An Open Letter to our Brokers

Hi,

I wanted to provide an important update on our long-standing challenge with Revenue NSW on the NSW payroll tax case - a matter that has implications for our entire industry. 

Summary

• While we didn't achieve the primary outcome we hoped for, there are some positives to share.
• A majority of Loan Market and BYOB (now Partner) businesses are covered by the exemptions clarified by the court.
• We’ve been preparing for this since 2016, bolstering our cash reserves specifically for this moment.
• We have a pathway forward and are set to manage the implications, largely through detailed documentation processes which we will be guiding our businesses through.
• Some aspects remain unclear, but we are actively working on these and have 28 days to consider our response.
• Read the Court Summary here.

Recap of the Loan Market (LM) NSW Payroll Tax Issue

Revenue NSW is of the view that Loan Market, for the period from 2012 to 2018, have what is termed a ‘relevant contract’ (a term defined in the Payroll Tax Act where the Commissioner believes that, in our case, a broker supplies services to an aggregator), and has therefore made an assessment that payroll tax should be paid on commissions and payments to LM brokers. 

We believe this is completely wrong - our brokers are our customers, not our employees. After prolonged engagement with Revenue NSW, in May 2023 we challenged Revenue NSW on the issue in court to argue that; 

1. Payroll tax should not be payable at all as brokers were customers of aggregators and not employees.
2. If the court disagreed with our interpretation, we sought to get clarity on how the exemptions could work.

Friday's court decision

At 4:15pm on Friday 12 April, His Honour Justice Richmond delivered his judgment on the Loan Market payroll tax case. It is a complicated case and judgment and we’ve spent the weekend closely analysing and dissecting the judgment with our legal team.

On the key threshold question, His Honour has ruled that, for the purposes of The Payroll Tax Act, there is a ‘relevant contract’ that exists between Loan Market and the brokers that use its aggregation services. This does not mean that brokers are employees of Loan Market, but that for payroll tax purposes only, there is a deemed relationship where payroll tax is payable on broker payments passed through from lenders to aggregators to broker, unless the broker business can establish they fall into an exemption. 

This is obviously a disappointing outcome on the threshold issue. Having said that, we have secured some significant reductions in the number of brokers originally assessed by revenue NSW through the clarification of the exemptions that a broker can establish. 

In an indication of how His Honour felt about the application of the law to our case he said…

“The conclusion that the Broker Agreements constitute a relevant contract under s 32 may be seen as a harsh outcome for LML [Loan Market] because the contractor provisions now found in s 32 were originally introduced as an anti-avoidance measure which was not intended to catch “bona fide independent contractors”..: 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.”

Consequently, whilst His Honour found that Payroll Tax applied broadly, he also agreed with our position that the exemptions that a broker business could fall under were wider than the position adopted by Revenue NSW. With the support of our NSW brokers, this has led to a substantial reduction of payroll tax from the application of the exemptions to be calculated and agreed between the parties. 

What we're clear on now:

• It is clear from the judgment that Payroll tax will apply to all individual operators who have a direct relationship with the aggregator, whether they are incorporated or not, unless they can establish an exemption.
• The judgment has clarified and broadened the exemptions more than what was previously recognised by Revenue NSW.  We now know that such exemptions include:
  
  
  • 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.
  • Engaging another business as a genuine service provider - again evidence of a contract may be necessary to establish this.
• Other exceptions agreed prior to trial include:
  • 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.
• The judgment appears to apply equally to individuals] that hold an ACL or are a Credit Representative of an ACL held by an aggregator. 
• Payroll tax only extends to active brokers. If a broker is not active with us - e.g. they have sold their book or have terminated their relationship with us - that payroll tax does not apply to trail payments for inactive brokers.
• More broadly, our understanding is that the vast majority of Loan Market and Partner (BYOB) would be exempt due to the ‘2 or more’ exemption. The judgment applied to Loan Market businesses in NSW from 2012 to 2018 - since that time the vast majority of Loan Market and BYOB (now Partner) businesses fall within the exceptions that his Honour helpfully clarified.

What we're still unclear on:

• The application to the other service plans that don’t use the Loan Market brand, and where we don’t share in commissions - our Member businesses. We believe there is still some ambiguity in how broadly this case applies to other LMG service plans. We will be seeking to clarify this question of how the State Revenue Offices will view other LMG service plans, and note that the Finsure challenge will be helpful on these points but, in our experience, will be some time away. 

What does this mean for you?

• The judgment has resulted in a substantial reduction in our potential tax liability, thanks to identified exemptions and the significant support and effort from our NSW brokers. This includes scenarios like brokers hiring family members or using offshore loan processing services.
• Where a broker uses our outsourcing services then we will automatically register the exemption.  For other providers and exemptions there will need to be some evidence to support this.  We will work through what evidence may be required.
• This will be an opportunity to understand the ruling and its potential impact on your business, especially for those who are not covered by exemptions. We’re working to understand this as quickly as we can.
• This ruling is precedent-setting, affecting not only LMG but all aggregators in NSW and potentially other states, except WA. And we are concerned about this.

What happens next?

We need to meet Revenue NSW to discuss how this judgment applies to our case and overall liability. We then return to court to propose orders.

Each party has a right to apply for an appeal to this decision, and need to exercise that within the next 28 days. Such appeal must be made on a point of law. We are currently reviewing the judgment and the reasons provided by the Court, and will consider our right to appeal over the coming weeks.  For this reason, we need to be conscious of what is said publicly.

I want to thank all our NSW brokers who have committed their time and energy to support this case. The joint effort between us and our brokers has significantly helped minimise the impact of this ruling to all brokers. 

I know that this will be an anxious time for many of you, particularly those of you who are individual broker business owners. I understand that the uncertainty can be very frustrating and I know you want answers. I need time to work through this preserving our ability to both appeal this decision and to work with the State Revenue Authorities. I am committed to minimising the impact of this ruling on your businesses and to continuing to support you, our customers, so that you can help your clients get a fairer go with their finance.

Of course we will be working closely with the industry associations and other stakeholders to keep prosecuting the arguments we all know are right.

Thank you for your patience and support while we work through this. We will be communicating with you as soon as we are able to tell you more.

Sam White
Executive Chairman, LMG | Loan Market