Any business that employs staff needs to consider payroll tax, but it is an area that can be very complex and, as a result, there is a high risk of running into problems.
There are a number of areas to be aware of in payroll tax. These include:
Registration thresholds
A business must register for payroll tax as soon as its ‘taxable Australian wages’ exceeds the registration threshold of the relevant state or territory in which it operates.
These rates and thresholds vary significantly between each state and territory. For example, in New South Wales, the payroll tax rate is currently 5.45% on taxable Australian wages that exceed the annual threshold of $750,000.
Taxable Australian wages
Once a business reaches a certain size, it may become taxable in a number of states and territories even if only one or two staff are employed in a particular jurisdiction.
This can be a trap for businesses, especially those with management based outside Australia who may not be familiar with the way rules vary between different states and territories.
There has been an increase in audit activity in this area by state revenue offices in recent years, accompanied by an increase in the level of data matching and information sharing at all levels of government.
It is also worth noting that the scope of ‘wages’ for payroll tax purposes is generally quite broad, covering such items as:
- Allowances, bonuses and commissions
- Taxable fringe benefits (usually grossed up)
- Shares or options under an employee share scheme
- Superannuation contributions
- Termination payments.
Tax-free threshold
Businesses that pay wages in more than one state or territory can apportion the relevant tax-free thresholds based on the proportion of wages in a particular state compared to the total of all wages.
The payroll tax rate is then applied to the difference between total wages for that state and the reduced threshold.
Related businesses
The payroll tax grouping rules are broad, and this is another key area that is often not well understood.
Businesses can generally be grouped in one of three ways:
- Related under the Corporations Act – where one company is a subsidiary of another, or two companies are each subsidiaries of the same holding company:
- Commonly controlled businesses – where two businesses are controlled by the same person or set of persons, directly or indirectly; and
- Employees used in another business – where employees of one business are used to perform duties for another business.
In the second and third categories, the Tax Commissioner has discretion to exclude a business from being ‘grouped’ if it can be shown that the businesses are sufficiently independent.
The third category in particular can be very subjective, and it is recommended that any situation where employees provide services for more than one business is reviewed carefully to consider whether the businesses might be grouped.
One of key implications of the grouping rules is that only one tax-free threshold is available to the group as a whole. This may increase the total payroll tax liability significantly, especially where employees across the group operate in a number of states or territories.
Payments to contractors
This is another common trap, as payments to contractors can be included in the scope of ‘wages’ for payroll tax purposes where a payment is made mainly for services (as opposed to a supply of goods with ancillary services), and none of the specific exemptions apply.
As well as payments to individuals, these provisions extend to entities unless they engage two or more persons to carry out the services under the contract.
This means a ‘one man band’ company will usually be caught by the contractor rules, and payroll tax will apply in a similar way to an individual employee providing similar services.
Other exemptions that may apply include:
- services of a kind not ordinarily required; services of a kind required for a total (not necessarily consecutive) of less than 180 days in a year (e.g. seasonal fruit pickers);
- services provided by a contractor for a total (not necessarily consecutive) of less than 90 days in a year; and
- services performed by a person who ordinarily provides such services to the public generally.
