Payroll tax is a matter that is not prioritised and considered less important as other federal taxes. This topic is not usually discussed in the academia, and, therefore, employers and tax professionals normally have minimal knowledge regarding this subject. Furthermore, payroll tax liability has a high threshold and is not generally applicable to most clients.
Non-compliance to payroll tax regulations may negatively impact taxpayers and therefore warrants consideration. Although different payroll tax regulations apply to different states, this article focuses on those legislations that are applicable across Australia.
Payroll Tax
Payroll tax is payable by Australian employers who pay annual wages exceeding a particular threshold. Thresholds and tax rates are adjusted each year and varies between jurisdictions. For example, in NSW, the threshold for the 2018/19 financial year is $850,000 where employers must pay tax at 5.45% for the portion over this threshold.
Payroll tax payments are made monthly with an annual reconciliation requirement at the end of the financial year. If the payer must pay payroll tax in multiple jurisdictions, the threshold is adjusted for each state to ensure that the same proportion of payroll tax is paid.
Salaries and Wages
The amount of ‘taxable wages’ is considered when calculating the amount of payroll tax payable. However, the term ‘wages’ is a general term that encompasses several types of payments. The following discusses the nine forms of payments that employers must pay payroll taxes on:
Division 1 - Wages
A principal part of taxable wages subject to payroll tax is made up of wages paid or payable to employees. Payroll Tax Act 2007 defines wages as ‘normal’ wages, remuneration, salary, commission, bonuses or allowances paid to an employee. Note that this also includes amounts paid by a company for a director’s remuneration.
Division 2 – Fringe benefits
Taxable wages also include fringe benefits. If the fringe benefit is exempt, it is not liable for payroll tax. When calculating the amount of fringe benefits for the purposes of payroll tax, the grossed-up amounts are used, not the ‘reportable value’. The reportable value is the amount shown on group certificates and does not correspond to the full value of the fringe benefit.
Division 3 – Superannuation Contributions
Employers are also liable for payroll tax on employer superannuation contributions. These include employer superannuation contributions made on behalf of employees, directors, relevant contractors or agency workers. After-tax contributions made by employees to any superannuation fund, including those managed by their employers, are not superannuation contributions made by employers and are therefore not subject to payroll tax.
Division 4 – Shares or options
The value of shares and options granted to employees under Employee Share Scheme (ESS) are also considered as wages. The consideration paid by the employee or director is deducted from the value of shares and options assessed as taxable wage.
Division 5 – Employment Termination Payments
Employee Termination Payments are also liable for payroll tax. These are payments made by an employer as a consequence of employee termination or retirement less the income tax exempt component such as genuine superannuation lump sum paid on retirement. This also includes the payment of unused annual leaves or unused long service leaves.
Division 6 – Allowances
Wages also include all other allowances except for those relating to motor vehicle and accommodation. However, per Division 6 of the Payroll Tax Act 2007, the portion of motor vehicle or accommodation allowances paid in excess of Commonwealth taxation limits are considered as wages.
Division 7 – Contractor Provisions
Payments to contractors are also considered as wages if they were paid under a ‘relevant contract’. These might include payments made to contractors, subcontractors, agents, consultants or other entities, be it natural persons or corporate entities, that were paid to perform services for the business.
Division 8 – Employment Agents
An employment agency arrangement exists when an employment agent engages a worker to provide services to a client. If an employment agency arrangement exists, the agency makes Division 8 payments that may be subject to payroll tax.
However, if the agency was hired to find a worker who is subsequently hired and paid by their client as an employee or contractor, the payments made by the client are considered as wage payments under Division 1.
Division 9 - Other
Other payments subject to payroll tax also include payments made to group employers and third parties made upon the employee’s request.
These include payments made to:
External payroll companies
Employee’s spouse
Employee’s superannuation fund
Another private company
Division 9 also covers payments made by companies to directors. The portion of GST of any payment made is excluded from the definition of wages.
Payroll Tax Jurisdiction
Wages are only taxed in one jurisdiction to avoid double-taxation. For example, wages are taxable in NSW if the work was done in NSW. Subsequently, NSW payroll tax is only applied to taxable wages in NSW.
Wages paid to an employee who works only in NSW are taxable in NSW for that month.
Complications arise when an employee works in multiple states or is working from overseas. In these cases, the employer must use the nexus provisions, a four-tiered test, to determine which jurisdiction the wage is taxable at.
Payroll Tax Administration
Taxpayers can seek for an amendment up to five years after their payroll tax has been assessed. If the new assessment results in an overpayment, then the difference is refunded. However, if extra tax has to be paid, interest and penalties may be applied.
The interest charged on the shortfall amount is around 9% while penalty tax rates vary from 0% to 75%, depending on the circumstances and the taxpayer’s culpability. For example, a tax shortfall will not attract penalties if the employer is able to prove that they took reasonable care to comply with the act or if they made a voluntary disclosure prior to an investigation.
A 20% shortfall penalty applies if the disclosure was made after an investigation has started. 25% shortfall penalty applies if the Commissioner deems that the taxpayer did not take reasonable care after an investigation is completed. The maximum penalty tax of 75% applies when there was an attempt to intentionally disregard the law.
Compliance to payroll tax in NSW is regulated by the NSW Office of State Revenue (OSR). This body carries out formal inquiries directed at all employers who may be liable for payroll tax
Objections can be made within 60 days of a decision, determination or assessment being issued by NSW OSR. The statement must contain a thorough discussion on the grounds for the objection as well as documents in support of the submission.
Please contact us on 02 9299 7044 or email us on admin@lockwood.com.au if you have any questions regarding pay roll tax.
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