Is it time for payroll tax reform?

 Payroll tax is a significant source of revenue for Australia’s state and territory governments but its ongoing existence after more than 80 years is under increasing scrutiny, with persistent calls for reform.

At a glance

Payroll tax revenues total nearly A$27 billion a year and are administered by the states and territories.

Widely regarded as a tax on jobs growth, payroll tax can influence how willing a business is to employ new staff.

Reform options include increasing the goods and services tax or adopting other broad-based taxes.

Control of payroll tax was passed to the states and territories in 1971 to provide jurisdictions with revenue for their expenditure on services and infrastructure, with the flat tax rate then uniformly lifted to 3.5 per cent.

Across Australia, payroll tax revenues now total nearly A$27 billion a year, representing between 27 per cent and 40 per cent of state and territory revenues

To put that into greater context, Australia ranks third among the 38 member countries of the Organisation for Economic Co-operation and Development (behind Sweden and Austria) in the share of government revenue contributed by payroll tax.

Pain points

The application of payroll tax has evolved over time. Only businesses with wages bills that exceed specific monthly thresholds need to pay payroll tax, but the thresholds vary by jurisdiction.

As such, businesses operating in multiple states and territories have added layers of complexity in managing their tax affairs.

"Payroll tax is complex, extremely inefficient and distortionary. The proliferation of rates and scaling, tax-free thresholds, discounts and exemptions, as well as definitional differences and grouping arrangements, places a high administrative and compliance burden on business."

— Jenny Lambert, Australian Chamber of Commerce and Industry

“It is not connected to profit but based on wages paid. As we saw during the COVID-19 crisis, when businesses weren’t generating an income, let alone generating a profit, they continued to incur a payroll tax liability.”

“This will involve some difficult questions, some tasks and a massive conundrum – who should do what in the federation, and who should pay for what?

Westacott says harmonising payroll tax bases is one of the first steps towards more efficient state tax systems.

“It’s a tax on labour, so it’s effectively just another way of increasing non-wage labour costs for business,” he says.

“Certainly, when you look at whether we should even have payroll tax, for example, there may be better ways to improve our productivity and competitiveness.

“Removing payroll tax might be one of them, but also the states do need to have revenue for education and health services.

“So, the broader question is, where else will the money come from? If you change the payroll tax ratio and the amount of money the states and territories get, we need to make sure we can still fund the services that governments give to us.”

For one thing, there is no simplified digital system available for businesses to make payroll tax payments.

That compares with the federal government’s Single Touch Payroll system, which is a single, national system for managing employees’ personal income tax and superannuation payments.

“With the previous government, there was an announcement to share Single Touch Payroll information with state and territory revenue offices,” says Kasapidis.

“It was a small step in the right direction. We’d like to see initiatives like that progress, and certainly we’d like to see the states talk with each other about harmonising their regimes.

Kasapidis, CPA Australia’s senior manager tax policy, says that even if there is no wholesale change to payroll tax, CPA Australia would like to see steps taken to make it simpler, easier and clearer, particularly for businesses that operate across states.

At the moment, the states are operating outside of the Single Touch Payroll system.

“What we’d like to see is all of it brought into Single Touch Payroll, and that way digital service providers would have the functionality to make it easy for businesses.

“The reporting and payment would be through a single portal. Hopefully, a lot of the definitions and classifications would be the same.

Ref: CPA