- Many want payroll tax abolished, but states can’t afford to unless there is revenue replacement
- Without substantive reform of federal/state financial arrangements is there an alternative approach?
- Incorporating payroll tax into single touch payroll may provide some incremental benefits
By Susan Franks, Senior Tax Advocate, Chartered Accountants Australia and New Zealand
Love it or loath it, payroll tax plays an important role in state government funding.
Australian Bureau of Statistics numbers show that for the period 2013-19, payroll tax represented 30% of state tax revenue. Almost A$26 billion for all states and territories in 2018-19.
States and territories, like the federal government, are facing large on-going budget deficits as a result of COVID-19. They can't afford to abolish payroll tax without an alternative source of revenue.
Replacing payroll tax with an expanded GST (either rate and/or base) or by having Canberra share a portion of the income tax base has been discussed in the past. Neither option got much traction.
With the Federal government needing revenue to support its own COVID-19 initiatives, it is unlikely to want to give away part of its income tax base. And reforming GST seems a bridge too far.
Media reports indicate that in response to recent calls by the New South Wales Treasurer for an expanded GST, the Federal Treasurer clearly rejected the idea and told states to pull their weight in revenue collection.
Is there a middle way that does not require substantial reform of federal-state financial relationships?
Payroll tax, like income tax and fringe benefits tax (FBT), is a tax on employment. However, like FBT, payroll tax is legally imposed on the employer, but economic incidence of the tax is borne by employees.
The Henry Report stated that “existing payroll taxes are more complex and less efficient than they could be because of [payroll] tax-free thresholds and other exemptions.”
Payroll tax rules are very similar, but not identical, to income tax and fringe benefits tax rules.
Currently employers who operate across multiple jurisdictions deal with multiple regulators, multiple reporting obligations and multiple payment obligations. Employers dislike this compliance burden.
How can compliance costs be minimised? Aligning all payroll tax definitions to those used for income tax and fringe benefit tax rules would reduce the regulatory interpretation burden on employers. The state harmonisation program has achieved significant improvements but there is still some way to go.
Reducing the payroll tax rate and broadening its base has the potential to rectify many of the economic inefficiencies associated with the current payroll tax system while allowing states access to a better income stream and making it easier for employers to comply.
Incorporating payroll tax reporting into single touch payroll reporting could greatly reduce the regulatory administrative burden on employers.
This could even extend to payment obligations. Employers could make one payment that is then dispersed by the ATO to the various State governments for a very minimal fee – rather like the arrangements regarding GST payments.
This is also consistent with the Australian Small Business and Family Enterprise Ombudsman’s recommendation that small businesses be able to make a single payment to the ATO to cover PAYG(W), superannuation guarantee and GST payments in line with their single touch payroll reporting.
Henry did contemplate a similar concept (albeit before the advent of single touch payroll) and thought that it could be simpler, more efficient and more sustainable that the current system.
The Henry Report even contemplated that it may be possible for states to vary, within limits, the rate applied to their residents so that some revenue raising autonomy remained.
If big-bang reform is not on the agenda, then incremental reforms such as incorporating payroll tax into single touch payroll should be considered.
Oh yes, and could we please have national alignment on the employee – contractor distinction? I won’t hold my breath on that one.
Source: 1. Page 293 Australia’s future tax system
Australian Bureau of Statistics payroll tax numbers
A compilation of statistics of taxation revenue collected by all levels of government in Australia for the periods 2009-10 to 2018-19Find out more
Federal Treasurer's statement on expanding the GST
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