The cash flow impact of not complying with payroll tax reporting
Understanding the complex rules surrounding payroll tax can sometimes be difficult to manage. Not planning for your payroll taxes can cause serious consequences for the cash flow of a business
Common examples of where this situation may arise are as follows:
- An employer has inadvertently exceeded the payroll tax threshold and failed to report its wages and remit payroll tax to the State Revenue Office (SRO) and then needs to make a significant one-off payment to settle its outstanding liability.
- An employer assumes that all payments they make to contractors are exempt from payroll tax. As a result of an audit undertaken by the SRO, the employer is required to report and remit payroll tax to the SRO on these contractor payments. Employers should not discount the possible application of payroll tax to payments which are not for wages.
So what is payroll tax?
Payroll tax is imposed at a rate of 4.85% by the State Revenue Office (SRO) in Victoria on wages which exceed the monthly threshold of $47,916, and the annual threshold of $575,000 as of 1 July 2016. Payroll tax is imposed in all states of Australia. In NSW, for example, the annual threshold is $750,000. Your local RSM office can update you on your State’s payroll tax rates.
If your business falls below the wage threshold, it will not have a payroll tax obligation.
For example, a real estate business which is located in Victoria and pays wages of $1M per annum, would have an annual pay roll tax liability of $20,612.50, calculated as follows:
|Less: Tax free threshold||($575,000)|
|Wages subject to Payroll Tax||$425,000|
|Payroll tax rate liability @ 4.85% of wages||$20,612.50|
What wages are included and excluded for payroll tax purposes?
Wages include many common forms, but are not limited to:
|Superannuation guarantee payments||Salary sacrifice contributions including (pre-tax) superannuation contributions||Fringe benefits||Value of shares and options granted to employees, directors, former directors and some contractors||Payments to some contractors|
|Bonuses||Payments (considered wages) to employees engaged on a permanent basis||Remuneration paid by company to company directors||Payments to temporary or casual staff||Employment termination payments and accrued leave|
As can be seen from the above table, many forms of payments which are made by employers count towards wages for payroll tax purposes.
Some wages are exempt from payroll tax. These include, but are not limited to:
- Adoption and maternity leave payments
- Paid parental leave
- Contributions to redundancy benefit schemes
- Bone fide redundancy or early retirement payments
Some of the common errors to avoid:
Listed below are some of the errors which are commonly made by employers:
- Employers not registered for payroll tax when required (e.g. their wages are over the threshold)
- Not declaring taxable contractors payments (e.g. contractor engaged solely by the employer)
- Incorrectly classifying employees as contractors
- Not declaring interstate wages
- Not declaring fringe benefits, or not applying the correct gross-up factor
- Not including director superannuation payments
What actions should you take?
Payroll tax can be a very complex area and we recommend you review your current reporting obligations, particularly when your business makes payments to contractors or operates in multiple states across Australia.
Have a question about payroll tax?
Contact our tax experts at RSM should you require assistance with your business’s payroll tax reporting obligations.
Learn more about Payroll Tax and Cash Flow