Payroll Tax: Why do we have it, and what does it do?
/By Will Parker – QiBalance Bookkeeping, Certified Bookkeeper
If you employ in Australia, and your total wages paid or payable is over a certain threshold, you may be required to pay payroll tax: a tax paid by businesses to the states of Australia they employ in. Payroll tax is charged as a percentage on the dollar. The tax rates, tax-free thresholds and exemption to Payroll tax differ between states.
Payroll tax is a regulatory requirement, and it is mandatory for businesses that meet state criteria to pay it.
While Payroll tax is an important source of revenue for the states, it is not very popular with businesses, and can be quite politically divisive. In this blog post, we will take a look at how Payroll tax came about, and some of the changes and challenges it has undergone, in order to understand the way Payroll tax operates today.
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How Does Payroll Tax Work?
The states (as well as by the Northern Territory and Australian Capital Territory) charge payroll tax to businesses that employ within their borders. The tax-free thresholds and the rates at which payroll tax is charged vary between jurisdictions, depending on the needs of the state in question. Deduction entitlements also differ between states. Additionally, some states have a tiered payroll tax system, where a higher rate of tax is charged at given thresholds.
In Western Australia, payroll tax is administered and collected according to the Pay-roll Tax Act 2002 and the Pay-roll Tax Assessment Act 2002.[1]
The payroll tax rates and exceptions are listed below:
Payroll Tax By State
[2]
*The deduction/threshold entitlement may be reduced for businesses that employ for part of the financial year or in more than one state or territory.[2] The deduction/threshold entitlement may reduce as wages paid increase in some states and territories.[2]
The minimum annual Australian wages at which a business reaches the (annual) payroll tax threshold for each state are compared in the graph below:
Minimum Annual Payroll Tax Thresholds
(All states except for NSW and Tas have an additional monthly threshold; NT, SA and Tas also have weekly thresholds.[2] A business is required to pay payroll tax if they reach any state threshold for a state they employ in and are not entitled to an exemption.)
The standard rates each state charges for payroll tax at the lowest threshold are compared below:
Standard Payroll Tax Rates AT Minimum Thresholds
*SA rate increases incrementally from 0% to 4.95% between $1,500,000 and $1,700,000.[4]
Businesses must register to pay payroll tax in line with state requirements. Further details regarding specific state payroll tax requirements can be found on the Payroll Tax Australia website or on the state revenue office websites:
If you have any queries about payroll tax, or would like help meeting payroll tax obligations, QiBalance Bookkeeping can assist you.
QiBalance Bookkeeping can help with the following:
Advise when the payroll tax threshold is approaching and register the company for payroll tax on behalf of the client.
Reconcile payroll control accounts and prepare payroll tax.
Provide clients with detailed reports supporting the amounts to be paid.
Lodge payroll tax on receipt of signed client approval.
Payroll tax serves an important purpose for the states. However, it is also criticised by those who disagree with the concept of payroll tax in principle. Additionally, some disagree with the way Australian payroll tax is implemented.
How Did Payroll Tax Come About?
Payroll Tax was first introduced by the Federal Government in 1941, during WWII.[7] It was instituted in order to pay for a national child endowment scheme.[8] The scheme paid endowment at a rate of five shillings per week to the carers of more than one child under the age of 16 years.[8]
Did you know? Payroll tax was first implemented at a flat rate of 2.5% on paid wages.[8]
This was a time for changes to the taxation structure, as the federal government also consolidated income tax in an effort to meet requirements to wartime funding.[9] Prior to this, income tax was levied by both state and federal governments.[9] This resulted in a decrease in direct state tax revenue, and a replacement of this loss with federal government grants.[9]
In 1971, following lobbying efforts of the states, payroll tax was handed from the federal government to the states to administer.[9] Over time, varying payroll tax rates, thresholds and exceptions were introduced as the states altered the tax structure to suit their specific needs and to compete with other states.[9]
In 2007, state treasurers announced a decision to improve legislative and administrative payroll tax ‘harmonisation’.[10] The states proceeded to align payroll tax provisions in key areas, including lodgement timing, motor vehicle and accommodation allowances, and grouping of businesses. [10] This helped close loopholes that businesses could use to get around payroll tax.[8]
However, despite payroll tax harmonisation, there remains a lack of conformity between states regarding payroll tax rates, thresholds and exemptions.
