In Commissioner of State Revenue v The Optical Superstore Pty Ltd, the Optical Superstore was held liable for payroll tax under Victorian law, on distributions made to optometrists from its trust account under an occupancy agreement. The distributions related to fees that the Optical Superstore collected directly from mutual customers of the Optical Superstore and the optometrists in exchange for services provided to the customers by the optometrists. The Optical Superstore would then remit the balance of the fees to the optometrists after deducting amounts due and payable to it (namely, occupancy fees).

Franchise and other business systems that licence independent service providers to provide services under the auspices of the franchisor’s brand for the purposes of servicing mutual customers will need to review their structure to ensure that they comply all applicable laws (including any payroll tax obligations that may apply).

On the basis of the Optical Superstore Decision, at least in Victoria, where the franchisor collects payment direct from the franchisee’s customers and then remits the proceeds back to the franchisee after deducting administration fees and royalties due to the franchisor, payroll tax may be payable on the amount of the remittance. This is so despite the remittance being direct revenue earned by the franchisee for providing the services direct to its customers.

Importance of the recent VSCA decision

Payroll tax is paid by an employer to employees in respect of taxable wages.

Importantly, there are provisions in the Payroll Tax Act 2007 that deem:

• persons to be employers and employees when they would not otherwise be ordinarily regarded as such
• amounts to be taxable wages when they would not otherwise be wages as ordinarily understood.

More specifically, where a person is paid an amount for or in relation to work performed, then:

• the payer can be deemed to be an employer
• the payee can be deemed to be an employee
• the payment can be deemed to be taxable wages.

In the Optical Superstore Decision, Optical Superstore made space available to optometrists to provide services to customers of the relevant stores. The optometrists would directly bill the customers and the fees would be paid to Optical Superstore who would then deduct certain fees (for occupancy etc) and then remit the balance to the optometrists. Whilst it was accepted that:

• the optometrists were not common law employees of Optical Superstores
• the optometrists directly provided optometrist services to the customers
• all funds that were paid to Optical Superstores were held in trust for the benefit of the optometrist (subject to the appropriate deduction for fees) (net remittances), there was work performed by the optometrists in favour of Optical Superstores and the net remittances from Optical Superstore to the optometrist were payments that related to that work.

Consequently, it was found for the purposes of the PTA, that Optical Superstores was a deemed employer, the optometrists were deemed employees and the net remittances were payments that constituted taxable wages. That is, payroll tax was payable in respect of the net remittances.

In our view, this case has significant ramifications where principals/contractors or franchisor/franchisees have mutual clients and the principal/franchisor collects all of the monies from the provision of the services by the contractor/franchisee to the customer and remits amounts back to the contractor/franchisee.

Where such arrangements exist, steps should be taken to review the relevant business structure to ensure that the structure does not give rise to payroll tax obligations. For a more complete understanding of the Optical Superstore Decision and the decisions that preceded it, please click here.