divided between the tax offices as to who gets the payroll tax?

The Hon. P. HOLLOWAY: My advice is that, if someone is paid an annual performance bonus in July, for example, and if the services were provided in one state—whichever state the services were provided in that month—that is where the duty would be paid. My understanding is that what happens in that month determines where the liability lies. However, if in that month they were in different jurisdictions, it would go to the principal place of residence. That would determine that.

The Hon. R.I. LUCAS: That does not make much sense to me. Let us take the example where a Victoria-based person worked for nine of the previous 12 months in South Australia, and the payroll tax has been paid in South Australia, and worked for three of those 12 months in Victoria and Victoria has collected the payroll tax. In July, the person happens to be working in Victoria and gets paid a 100 per cent performance bonus for the work over the past 12 months, most of which was performed in South Australia, where the tax was being collected. What the minister's advice seems to be is that Victoria will collect the payroll tax on the July performance bonus which relates primarily to work and payroll tax having been incurred and paid within South Australia during the previous financial year.

Perhaps, for practical reasons, that is the way it is going to be interpreted, but it does not make much sense if this is to resolve potential loopholes of the sort that the minister has been talking about. It potentially raises issues for companies, if they wanted to, in a way to forum shop by changing the structure of remuneration packages. That will not suit everyone, obviously, because people want a significant component of their remuneration package paid on a monthly basis. When one is talking about directors and senior managers—and we will come to a later clause which talks about shares and options being granted, which applies mostly to directors and managers—this potentially raises a significant loophole in terms of the way the tax office is going to interpret these new provisions.

The Hon. P. HOLLOWAY: My advice is that this is the way it has always been interpreted. The problem is that, if one tried to allocate an annual performance bonus over where a person has worked, it would create an enormous amount of red tape. One would think that, normally, performance bonuses would not be of such significance to have a huge impact. I suppose it might be a different matter when talking about directors, and I guess we may come to that later.

The Hon. R.I. Lucas: The annual performance bonuses of some of these CEOs are beauties.

The Hon. P. HOLLOWAY: That is what I mean. In relation to some of those illustrations, whether a CEO would be working in other states is probably another question. How could you envisage a situation where a CEO of a Victorian company might be working here? I am not sure that that would be a significant issue. I guess if it were, you could contemplate the scenario in the future. I do not think that there is any particular evidence that this would pose a significant drain on revenue.

The Hon. R.I. LUCAS: I will not prolong the debate, suffice to say that I can understand why, for practical purposes, state tax offices may well have decided on this particular ruling. The minister is probably correct to say that at this stage it is not a significant issue. The history of state tax law, however, is that, when one loophole is closed, what was formerly not a significant issue then does become a significant issue. The lawyers and the accountants work out a way to forum shop or to lower the tax payable. I guess if that occurs at some stage in the future, we will be confronting another piece of legislation that will endeavour to close that particular loophole. I might set myself up as an adviser in that particular area.

I would like to draw attention to a note that has been included in the same clause, which appears on page 5 of the bill in new section 11(6). As a point of clarification, the note states 'if 1 amount of wages is paid by an employer in a particular month'. I presume it is the decision of parliamentary counsel, and we have eminent counsel here advising the government. It seems an unusual construction of legislation in terms of the use of the number 1 in that note. Can the minister clarify why it has been drafted in that particular way? Is that just the personal style of parliamentary counsel these days or is there some legal significance or importance in the way that particular section has been drafted?

The Hon. P. HOLLOWAY: Essentially the answer to the question is that it is just a stylistic factor following on from the former parliamentary counsel, Mr Hackett-Jones.

The Hon. R.I. LUCAS: If I could just offer a comment about the new style, it certainly does not attract me as an individual legislator; for what it is worth, pass that onto parliamentary counsel. It seems clumsy in terms of its grammatical impact. If it has no legislative impact, I think there are a number of ways in the past we would have drafted that. It is only a note to the legislation. We have obviously had advice that it does not change the legal impact at all in terms of the way it has been drafted.

An honourable member interjecting:

The Hon. R.I. LUCAS: Yes, it is stylistic. If it is stylistic, we can all offer our individual views, and I am sure parliamentary counsel will take that into consideration. My further questions are on clause 7, so that is all I have on clause 5.

Clause passed.

Clause 6 passed.

Clause 7.

The Hon. R.I. LUCAS: This question in part comes back to the sorts of questions I was asking before about bonuses. This provision is a change in relation to shares and options being granted to directors as wages and deletes section 24(4) of the legislation. Can the minister provide advice to the committee as to the reasons these changes have been made? Are they part of the overall reason for the bill? Is this tied up with the overall problems being resolved by the legislation, or is this the government taking the opportunity to resolve some other issue which is completely unrelated?