Payroll Tax and GST: the Tax Reform That Might Have Been
It was the year of 1991, and the opposition leader of the Liberal Party, John Hewson, was campaigning to introduce a goods and services tax (GST).[11] Hewson wanted to abolish ‘hidden taxes’ such as payroll tax, fuel excise, sales tax, superannuation lump sum tax and Customs duties, and replace them with a goods and services tax that applied across the board.[11]
Fun fact: Just 10 days before polls opened for the 1993 election, Hewson was interviewed by Mike Willesee on A Current Affair.[12] The infamous interview, where Hewson was unable to provide an easy answer on whether a birthday cake would cost more or less under his proposed tax model, is described as ‘the turning point in the whole campaign for… Hewson’ that ‘decided the election’ against him.[12][13]
Hewson lost the 1993 election, and along with it, the opportunity to introduce the Goods and Services Tax he wanted.
In 1995, John Howard, who was leading the Liberals, declared that “never ever” would a Goods and Services Tax be introduced if he were to become Prime Minister.[14] However, once in office, Howard and his treasurer Peter Costello soon felt “[they] needed to put [GST] back on the agenda”, and after meeting with the State Premiers, they established a tax review in 1997 to identify their options for reform, including ‘a broad-based indirect tax to replace some or all of the existing indirect taxes’. [14]
Despite significant opposition to a Goods and Services Tax (GST), Howard was narrowly re-elected in 1998 and successfully introduced GST in A New Tax System (Goods and Services Tax) Act 1999. However, the GST that was passed into law was watered down from what Howard had hoped it would be.[15] In order to get the legislation to pass, Howard had to compromise.[15] As a result, there were a number of exceptions to the GST that cut into the revenue it raises.[15] The GST rate of 10% is also well below the Organisation for Economic Cooperation and Development (OECD) average of 19.5, further limiting revenue collection.[16]
The GST ‘replaced a range of less efficient federal and state indirect taxes’.[9] However, importantly, it did not provide states with sufficient revenue for them to be able to afford to abolish Payroll Tax like Hewson had hoped for.
Payroll Tax Criticisms
Payroll tax is, unsurprisingly, not particularly popular with businesses, whose profitability and competitiveness can be reduced by the tax.[17] However, it is not only business owners that dislike payroll tax. Jenny Lambert, director of economics, employment and skills at the Australian Chamber of Commerce and Industry (ACCI) from 2011-2022, has described Payroll Tax as a “tax on job growth”. [17]
“For those businesses over or near the thresholds, every additional employee costs more in tax,” Lambert said in 2022.[17] “Payroll Tax [also]… places a high administrative and compliance burden on businesses.”[17]
This administrative burden is particularly high for businesses that operate across state lines.[17] Businesses are required to comply with payroll tax regulations for each state they employ in. Given the variation in rates, thresholds and other particulars (such as exemptions) between states, businesses that employ in multiple states have a greater level of complexity to manage.[17]
Payroll Tax may also disincentivise wage growth: in a 2021 paper released by the ACCI following a national survey of 620 of its members found that 21% would increase the wages of their employees if Payroll Tax was abolished.[17]
Along with critique of Payroll Tax as a concept, there are those who call for it to be reformed. There is a belief that while Payroll Tax is ‘conceptually efficient’, its efficiency is undermined by the many thresholds and exemptions which increase complexity for businesses.[7] Proponents with this view call for payroll tax exemptions to be reduced or removed and the tax rate lowered to a standardised rate nationwide, in a move that would see Payroll Tax move closer to its original form.[7]
However, whether such reforms are likely, or even possible, remains to be seen.
