Payroll tax

What is payroll tax, and how does it work?

Staff in more than one state? |  Harmonisation |  Exemptions

Wages that your business pays to staff will more than likely attract payroll tax – unless your annual wages bill is less than the thresholds at which the tax starts to bite. It is levied on the sum of all forms of remuneration – wages, salary, commissions, allowances and bonuses, penalties and leave loadings if applicable.

Include super guarantee and salary sacrifice components, and taxable fringe benefits (see the FBT page for details). Most states now include contractor payments in 'payroll', as well as employee share plans and option schemes.

Payroll tax applies once the total wages you pay passes certain thresholds. The tax generally applies only to the portion of total wages that exceed the threshold. But as it is a state and territory-based tax, the calculations are muddied by having varied thresholds. And the rates each state applies are also unhelpfully inconsistent.

Staff in more than one state?
If you have staff in more than one state, the cut-in level is based on your total Australian wages bill. So if, for example, your head office is in Sydney but you have representatives in Melbourne, Adelaide and Perth, and the Sydney part of your wages bill is less than the NSW payroll threshold (see rates and thresholds in member's section), your business will still have to pay payroll tax in NSW if the national wages exceeds the threshold.

In these circumstances, the state that gets the tax payment depends on both the place where wages are paid and where the work is actually done. However proposed changes that aim to 'harmonise' the rules should see payroll tax liability limited to the jurisdiction where the worker resides rather than where they are paid.

Car and travel accommodation allowances escape payroll tax to a certain extent. As payroll tax is a state-based impost, some specifics vary between states and territories (Western Australia for example varies the car and travel allowances made).

Harmonisation
Most jurisdictions have taken steps already to harmonise payroll tax between states, so while the rates and thresholds will continue to differ, the legislation that governs the tax will be virtually identical.

Exemptions
There are certain organisations that are exempt from paying payroll tax, such as benevolent and religious institutions, non-profit hospitals and charities.

Some forms of payments, no matter who makes them, are also exempt. These can include compensation payments made to injured workers, maternity or adoption leave, the income tax free part of a redundancy payment, and payments to employees while they are on leave to serve in the defence forces.

Further reading: Hiring: Your staffing options

Reviewed April 2, 2012

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