The Hon. P. HOLLOWAY: My advice is that it is just a complementary change to these amendments that are moving to the principal place of residence.

The Hon. R.I. LUCAS: Given it is the case that it is part of the package, can the minister then indicate why section 24(4) of the legislation is being deleted?

The Hon. P. HOLLOWAY: What the bill is attempting to do is collect many of these issues under section 13. Clause 6 amends section 13—What are wages?—by inserting new subsection (2a). I think the idea is now that section 13 will treat these timing issues, and that is why they are being removed from section 24, and try to include them more generally under section 13. That is about the best I can do to explain that.

The Hon. R.I. LUCAS: Just to tease this out, if we go back to section 24 of the parent act, we are saying that for the purposes of this act wages include the grant of a share or option by a company to a director of the company by way of remuneration, etc. Let me clarify the practical implementation of that and look at the issue of a share option. The traditional share option is an opportunity for the director of a company, at some stage in the future, to purchase shares at a particular price.

Obviously, the most attractive option is to purchase shares at a discounted price to what might currently be on the market. Who knows what it will be at the time of being able to retrieve them? The director obviously hopes that it will still be at a price lower than the market price—it may or may not be—which might impact on the decision of the director.

So, what is the practical effect of the act and the bill, in relation to these share options, if a director chooses to take up a share option? How does the Tax Office determine what the aspect of wages payable is in relation to a share option? Is it the difference between what the director pays for the share and the share price on the particular day that the director exercises the option?

The Hon. P. HOLLOWAY: I am advised that the bottom line is that nothing is changed overall through the provisions before 24. I think that sections 19 to 23 inclusive set out the valuation of shares and options—section 19, choice of relevant day—and so on. All those issues are, I believe, set out under those sections of the act which are not amended by this particular bill.

The Hon. R.I. LUCAS: That is interesting but it does not answer the question. The question is: how does the Tax Office interpret this provision of the legislation? I am told, in relation to section 24(4), that it is deleting a provision which specifically relates to the payment of payroll tax in the circumstances of the grant of a share or an option to a director or an employee. I am told, 'Don't worry about the deletion of 24(4) because it's tied up with the amendments to 13, the overall provisions.'

I also have questions in relation to section 25 being deleted which, again, relates to the granting of a share and options. I ask the minister: how does the Tax Office currently interpret the payment of payroll tax for the granting of a share option? I repeat the question: if a director takes up a share option at a particular price—let us say it is $2 and on that particular day the market price is $3—does the State Tax Office calculate the wages payable subject to payroll tax as the difference between the $2 and the $3, multiplied by the number of shares, minus whatever fees and costs there might be, and then levy payroll tax in that particular way?

I think it is a pretty straightforward question. We have senior tax officers and parliamentary counsel available. The committee is entitled to get a response so that it can make a judgment as to what potential impact there might be regarding 24(4)–and I assume I am going to be told the same thing when I ask the question about section 25 being deleted.

The Hon. P. HOLLOWAY: My advice is that, essentially, the Tax Office will work on the market value of the option which, as the honourable member suggested, is really the difference between the share value on the particular date and how much they paid for the option. That is how they would work it out.

The Hon. R.I. LUCAS: It is not a normal circumstance but there have been recent examples in corporate history where CEOs wishing to demonstrate their faith in the company have exercised share options at a price slightly higher than the market price for the day; again, I assume doing so in an indication that they demonstrate good faith in the future of the company and that the share price will recover. In those circumstances, does the State Tax Office net the loss as a negative or a reduction in the wages for the director and therefore reduce the payroll tax payable?

The Hon. P. HOLLOWAY: My advice is no.

The Hon. R.I. LUCAS: The good Tax Office is all upside and no downside! I thank the minister for that response. In relation to the granting of a share as opposed to an option, if the director purchases a share at the tradeable market price of the day, then I am assuming from what the minister has said I can infer that there would be no addition to the wages calculation for the director and there will be no payroll tax payable.

The Hon. P. HOLLOWAY: My advice is that is correct.

The Hon. R.I. LUCAS: To firmly put it on the record, section 25 of the act is deleted and I ask the minister to indicate the reasons why. I am assuming he will say it is because it has been encapsulated under the changes to section 13, but if that is the case I would like that on the record as well.

The Hon. P. HOLLOWAY: Yes. I will place that on record: that it is my advice that that is the explanation.

Clause passed.

Remaining clauses (8 to 12), schedule and title passed.

Bill reported without amendment.

Third Reading

Bill read a third time and passed.