A common trap for growing businesses is knowing when their total wages reach the level that requires them to register for payroll tax in the states or territories in which they have employees.
The various State Revenue Offices, just like the ATO, increasingly use data-matching from a variety of sources (including sharing information between themselves) to test compliance with the rules, and we are seeing an increase in payroll tax investigations. Just to prove that life wasn’t meant to be simple, every state and territory has a different threshold and charges payroll tax at different rates.
Below is a summary for the year ending 30 June 2018. For payroll tax purposes, ‘wages’ generally include any amounts of wages, salary, remuneration, commission, bonuses or allowances paid to employees, as well as taxable fringe benefits, employer superannuation contributions, benefits provided under an employee share scheme and payments to certain individuals and entities who might otherwise be regarded as contractors.
The second common risk for a growing business is when they are registered for payroll tax in their home state, but have one or two interstate employees.
These businesses must then report their taxable Australian wages in each state, applying the relevant tax-free threshold and then apportioning the excess over the threshold to each state (the method used to do this calculation varies for each state and territory). The effect will be firstly that they will need to register and start paying tax on wages relating to the second state, and secondly this will increase the payroll tax payable in the home state.
Take the example of Alpha Pty Limited, which has 15 employees in NSW and total annual wages of $1.2 million, and therefore has a NSW payroll tax liability for 2018 of $24,525. Say that on 1 July 2017 Alpha’s directors decided to build on their fledging customer base in Queensland by employing two sales representatives and a support staff member based in Brisbane for total additional salary costs (including commission) of $300,000.
Total Australian wages will now be $1.5 million, of which 80 percent relates to NSW wages and 20 percent to Queensland wages. For NSW the payroll tax will now be $32,700 (i.e. ($1,500,000 – $750,000) x 5.45 percent x 80 percent), while in Queensland the payroll tax will be $4,750 (calculated on the Queensland OSR website), so Alpha will pay total payroll tax of $37,450.
Grouping of related entities
A very common payroll tax trap is the extremely wide grouping rules, which can apply to entities within the same state, and also to related entities in different states.
When entities are grouped in the same state, only one member (referred to as the Designated Group Employer) will usually claim the tax-free threshold while all other members will be taxed at the applicable flat rate on all of their wages for the period. However, when entities are grouped in different states, the thresholds are apportioned according to the total annual Australian taxable wages.
There a several different grouping rules that can apply including where one entity controls another, or where they are both controlled by a third entity. Controlling interests can be established by direct holdings, or may be indirect by tracing through interposed entities (which is where some unexpected outcomes may arise, especially where trusts are used in the structure).
Let’s vary Example 1 and have Alpha establish a subsidiary company Beta Pty Limited to run the Queensland business, which is to be owned 60 percent by Alpha and 20 percent each by the two Queensland sales representatives. Clearly Alpha has a controlling interest in Beta, so they will be considered grouped for both NSW and Queensland payroll tax purposes.
As in Example 1, there will be an apportionment of the NSW payroll tax threshold and Queensland payroll tax threshold with the calculation resulting in the same outcome, a total payroll tax of $37,450, i.e. Alpha will pay $32,700 in NSW, and Beta will pay $4,750 in Queensland.