How to Manage and Minimise Your Payroll Tax Liability

Payroll tax is levied by the State Government on wages paid or payable by an employer to its employees when the total wage bill of an employer (or group of employers) exceeds a threshold amount. The payroll tax rates and thresholds vary between states and territories. The payroll tax applies if you pay wages in Victoria and your Australian wages exceed the monthly threshold of $54,166. Continue reading to learn more about payroll tax and how to minimize your payroll tax liability with payroll tax deductions.

Payroll Tax Registration

An employer must register with the relevant state or territory revenue office when their Australia-wide wages exceed the threshold applicable in that state or territory. You or your group of employers pay this state tax if you pay wages in Victoria and your Australian wages exceed certain thresholds. The tax-free annual threshold in Victoria for 1 July 2020 to 30 June 2021 is $650,000, with a monthly threshold of $54,166.

The State Revenue Office Victoria (SROV) is the state Government authority for collecting and administering payroll taxes in Victoria. If you’re located in Victoria and have employer liabilities for payroll taxes, you can register for payroll tax here.

The Payroll Tax Rate in Victoria

The payroll tax rate is 4.85%, except for regional Victorian employers. For 2020-21, the rate of payroll tax for regional Victorian employers is 2.02%. There is also a special payroll tax rate for businesses in bushfire-affected local government areas.

The regional payroll tax rate will reduce further over the next two years:

• From 1 July 2021, it will be 1.62%
• From 1 July 2022, it will be 1.2125%

From 1 July 2019, you are a regional Victorian employer if you are paying at least 85% of your payroll to regional employees. For wages paid before 1 July 2019, you must also satisfy the business location test.

Wages to Be Included in Payroll Calculation

Wages to be included to calculate an employer’s payroll tax liability in Australia are:

• Basic wages
• Remuneration
• Salaries
• Allowances
• Commissions
• Bonuses
• Employer (pre-tax) superannuation contributions such as:
  • Superannuation guarantee payments
  • Salary sacrifice contributions
  • The value of non-monetary contributions (from 1 July 2007)
  • Superannuation contributions to defined benefit funds
• Fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986 (Cth)
• 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 company directors
• Employment termination payments and accrued leave

Payments (considered wages) to employees engaged on a permanent, temporary, or casual basis are always considered employer liabilities for payroll taxes.

Exempt Wages

Some wages are exempt from payroll tax. These include:

• Primary and secondary caregiver leave (formerly adoption and maternity parental leave)
• Commonwealth paid parental leave scheme
• Contributions to redundancy benefit schemes
• Wages paid to employees absent from work to volunteer as firefighters or respond to other emergencies
• Wages paid to a person while on military leave as a member of the Defence Forces
• Bone fide redundancy or early retirement payments
• Wages paid from non-profit group training organizations – from 1 July 2018, this also includes for-profit group training organizations.

Contractors

Payments to contractors will be deemed wages and taxable in certain circumstances. The person or entity engaging the contractor is deemed to be an employer and is liable to payroll tax on those deemed wages.

Contractors include sub-contractors, consultants, and out workers. The provisions apply regardless of whether the contractor provides services via a company, trust, partnership, or as a sole trader.

Several exemptions are allowed under the provisions, and if any one of the exemptions applies to a particular contract, the payments are not taxable. People on-hired under an employment agency contract are subject to different provisions.

Grouping

Under the grouping provisions, all members of a group pay payroll tax as if the group had only a single employer. The wages of these related businesses are then added together, and only one member of the group is entitled to claim the threshold amount.

In most cases, although each member of the group must register for payroll tax and lodge a separate return, the businesses which constitute the group are effectively treated as one entity and the calculation of their payroll tax liability is based on the group’s total wages.

Further, all members of the group (irrespective of whether or not they are employers) become jointly liable for the debts of the group which are incurred while they are members of that group. This means that if one member defaults in the payment of tax, that amount may be recovered from any of the other group members.

Corporations are related bodies corporate within the meaning of s50 of the Corporations Act 2001 (this situation is commonly known as a holding and subsidiary relationship).

