Do you know your payroll tax rights and obligations? We take a look at the crucial payroll tax clauses every business owner should know about.
Payroll tax is a state and territory tax levied on wages paid by employers to their employees unless a relevant exemption or exclusion is applicable, although these and other features of payroll tax can vary across the different jurisdictions.
While payroll tax legislation in NSW and Victoria has been recently harmonised (from July 1, 2007) and Queensland and Tasmania have foreshadowed that they also propose to adopt this model, it should be noted that payroll tax rates and general deduction and exemption thresholds are not part of this exercise.
The current payroll tax rate in Victoria is 5.05 percent with rates in other jurisdictions varying from 4.75 percent (Queensland) to 6.85 percent (ACT).
When is an employer liable for payroll tax? An employer who employs staff in Victoria must register and pay payroll tax when its total Australian wages exceed the general deduction threshold of $45,833 a month or $550,000 over a full financial year; or, when grouped with other businesses, the combined Australian wages of the group exceed the general deduction threshold.
Similar but not identical thresholds apply in other jurisdictions and so further clarification should be sought on the precise position in these jurisdictions.
When is payroll tax paid? The tax is payable monthly, by the seventh day of the month following the month in which an employer’s wage bill has exceeded the general deduction threshold. However, if the estimated tax payable by an employer is relatively low, the employer may apply to the State Revenue Office (SRO) for approval to pay annually.
Employers must lodge an Annual Adjustment Return by July 21 each year. This return reconciles the tax payable for the financial year and incorporates wages paid for the month of June as there is no separate payroll tax return for June in Victoria.
Interest is charged for underpayment, late payment or failure to pay tax at the market rate (currently 6.37 percent) plus a premium of 8 percent per annum. Penalty tax may also be imposed ranging from 25 to 75 percent of the tax payable, with the precise penalty varying according to the circumstances of the case, such as intentional disregard of the law as opposed to exercise of reasonable care, etc.
What payments are included as wages? The definition of wages under state/territory PRT legislation is very broad and includes:
* wages/salaries
* allowances
* commissions
* bonuses
* employer contributions to superannuation funds on behalf of employees
* fringe benefits (as per Federal FBT legislation)
* from 1/7/07, the value of shares and options granted to employees, directors, former directors and some contractors
* payments to some contractors
* payments by employment agencies arising from employment agency contracts
* remuneration paid by a company to or in relation to company directors, and
* employment termination payments and accrued leave
* trust distributions made in lieu of wages in certain circumstances.
The precise position in some jurisdictions may vary from the above and should be clarified further.
What is not subject to PRT? Not all wages are subject to payroll tax as amounts paid by the following are generally excluded:
* religious institutions
* public benevolent institutions
* public or non-profit hospitals
* primary and secondary schools or colleges
* municipal councils
* charitable organisations
* payments to employees while on leave with the defence forces.
Some states have additional exemptions that may need to be clarified further. Examples include teachers’ training colleges, childcare centres, group apprentice or traineeship schemes, ambulance services and employees on maternity or adoption leave.
Non-cash benefits
State/territory legislation expressly provides for payroll tax to be levied on non-cash fringe benefits provided by employers to employees.
The value of such benefits is calculated in accordance with the rules contained in the Commonwealth’s FBT legislation. Some additional points to note are:
NSW and Victoria exclude benefits that are exempt benefits under FBT legislation, and Queensland expressly excludes car-parking benefits.
Treatment of allowances
Allowances are cash amounts paid to employees to cover the cost of meals, tools, etc and are generally fully taxable subject to the following provisos:
* genuine reimbursements of work-related expenses are not allowances and not subject to PRT
* motor vehicle, accommodation and living away from home allowances may be fully or partially exempt in some circumstances.
The exempt rates for motor vehicle allowances (per kilometre) and accommodation allowances (per night) in Victoria for 2007/08 are 70 cents and $201.25 respectively. These rates vary between the different jurisdictions.
A living away from home (LAFH) allowance is a fringe benefit and thus the value of this allowance for PRT purposes is the value specified in the FBT legislation.
Employment agents
In the various jurisdictions, the employment agency is liable for payroll tax for their on-hired workers, with concessions generally available where the end user of the services is tax exempt.
Payments to contractors
While a contractor is not ordinarily considered to be an employee, most states deem contractors to be employees where a ‘service’ contract exists between the person supplying the services (contractor) and the end-user (employer).