The Modern-Day Value of Payroll Tax
Drawbacks aside, it is undeniable that Payroll Tax plays a critical role in providing states with crucial revenue for essential services.
In Western Australia, payroll tax revenue collected by the State Government goes towards meeting the costs of public services such as:
Education
Health
Public safety
Law and order [18]
While states do receive revenue from GST, payroll tax is a way for states to collect revenue directly. States are limited in the types of taxes that they are permitted to introduce.[7] As a result, payroll tax plays an important role in allowing states to continue to provide Australians with the many valuable services we rely on, both to support us in the present and to advance our communities into the future.
In the 2023-2023 financial year, figures released by the Australian Bureau of Statistics show WA payroll tax made up 40.6% of tax revenue raised by the WA government, making up 11.5% of total state revenue.[19][20]
Payroll tax also represented 28.3% of tax revenue for the Australian Capital Territory, 28.8% of tax revenue for New South Wales, 38.2% of tax revenue for the Northern Territory, 28.3% of tax revenue for Queensland, 28.1% of tax revenue for South Australia, 29.3% of tax revenue for Tasmania, and 25.7% of tax revenue for Victoria.[19][20]
Where to From Here?
Payroll tax is one of many taxes charged in Australia. Australian state and national governments use these taxes in combination with each other to manage the economy, raise revenue and promote equity.
You don’t have to look far to find people calling for reforms to the tax system. In 2023, the International Monetary Fund (IMF) suggested a range of measures to the Australian government that include raising the GST rate, decreasing the list of things GST is not collected on, and winding back exemptions to Capital Gains Tax.[21]
The Organisation for Economic Co-operation and Development (OECD) also recommends that Australia ‘raise and broaden’ GST (the revenue raised by Australia’s GST only adds up to 3.4% of our GDP, compared with the OECD average of 6.8%).[16] In addition, they suggest a replacement of property stamp duties with land taxes, as well as possible inheritance and estate taxes.[16]
Financial services company AMP’s chief economist, Dr Shane Oliver, would also like to see a change in Australia’s high reliance on income tax – OECD figures show that the percentage of Australian government revenue that comes from income tax is 62%, the highest in the developed world.[22]
However, as former Liberal leader John Hewson discovered, tax reform is not always politically popular. Politicians may shy away from pushing for significant changes to the tax system for fear of displeasing voters.[22]
In the words of Dr Oliver: “Tax reform in Australia… has become harder and harder.”[22]
Hard is not the same as impossible though. Going forward, the big challenge for any sort of tax reform appears to be building consensus and working to get everyday Australians onboard. There is no indication at this stage whether comprehensive payroll tax reform is on the horizon.
Payroll Tax in a Nutshell
Payroll tax is a state tax on the dollar of business payrolls over a certain threshold.
It is a regulatory requirement, meaning that payment is mandatory if your business meets the criteria to do so. QiBalance Bookkeeping can help you meet payroll tax registration and payment requirements.
Payroll tax rates, thresholds and exemptions differ between states.
Businesses that employ in WA should self-register for payroll tax within seven days if their total Australian wages exceed $83,333 in any single month to avoid penalties.[1]
Payroll tax has its critiques and there are those who want it reformed or removed. However, payroll tax plays a vital role in generating revenue for state governments and helps provide Western Australians with critical education, health, public safety and law and order services.
Payroll tax is part of a larger tax environment and, like other taxes, is subject to revisions. If you employ in Australia and may be near the threshold, it is important to stay on top of changes to payroll tax – QiBalance Bookkeeping is here to help you in this.
