Business owners are often unaware of what Payroll Tax is and when the obligations for payroll tax arise.
As a business owner in Australia, navigating the complexities of tax obligations can be a daunting task. Among the various taxes that businesses must be aware of, payroll tax often causes confusion, especially when it is mistaken for PAYG Withholding Tax. It's important to understand that these are two distinct taxes, each with its own set of rules and implications for your business.
This article explains payroll tax so you are absolutely clear on when, and how, payroll tax obligations may affect you and your business.
What is Payroll Tax
Payroll tax is a state-based tax that is levied by the individual states and territories in Australia. It is calculated on the total wages paid by a business, which means it is directly related to the size of your workforce and the amount you pay them. The rationale behind this tax is to contribute to state revenues, which in turn fund essential public services such as health, education, and infrastructure.
Payroll Tax is different from PAYG Withholding Tax
It's important to differentiate between payroll tax and PAYG Withholding Tax. PAYG stands for 'Pay As You Go' and is a federal tax that involves withholding amounts from payments made to employees, to cover their potential income tax liabilities. In essence, PAYG is a method of collecting income tax in advance, whereas payroll tax is a state tax on the wages you pay.
Key Points about Payroll Tax
State-based Tax: Unlike federal taxes, each state and territory sets its own payroll tax rates and thresholds.
Based on Payroll Value: It is calculated on the value of the wages you pay, not the profit your business makes.
Threshold-dependent: Only payable when wage expenses exceed the state-specific threshold.
Not PAYG Withholding Tax: Payroll tax should not be confused with PAYG Withholding Tax, which is a system for withholding income tax from payments made to employees.
Deductible Expense: Payroll tax is generally deductible for income tax purposes for the business that incurs it.
When does my business need to register for Payroll Tax?
Payroll Tax Thresholds
Each state and territory in Australia has a payroll tax threshold. This is the amount up to which you do not have to pay payroll tax. If your total payroll value exceeds this threshold, you will be required to pay payroll tax. These thresholds vary from state to state and are subject to change, so it's important to stay updated with the latest information from your state's revenue office.
For example, at the time of writing, Victoria's threshold is $700,00 between 1 July 2023 to 30 June 2024 with a monthly threshold of $58,333. The payroll tax rate is currently 4.85% except for regional Victorian employers.
From 1 July 2024 the payroll tax-free threshold will increase from $700,000 to $900,000. This threshold is set to increase to $1 million from 1 July 2025.
It’s important to note that:
- The annual threshold is adjusted if you are not an employer for a full financial year.
- Certain wage payments may be exempt from payroll tax, and deductions may apply, which could affect whether a business needs to register.
- Not all organisations are required to register; non-for-profit, public benevolent institution, and religious institutions are exempt from paying payroll tax.
Interstate Wages and Payroll Tax in Victoria
If your business operates in Victoria as well as other Australian states and territories, you'll be liable for Victorian payroll tax if the wages paid within Victoria, when combined with your interstate wage payments, surpass the monthly threshold set by Victoria. Interstate wages are defined as any wages subject to payroll tax under the legislation of another state or territory.
If yoru business is an employer that pays both interstate and Victorian wages, the full payroll tax threshold in Victoria is not claimable. Instead, the threshold is proportionally reduced based on the ratio of Victorian taxable wages to total Australian taxable wages. This means that only a part of the Victorian threshold can be deducted.
The monthly threshold is determined by the estimate of Victorian and Australian wages provided in the previous year's Payroll Tax Annual Reconciliation or at registration. The annual threshold is based on the actual wages declared in the annual reconciliation return. All wage components, such as superannuation, contractor payments, and allowances, must be included in the calculations.
What Comprises Gross Taxable Wages?
Understanding what is included in gross taxable wages is essential for calculating your payroll tax. Gross taxable wages encompass:
Salaries and Wages: The most obvious component, this includes all the regular payments made to employees, including Directors Fees.
Bonuses and Commissions: Any additional incentive payments.
Allowances and Fringe Benefits: Payments for travel, entertainment, or other expenses.
Superannuation Contributions: Both compulsory and voluntary contributions made by the employer.
Termination Payments: Any payments made when an employee leaves the business, excluding the tax-free threshold.
Contractor Payments: In some cases, payments to contractors are deemed wages if the contractor primarily provides labour and works exclusively or primarily for your business.
What are subcontractor payments for Payroll Tax purposes?
Contractor payments can be relevant to payroll tax in Australia under certain conditions. Some contractor payments are included in calculating the wages amount, particularly where the contractor is deemed to provide predominantly labour services and work exclusively or primarily for one designated person in a financial year.
Even though you may consider someone to be a contractor, the State Revenue Office may consider them a regular employee. For example, only a 'person' can be an employee, so generally if you engage someone though a trust or company structure, these are not considered employees by normal measures. However, the State Revenue Office can include payments to such entities as part of the threshold.
There are other factors to consider when determining whether a person is a contractor or employee for payroll tax purposes. These can be specific to each business and may change in combination with other factors. Some of these include; who has control and direction, the contract and practical relationship between the parties, are the contracts in place to achieve a “given” or determined result; is the business independent, does the contractor or business have the power to delegate, who bares the risk of the contract, who provides the tools and equipment.
When are subcontractor payments relevant in the calculation of Payroll Tax?
While not all payments to contractors are subject to payroll tax, there are specific circumstances where they are deemed to be wages and thus included in the payroll tax calculation. Here are the general scenarios when contractor payments may be considered relevant for payroll tax:
1. Services Principally for Labour: Payments to contractors who primarily provide labour services, even if they are operating as a sole trader or through a company, trust, or partnership, can be subject to payroll tax.
