Payroll Tax – Tips & Tricks
Updated: Mar 16
Payroll tax is a tax paid by employers on their taxable wages. This act was implemented along with other significant changes such as the centralisation of income tax collection.
Other countries also utilise payroll tax. For example the US, also applies similar procedures.
Initially, payroll tax was used to fund the Federal Government’s child endowment commitments. At the time the tax was imposed, carers of children aged 16 years or under were paid five shillings per week. As time progressed, different jurisdictions exercised their discretion to use the monies received from Payroll tax for other initiatives, usually towards social security payments.
How does Payroll Tax work?
In 1941, when payroll tax payments initially commenced, employers had to pay 2.5% on wages paid to employees. This regulation was simple and all encompassing, regardless of the type of business involved.
This has since changed and, presently, each state applies a different payroll tax threshold and rate. Employers who pay wages above the threshold are liable for payroll tax. As an example, for NSW, the threshold increased from $800,000 to $900,000 from 1 July 2019.
Why the sudden push to reduce/remove payroll tax?
This has been perceived as an outdated form of tax and a bureaucratic nuisance since it adds a level of administrative complexity for businesses.
An estimate of $22 billion per annum in payroll tax is collected by the state from Australian businesses. To put this into perspective, on average, around $4,000 in payroll tax is spent per additional employee. Aside from this, since payroll tax can be claimed as a business deduction, it costs the government $6.5 billion of lost revenue each year.
The administrative burden is further complicated by businesses who have employees in multiple states. Since each state implements a different threshold and rate, businesses have to calculate the portion of payroll taxes payable to which state based on the total wages paid across all states. The resulting business deduction is reduced based on the percentage share of the specific jurisdiction. Due to the complex nature of the deductions required, businesses require the expertise of accountants to ensure that the correct amount of payroll tax is paid per state.
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