Payroll tax is a State/Territory-based tax that levies tax on employers. Payroll tax was originally introduced by the Federal Government in 1941 to fund the war effort and child endowment payments.
How is payroll tax calculated?
A liability for payroll tax arises when an employer’s `taxable wages’ exceed a prescribed threshold. The amount of the liability is calculated by applying a prescribed percentage rate to the amount of the employer’s taxable wages.
Connection of Wages to State/Territory
Liability for payroll tax arises when wages paid by an employer have a connection with a State or Territory. For example, in the Australian Capital Territory (ACT), payments to the following employees are deemed to have a connection with the ACT:
- Employee performing services entirely in the ACT.
- Employee performing services partly in the ACT and the employee is based in the ACT.
- Employee performing services partly in the ACT and the employee is based overseas, but the employer is based in the ACT.
- Employee performing services partly in the ACT and the employee and employer are based overseas, but wages are paid or payable in the ACT.
- Employee performing services partly in the ACT and the employee and employer are based overseas, and wages paid or payable overseas, but for services being performed mainly in the ACT.
- Services are performed overseas, but wages paid or payable in the ACT.
Wages Thresholds and Rates
The taxable wages threshold in the ACT is currently $166,666.66 per month (or $2m per year). The threshold is applied to the sum of the employer’s Australia-wide wages. Where the sum of these amounts does not exceed the threshold, the employer is not liable for payroll tax in the ACT. Where the sum of these amounts exceeds the threshold, payroll tax is payable on the amount that exceeds the threshold.
Please note, the rates and thresholds vary between different States and Territories as detailed in the following Table:
In another Tax Update, we will advise on how payroll tax is calculated where wages are connected with more than one State or Territory.
Certain employee payments are exempt from payroll tax. For example, in the ACT the following exemptions apply:
- the tax-free part of a termination payment;
- wages paid to new starters receiving eligible training, up to 12 months;
- wages paid to trainees and apprentices are also exempt if the organisation that provides the training:
- is a not-for-profit entity; and
- provides training to apprentices or trainees under approved training contracts; and
- makes apprentices or trainees available to work for other people.
- paid parental, adoption and primary carer leave, up to 14 weeks within 6 months following the birth or adoption of a child;
- wages paid to the Governor-General or an employee on leave from employment because of being a member of an armed force of a Commonwealth country;
- wages paid in relation to services performed by an employee entirely in 1 or more other countries for a continuous period of more than 6 months beginning on the day when wages were first paid or payable to the employee for the services;
- wages paid or payable to employees previously in receipt of unemployment benefits for at least 12 months, for up to 2 years;
- wages paid from a bank account kept under the Financial Management Act 1996; and
- wages paid to ACT Government employees.
Also, certain entities are exempt from the Payroll Tax:
- most charities;
- wages paid by employment agents to certain subcontractors;
- wages paid or payable by a hospital that is a recognised hospital under the Health Insurance Act 1973; and
- wages paid or payable to members of his or her official staff by a consular or other representative of any country in Australia (other than a diplomatic representative).
Payroll Tax Audits by States and Territories
Each of the State and Territory Governments needs payroll tax to fund their expenditures such as their education and health budgets. In more recent years they have been increasingly aggressive in auditing employers who are believed not to be paying the correct amount of payroll tax. Once an underpayment of payroll tax has been detected, significant penalties and interest are imposed. Moreover, information is now freely shared between Federal and State/Territory tax authorities. For example, the ATO may share wages, fringe benefits and superannuation contribution information gained from BASs and single touch payroll data with State/Territory Revenue authorities.