2. Contractor is an Employee in Substance: If the working arrangement between the business and the contractor resembles an employer-employee relationship, the payments may be liable for payroll tax. Factors include the level of control over the work, the ability to delegate, and the provision of tools and equipment.
3. Contractor Does Not Provide Services to the Public Generally: If the contractor provides services exclusively or almost exclusively (generally for more than 180 days in a financial year) to one client, this can indicate an employee-like relationship, making the payments subject to payroll tax.
4. Specific Contracts for the Performance of Work: In some jurisdictions, contracts that are substantially for the performance of work, as opposed to the supply of goods, can attract payroll tax on the payments made to the contractor.
5. GST exclusive: If payments to contractors are deemed to form part of wages, they are included as GST exclusive.
6. Exemptions and Exclusions: There are certain exemptions and exclusions available that can exclude contractor payments from payroll tax. These can include services that are not ordinarily required by the business, services provided for less than 90 days in a financial year, or services provided by contractors who provide the same services to the public generally.
It's important to note that the rules around contractor payments and payroll tax can be complex and vary by state and territory. The specific legislation and guidelines provided by the state revenue office should be consulted to determine the taxability of contractor payments.
Additionally, because this is a nuanced area of tax law, it is often advisable for businesses to seek professional advice from a tax lawyer to ensure they are complying with payroll tax obligations regarding contractor payments.
How to register for Payroll Tax
The process for registering for payroll tax varies slightly between different states and territories in Australia, but generally follows a similar structure. Here’s a general guide on how a business owner can register for payroll tax:
1. Determine Liability: Before registering, determine if your total wage bill exceeds the payroll tax threshold in your state or territory. This includes all wages, salaries, bonuses, allowances, and relevant contractor payments.
2. Gather Information: Collect all necessary information required for registration. This typically includes:
- Legal Name
- WorkCover Employer Number (WEN)
- Date you began to employ in Victoria and/or Interstate Important: Record this date
- Current year wage estimates for Victoria and/or Interstate
- Past four years wage details for Victoria and/or Interstate including superannuation and FBT
- Business activities you are engaged in
- Contact information including, name, phone number, email and address details
- Grouping details (if your business is part of a group of businesses)
3. Registration Online: Your state or territory will offer online registration through their respective revenue office websites.
4. Complete Registration: Fill out the registration form with the required details. Online forms will guide you through the process step by step.
5. Submit Application: Once the form is completed, submit your application.
6. Wait for Confirmation: After submitting your registration, the state revenue office will process your application. You will receive a confirmation with your payroll tax registration details and information on how to lodge your payroll tax returns.
7. Set Up for Payments and Returns: Set up your processes for ongoing compliance, including how to calculate, report, and pay your payroll tax on a monthly basis and how to complete the annual reconciliation.
8. Stay Informed: Keep up to date with any changes in payroll tax rates, thresholds, and compliance requirements.
For specific instructions, it's important to visit the website of the revenue office in the state or territory where your business operates. For example, in Victoria, you would visit the State Revenue Office (SRO) website, while in New South Wales, you would visit the Revenue NSW website. Each website provides detailed instructions and the necessary forms or online portals to facilitate your registration.
Is payroll tax a tax-deductible expense?
One critical aspect of payroll tax that should not be overlooked by business owners is its nature as a tax-deductible expense. If your business is required to pay payroll tax, it's not all grim news.
While payroll tax does represent an additional outlay based on your total wage bill, it's important to recognise that this tax is generally deductible for income tax purposes. This means that when you calculate your business's taxable income, you can subtract the amount paid in payroll tax, thereby reducing your overall income tax liability. It's a silver lining that can sometimes be missed amidst the complexities of tax compliance.
However, as with all matters related to taxes, conditions and regulations can change, so it's advisable to consult with a tax professional to ensure you're maximising your tax deductions appropriately and remaining compliant with current tax laws.
Tips for Managing Payroll Tax
To manage payroll tax effectively:
1. Keep Accurate Records: Use accounting software, such as Xero, to maintain accurate records of all payments to employees and contractors.
2. Understand Your Obligations: Know the thresholds and rates for the state or territory in which your business operates.
3. Consult with Professionals: If in doubt, consult with a tax professional who is familiar with state taxation laws.
Payroll tax obligations need to be carefully managed to ensure compliance with the relevant state revenue offices and to avoid payroll tax audits.
Payroll Tax Compliance and Audit Activities
When payroll tax is reported or paid late, businesses can face a range of penalties and interest charges. The specifics can vary by jurisdiction, but generally, the penalties for late payment or reporting of payroll tax in Australia may include the following:
Interest on Unpaid Amounts: If payroll tax is not paid by the due date, interest may be charged on the outstanding amount. The interest is typically calculated daily from the due date until the date payment is made.
Late Payment Penalty: If you pay your payroll tax after the due date, you may be charged a penalty in addition to the amount of tax owed. This is often a percentage of the unpaid tax.
Increasing Penalty Rates: Some jurisdictions apply increasing penalty rates the longer the debt remains unpaid. This can be structured as a tiered system where the penalty increases at set intervals (e.g., monthly).
Audit and Compliance Activities: Revenue offices conduct audit and compliance activities and can impose penalties as a result of findings from these activities.
Payroll tax is a state-based tax on the wages you pay, with specific thresholds and rates that vary across states and territories. It is a separate entity from the federal PAYG Withholding system.
For many business owners in Australia, the terminology ‘payroll tax’ and ‘PAYG Withholding tax’ can be confusing, so understanding the distinction between payroll tax and PAYG Withholding Tax is important.
By keeping informed and diligent with your payroll accounting, you can ensure that your business complies with all its tax obligations, avoiding any potential penalties and contributing responsibly to state revenue.
For any further queries relating to Payroll Tax, or on any other matter, please get in touch with us at Platinum Accounting & Taxation (03) 9746 6479.