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

Be inspired by this CPA’s philosophy

 Santhariah, together with his mother and siblings, also contributed to the family’s survival, opening a stall selling tea, coffee, noodles and home-made banana fritters.

“Most of the time the workers were too poor to pay cash, so our sales were mostly on credit,” he says. “I was 13 and I kept the books and did a debt collection task to collect the money on payday. This gave me first-hand experience of how to manage money in a business environment.”

Yet it was a job as an articled clerk at a British chartered accounting firm, from 1972 to 1977, that would cement his passion for accounting and finance and admitted him to the Fellowship of Certified Practising Accountants.

In fact, after retiring at the age of 64, he completed research on Malaysian GST for a masters in taxation at the University of New South Wales and, at the not-too-tender age of 73, gained a PhD for his thesis on Malaysian GST compliance costs of taxpayers at RMIT University. A series of articles on GST in its many forms, for international tax journals, followed.

“Learning is the best anti-ageing drug I know,” says Santhariah.

In 1983, he joined the Swedish-owned Malaysian Match Company as financial controller, gaining knowledge of manufacturing financial accounting, human resources and labour relations. He was seconded to New Zealand in 1986 to work in a consultancy role setting up a general, computer-based accounting system incorporating GST.

The only member of his family to graduate from university, Santhariah says his experiences and hardship during childhood reinforced a sense of discipline that allowed him to escape the poverty trap.

“Where there is a will, there is a way to achieve success in business and education and break the poverty cycle.”

Santhariah embraces Hindu Karma yoga, which embodies the belief that we have a social and moral debt to repay to society what has been given to us, and this is evident in his many charitable commitments that have included work for church, education and Indigenous services groups.

He says his achievements so far have been due to help rendered by kind people along his journey.

Recently, he earned a certificate of appreciation for services to the underprivileged at the World Humanitarian Drive.

Currently, the retired accountant is gathering a like-minded community of professionals who can offer free advice to small businesses via Zoom and give regular talks on financial topics to the Malaysian small business community.

One piece of advice

“Don’t be idle or retire and say you want to play golf. Spare some time to help others and you will activate regions of the brain associated with pleasure, social connection and trust.”

Ref: CPA 

Why New Zealand's tax policy is gold standard

 At a glance

New Zealand’s Generic Tax Policy Process (GTPP) has been in place since 1994 and is well regarded for its focus on consultation through public engagement.

Under the GTPP, the development of tax policies follows a five-stage system: strategic, tactical, operational, legislative and implementation/review.

Public engagement is encouraged at each stage, with the goal of early and frequent consultation, as well as improved transparency and accountability.

“The purpose of interacting with the public is to improve customer, policy and regulatory outcomes, and to inform stakeholders in advance of regulatory changes,” the IRD says. 

“Submitters will often have better access to information on the size and nature of the problem and how the issues can best be solved. 

“Consultation can also enhance voluntary compliance, because it allows interested parties more time to understand why there is a need to change, and more time to adjust to changes.” 

In the third – operational – phase, formal detailed consultation currently takes place during detailed policy design.  

“During the submission period, officials have intensive face-to-face meetings with affected taxpayers.” 

Is the GTPP working?

There’s been strong support for the GTPP over time from other countries, including Australia, although a similar system is yet to be adopted elsewhere.

However, Adrian Sawyer FCPA, professor of taxation at the University of Canterbury Business School and member of CPA Australia's New Zealand Tax Committee, highlights a major issue with the GTPP – using the framework isn’t enshrined in New Zealand legislation. 

Sawyer points out that there have been numerous recent changes made to New Zealand tax laws, particularly in relation to COVID-19, without any public consultation. 

“Setting aside [GTPP] can be done with relative ease with no apparent direct consequences. 

"The purpose of interacting with the public is to improve customer, policy and regulatory outcomes and to inform stakeholders in advance of regulatory changes."

— Inland Revenue Department

“A consequence of the GTPP is that it increases the time it takes to develop and implement tax and social policy,” the IRD says. 

REF: CPA