Why employers hate payroll tax

Ask just about any business owner across this country about the things that make their life harder, and more often than not payroll tax will be near the top of the list.

Yesterday employers in New South Wales welcomed a cut to payroll tax in that state when Treasurer Michael Costa announced a cut in the rate from 6% to 5.5% over three years and a lift in the threshold at which the tax kicks in from $600,000 to $623,000.

The Queensland budget also delivered some payroll tax relief, with employers required to pay tax on wages above the state’s $1 million threshold at the rate of $1 in every $4 instead of $1 in every $3.

While both cuts are helpful – Queensland in particular now has the most competitive regime in the country, with the tax kicking in at $1 million and at a rate of 4.75% – they remain seen as tinkering around the edges of a tax widely perceived as an impediment to growth and employment.

Brendan Jones, a client services director with accounting firm Pitcher Partners, says his business clients frequently express frustration at what they perceive as a counter-productive tax.

“Growing your business and employing people is supposed to be a positive thing for the economy and community, but payroll tax effectively penalises employers for doing that by imposing an additional cost when they take on more people, and business owners really dislike that,” Jones says.

The employers that express the greatest displeasure with the tax, he says, are those growing businesses that face the prospect of being slugged as soon as they take on one or two new employees.

“It’s certainly a real factor that comes into the decision-making process to take on new staff, especially for your SME that are perhaps on the cusp of the threshold and expanding their business. Rising wage costs are already pushing many of them towards the threshold, and then they put on a new employee and that can tip them over the line,” Jones says.

While all states have taken steps recently to cut payroll taxes, it is unlikely we will see it disappear from the tax mix any time soon. Ali Noroozi, tax counsel with the Institute of Chartered Accountants in Australia, says the efficiency of the tax makes it an attractive way for governments to raise money.

“It is a reasonably efficient tax. Companies generally keep quite accurate payroll records, so it is easy to calculate the tax obligation and make monthly remittances to the government, so the cost of collecting it is relatively low,” Noroozi says.

The best that business can hope for in the short term, Noroozi argues, is for harmonisation of the different payroll tax rules across the different states.

“NSW and Victoria have already moved to harmonise their definition of wages for payroll tax, so if we could see other states move to uniform definitions, and even rates and thresholds – as long as that doesn’t mean any tax increase – that would be a good thing,” he says.

The nation’s payroll tax rates as they currently stand:

• South Australia: 5.25% on payroll above $504,000
• Western Australia: 5.5% on payroll above $750,000
• Queensland: 4.75% on payroll above $1 million
• Tasmania: 6.1% on payroll above $1 million
• New South Wales: 5.75% on payroll above $623,000
• Victoria: 4.95% on payroll above $550,000

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