Such a contract is usually identified as one relating to the performance of work by a person in the course of carrying on a business. However, only the amount of the payment that relates to labour is liable to PRT, not the cost of equipment and materials that may be incurred by the contractor.
Each state also provides for specific exclusions from its contractor provisions such that contracts will be exempted in certain circumstances:
* the labour component of the contract is ancillary to the supply of materials or equipment (e.g., where the cost of the latter exceeds 65 percent of the contract amount)
* the services provided are not normally required by the business receiving the services and/or the person supplying those services provides them to the general public
* services under the contract are provided by two or more persons supplied by the contractor
* payment of consideration under the contract is greater than $800,000 (NSW) or $500,000 (Tas) – the exemption no longer applies in Vic, and
* the services are those of an owner/driver (NSW, Vic, SA), insurance agent (NSW, Vic and SA) or a direct selling agent (NSW, Vic and SA).
There are no contractor provisions in WA, Qld or NT so that liability for PRT in these jurisdictions will generally only arise on the deeming of the employer/employee relationship where the intention of the relevant contract is to reduce or avoid liability to payroll tax.
Payroll tax grouping rules
All jurisdictions require ‘grouping’ of associated/related businesses so that, where two or more businesses are grouped, their wages are aggregated in order to determine whether a liability exists. However, each employer in the group remains primarily responsible for the payment of PRT on its own wages.
The main circumstances in which businesses are grouped in the various jurisdictions are:
* where companies are related under the Commonwealth’s Corporations Act (i.e., holding/subsidiary relationship)
* where employees of one business perform duties solely or mainly for the benefit of another business
* where there is an agreement between two businesses relating to the performance of duties by employees of one, for the benefit of the other
* where the same person(s) has a controlling interest in two or more businesses, and
* where a business exercises managerial control over a branch or agency (Qld and WA).
Determining whether a group exists largely hinges on the opinion of the relevant commissioner in each state, having regard to the circumstances of each particular case. Generally, other than in respect to companies related under the corporations law, the commissioner has a discretion to exclude an employer from the operation of the grouping provisions. The discretion may be exercised where it can be demonstrated that the grouped businesses are substantially independent and unconnected, and that the relationship is not designed to reduce or avoid PRT.
Generally, where employers are grouped, one group member claims the exemption threshold and the remaining members must pay a flat rate of PRT.
Inter-jurisdictional payroll tax issues
Each state/territory prescribes the circumstances in which wages are liable to PRT in that jurisdiction with the broad criteria for establishing liability being:
* the wages are paid or payable in a particular state, unless the wages relate to services rendered wholly in another state
* the wages are paid outside a state (but within Australia) but all the services to which the wages relate were rendered in that particular state, and
* the wages are paid outside Australia in respect to services rendered mainly in a particular state.
Capital Gains Tax (CGT) issues
Recent changes to the small business CGT concessions have significantly enhanced the benefit of these concessions for eligible small business taxpayers (i.e., those with an annual turnover of less than $2 million or with net CGT assets of not more than $6 million).
CGT concessions
The four CGT concessions available are:
1. Fifty percent active asset reduction—where the basic conditions are met the amount of any capital gain will be automatically reduced by 50 percent.
2. Small business 15-year exemption: this concession fully exempts any gain from CGT if the basic conditions are met, the asset has been continuously held for at least 15 years just before the CGT event, and the individual is either 55 and retired or is permanently incapacitated.
3. The $500,000 retirement exemption provides a once in a lifetime $500,000 CGT exemption where the basic conditions are met, and an individual is either aged over 55, or is under 55 and rolls over the gain as an eligible termination payment to a complying superannuation fund.
4. Small business rollover: this concession is available where the basic conditions are met, and the amount of the gain is used to either purchase a replacement active asset or improve an existing active asset either one year before the sale of the original CGT asset or two years after. Where this concession applies, tax on any gain is deferred until the replacement asset or improved asset is on- sold.
Where a taxpayer does not satisfy the 15-year exemption, he or she may use a combination of the 50 percent active asset reduction, $500,000 retirement exemption, and the small business rollover to reduce any capital gain. With careful tax planning a taxpayer may also be able to use these concessions in combination with the 50 percent CGT discount to further reduce a potential capital gains tax liability.
You should consult your CPA accountant for more detailed advice regarding your particular circumstances.
—Garry Addison is senior tax counsel for CPA Australia www.cpaaustralia.com.au