References
Government of Western Australia. (2024). Payroll Tax Employer Guide. https://www.wa.gov.au/government/multi-step-guides/payroll-tax-employer-guide
Australian Revenue Offices for the States and Territories of Australia. (2024). Resources. https://www.payrolltax.gov.au/resources
Australian Capital Territory Revenue Office. (n.d.). Payroll tax. https://www.revenue.act.gov.au/payroll-tax
Revenue South Australia. (n.d.). Rates and Thresholds. https://www.revenuesa.sa.gov.au/payrolltax/rates-and-thresholds
Australian Revenue Offices for the States and Territories of Australia. (n.d.). About Payroll Tax Australia. https://www.payrolltax.gov.au/
Commonwealth of Australia. (2024). Payroll tax. https://business.gov.au/finance/taxation/payroll-tax
PricewaterhouseCoopers [PwC]. (2021). Payroll tax: Busting myths and fixing the system. https://www.pwc.com.au/tax/assets/tax-reform/127080731_payroll-tax-report_v2.pdf
Tobin, P. (2017). Brief History Of Payroll Tax In Australia. https://www.tobinpartners.com.au/brief-history-payroll-tax-australia/
Reinhardt, S., & Steel, L. (2006). A brief history of Australia’s tax system. https://treasury.gov.au/publication/economic-roundup-winter-2006/a-brief-history-of-australias-tax-system
Australian Revenue Offices for the States and Territories of Australia. (2022). 2012 Harmonisation Joint Protocol. https://www.payrolltax.gov.au/2010-harmonisation-joint-protocol
Stephens, T. (2021). From the Archives, 1991: Dr John’s tax shoes goes on tour. https://www.smh.com.au/politics/federal/from-the-archives-1991-dr-john-s-tax-show-goes-on-tour-20211115-p5992h.html
Bedo, S. (2019). How Mike Willesee’s infamous trainwreck interview with John Hewson decided the election. https://www.news.com.au/entertainment/tv/flashback/how-mike-willesees-infamous-trainwreck-interview-with-john-hewson-decided-the-election/news-story/0d2e61082afdef43dfceb1690221d681
Sakzewski, E. (2019). The Mike Willesee question that turned the ‘unlosable election’. https://www.abc.net.au/news/2019-03-01/mike-willesee-interview-current-affair-john-hewson-career/10862440
Kehoe, J. (2010). GST: the reform that divided a nation. https://www.afr.com/politics/gst-the-reform-that-divided-a-nation-20100630-iv9fo
Downer, A. (2020). Why the last great tax change remains unfinished business. https://www.afr.com/policy/tax-and-super/why-the-last-great-tax-change-remains-unfinished-business-20200628-p556wv
Anders, G. (2024). Can tax reform solve Australia’s urgent economic issues? https://intheblack.cpaaustralia.com.au/taxation/can-tax-reform-solve-australias-urgent-economic-issues
Anders, G. (2022). Is it time for payroll tax reform? https://intheblack.cpaaustralia.com.au/taxation/is-it-time-for-payroll-tax-reform
Government of Western Australia. (2024). About payroll tax. https://www.wa.gov.au/organisation/department-of-finance/about-payroll-tax
Australian Bureau of Statistics. (2024). Government Finance Statistics, Annual. https://www.abs.gov.au/statistics/economy/government/government-finance-statistics-annual/2022-23
Australian Bureau of Statistics. (2024). Taxation Revenue, Australia. https://www.abs.gov.au/statistics/economy/government/taxation-revenue-australia/latest-release
Ryan, P. (2023). IMF urges tough tax reforms as Australia treads ‘narrow path’ to avoid recession. https://www.abc.net.au/news/2023-02-02/imf-urges-tough-tax-reforms-for-australia/101920882
Ziffer, D. (2024). ‘It’s not just unfair but immoral’: Why experts say Australia’s tax system is broken and what can be done to fix it. https://www.abc.net.au/news/2024-02-12/tax-reform-unavoidable-income-tax-workers-ageing-population/103445138
