Payroll Tax

Payroll taxes in Australia are a percentage levy on the value of business wages, levied cooperatively by the states and territories.

The definition of ‘wages’ for payroll tax purposes is expanded to include not only salary and wages, but also contractor payments, allowances and fringe benefits. “Fringe benefits” generally refers to taxable amounts caught under the Federal FBT (Fringe Benefits Tax) rules.

Payroll Tax In Australia – States and Territories

Looking for the PAYG Income Tax Instalment (Withholding) rates? Go here

In Australia payroll taxes are implemented and collected by the various state and territory governments, each of which set:

• the payroll tax percentage rates
• tax thresholds – the levels at which payroll tax becomes payable

Payroll tax laws harmonisation

In 2006 and subsequently the states and territories agreed to harmonise their payroll tax laws, and have legislated accordingly. However certain differences persist, and it remains necessary to consult the law and practice of each jurisdiction in which wages or benefits are payable, or in which operations are conducted, to ensure compliance.

Separate registrations are required to be made in each state or territory in which there is a payroll tax obligation.

Notably there remain differences between the jurisdictions in relation to matters such as the payroll tax rates, thresholds, exemptions and rebates, a number of definitional issues as to what is taxable and in the treatment of allowances.

“Nexus” Rules – where tax is to be paid

From 1 July 2009, the payroll tax “nexus” rules provide the way to allocate taxing rights when the services of an employee are performed in more than one jurisdiction during the month. Priority of taxing is based on a four-level test, in descending sequence:

• Test 1 – payroll tax is paid in the jurisdiction of the the employee’s principal place of residence.

If the employee doesn’t reside in Australia:

• Test 2 – payroll tax is paid in the jurisdiction of the employer’s registered ABN address, or if no address or there is more than one, the jurisdiction of the employer’s principal place of business

If the foregoing circumstances don’t exist (i.e. a relevant address does not exist under Tests 1 and 2), then:

• Test 3 – payroll tax is payable in the jurisdiction where the wages, or the largest proportion of wages is paid.

If none of the foregoing are applicable (i.e. neither the employer or employee have Australian addresses and the wages are not paid in Australia), then

• Test 4 – payroll tax is payable in the jurisdiction in which the work is mainly (at least 50%) of the work is performed.

Working overseas

The payroll tax for an employee working overseas for less than 6 months is paid in the jurisdiction where the wages are paid (or payable).

Working overseas for a continuous period of more than 6 months results in the payroll being exempt from payroll tax. The necessary continuity is not broken by a period of holiday leave, or to perform a related work assignment followed by the immediate return to overseas service.

The nexus rules are quite complex – for a more detailed summary, see NSW Office of State Revenue Fact Sheet (PDF 4 mb)

In general..

Tax-free thresholds are generally set by way of prescribed amounts which are deducted from the gross taxable payroll. For businesses operating in more than one jurisdiction, there are calculations designed to reduce the adding together of state-based deductions.

However, grouping provisions operate to tax the combined payrolls of entities which are linked by relationships, including by way of entity, operations and links of influence. A single threshold deduction is applied to one designated employer, and the other group members are subject to tax without any deduction.

Grouping Provisions – Common Mistakes

Each of the payroll tax jurisdictions have grouping provisions, which seek to add business entities together for payroll tax purposes. The purpose is to apply a single exemption level to groups of related entities, which might otherwise each have a payroll below the minimum threshold.

Determining when entities are to be grouped for payroll tax purposes has an important bearing on the amount of payroll tax payable. Each payroll tax jurisdiction (i.e. state or territory) publishes grouping compliance information.

A article from Cooper Grace and Ward (linked below) outlines common payroll grouping mistakes to avoid. They include:

• missing ‘sets’ of individuals
• smaller groups being subsumed into larger groups
• assuming only trading businesses can be grouped
• not realising that a discretionary beneficiary can be deemed to control a trust
• not checking for common employees

Read the full article here: Payroll tax grouping – common mistakes to avoid

Payroll Tax Links

• State-by-state
• Payroll Tax News – Tobin Partners

This page was last edited 2019-01-02