• Employees are shared between businesses.
• The same person has (or the same persons together have) a controlling interest in at least two businesses
• An entity has a controlling interest in a corporation
• A company includes all bodies and associations (corporate and unincorporated) and partnerships

Adjustment of the Tax-Free Threshold by Employers Paying Interstate Wages

Employers or groups of employers which also pay interstate wages are entitled to a partial deduction in Victoria. This partial deduction is the maximum deduction adjusted by the ratio of the total Victorian taxable wages to total Australian taxable wages. Estimates are provided by the employer in the prior year’s annual reconciliation or at the time of registration.

In the annual reconciliation return, all employers recalculate the full year’s deduction based on actual Victorian and Australian wages. The annual reconciliation is completed electronically and can be accessed from mid-June via PTX Express.

Payroll Tax Relief

The following relief measures have been announced by the Victorian Government to provide an incentive to Victorian businesses suffering due to COVID-19. These payroll tax deductions include:

1. Payroll tax waived for eligible business – announced on 21 March 2020
2. Additional payments under the JobKeeper program are now exempt from payroll tax – announced on 5 May 2020.
3. Extended and expanded payroll tax relief deferral – announced on 10 July 2020.

1. Payroll Tax Waived for Eligible Businesses

The Victorian Government has announced that businesses with annual Victorian taxable wages up to $3 million will have their payroll tax for the 2019-20 financial year waived.

Eligible businesses must continue to lodge returns but do not need to make further payments for this financial year. These businesses can also defer paying payroll tax for the first quarter of the 2020-21 financial year.

2. Additional Payments Under the JobKeeper Program Are Exempt From Payroll Tax

Any additional payments made to bridge the gap between an employee’s wage and the $1500 a fortnight required for the JobKeeper program are now exempt from payroll tax.

Any employer who has claimed this relief is still obliged to lodge payroll tax returns with the Commissioner, keep proper records and produce such records to the Commissioner if the Commissioner requires their production.

3. Extended and Expanded Payroll Tax Relief Deferral

Eligible businesses with payrolls up to $10 million can defer their liabilities for the first half of the 2020-21 financial year. If the payroll cost of your business is growing, you need to be proactive in managing any potential payroll tax liability.

Frequently Asked Questions

What is Payroll Tax?

Payroll tax is a tax on the wages employers pay. This tax is calculated on the number of wages an employer pays per month and is collected by the state or territory where the employees are located. Payroll tax is only payable over a monthly threshold, which varies between states.

How Do You Calculate Payroll Taxes?

You can calculate your employer’s liabilities for payroll taxes by working out the percentage of tax you must pay and applying it to the total amount of wages you pay per month. In Melbourne, the payroll tax rate is 4.85%, while in regional Victoria the rate is lower.

How Do You Figure Out Payroll Tax Deductions?

You can learn about available payroll tax deductions by visiting the website of your local state or territory’s payroll tax authority. In Victoria, this is the State Revenue Office Victoria (SROV).

Is Worker’s Compensation Subject to Payroll Tax?

No, worker’s compensation is not subject to payroll tax when it’s a compulsory payment required by WorkSafe or a payment made by an insurer. However, any additional wages paid by an employer to an employee to make up the difference between their regular pay and compensation is not exempt.

What is the Payroll Tax Threshold?

The payroll tax threshold in Australia varies between the states and territories. In Victoria, the payroll tax will apply if you pay wages that exceed the monthly threshold of $54,166.

When Should Payroll Taxes Be Paid?

Each employer registered for payroll tax in Victoria must pay payroll tax monthly unless the SRO approves an annual payment. If you are registered to lodge and pay on a monthly basis, you must submit your wage details every month, even if you do not have a payroll tax liability. All employers must lodge an annual reconciliation by 21 July each year.

How Often Do You Have to Pay Payroll Taxes?

Payroll tax is required to be paid on a monthly basis in Victoria. However, an annual payment option is available if approved by the SRO.

Want to Learn More?

For more information on payroll tax liability and how you can maximize your deductions, contact the team at Lotus Smart today. Our business accountants can help businesses across Melbourne and Australia to work out their payroll tax liability and identify any payroll tax deductions they may be eligible for. We can also assist with generating a payroll tax liability report in QuickBooks and other accounting software, as well as creating a payroll tax liability journal entry. Contact us today to benefit from our expertise.