The following outlines some Payroll Tax issues most commonly overlooked by employers.
Employers who pay wages in Tasmania are required to register for payroll tax if their total Australia-wide (including Group members’) wages exceed:
Not including all components of wages
Taxable wages for payroll tax purposes includes not only wages/salaries, but also employer superannuation contributions, commissions, bonuses, allowances, directors’ fees, fringe benefits, the taxable component of termination payments and payments to relevant contractors.
Grants of shares or options to employees are also taxable.
Please refer to the checklist at the end of this document for further information.
Not claiming exemptions and exclusions
The most common errors are:
Workers’ Compensation payments claimed from and approved by the insurer may be deducted for payroll tax purposes, including the related first 5 days excess payment.
All allowances are taxable in full unless they represent a direct reimbursement of employment related expenditure. The only exceptions to this rule are accommodation and per kilometre travel allowances which are exempt up to a prescribed amount.
An accommodation allowance applies where an employee is paid an allowance for being temporarily away from home. The allowance covers their meals, incidentals and accommodation.
Only amounts paid in excess of the prescribed rate are to be included in taxable wages. The prescribed rate is equal to the ATO’s daily travel allowance rate for the lowest capital city for the lowest salary band. The ATO rate for the 2015-16 financial year is $255.45 per night.
Motor vehicle allowances
Motor vehicle allowances are paid to compensate employees who use their own vehicles for business purposes. These allowances are generally paid on a per kilometre rate, or a flat rate basis.
Per kilometre rate
Where a per kilometre rate is paid, and appropriate records have been kept, the exempt rate for 2015-16 is 77 cents per kilometre for actual business kilometres travelled. Any amount paid in excess of this rate must be included in the taxable wages total.
Generally, the full amount of the motor vehicle allowance must be included in the total taxable wages if the allowance is paid as a flat rate. However, the exempt component may be calculated and deducted where the employer produces records to verify the number of business kilometres travelled.
For example, an employee drives their own car to the bank daily to deposit the day’s takings. The return trip from the office to the bank is 6 km. The employee receives $50 per week for using their own car for business purposes. The exempt component of the weekly allowance is $23.10 (30 km @ 77 cents per kilometre). The taxable component is $26.90 per week.
Combination of per kilometre rate and flat rate
If a motor vehicle allowance is paid as a combination of a fixed amount plus a kilometre rate, the total amount of the allowance that exceeds the exempt component will be taxable.
Not including contractor payments
Many businesses have replaced employees with contractors. Payments made to these contractors may also be subject to payroll tax.
In ascertaining if the contractor provisions apply, an employer must first determine if the payment is to an employee or contractor.
If the person performing the work is an employee then the payments must be included in full. However, if the payments were made to a contractor then the relevant contractor provisions apply unless one of the seven exclusions apply.
The definition of wages in the Act includes amounts paid or payable to contractors under the contractor provisions detailed below.
For more information please read Revenue Ruling PTA038, available on the SRO website.
Relevant contractor provisions
Where a contractor is engaged, payments for services under the contract are subject to payroll tax. They will remain so unless one of the relevant contractor exclusions applies. If none of the exclusions are satisfied, payroll tax is payable on the GST exclusive component of the contract’s labour content only.
For more information please read Revenue Ruling: PTA008: GST Considerations for the Calculation of Payroll Tax Liability, available on the SRO website.
Payments for the labour content of relevant contracts will be subject to payroll tax whether or not the person supplying the services, or labour, does so as a natural person or through a company, a trustee (incorporated or unincorporated) or a partnership.
Termination payments made to contractors deemed to be employees under the relevant contractor provisions are also included for payroll tax purposes.
The Commissioner has issued a number of payroll tax rulings that explain the interpretation and application of the contractor provisions. For information refer to the Rulings Index
Employment agency provisions were introduced that deem the employment agency to be the employer of its on-hired workers. Therefore, no payroll tax is payable on on-hired employees as this is the responsibility of the employment agency.
Not registering as a group
Another error made by employers is failing to include all group members’ wages. This can be a particular problem for subsidiaries of overseas holding companies that are often not aware of other group members operating in Australia. A group for payroll tax purposes exists where:
Members may be excluded from a group in the following circumstances:
Not including directors’/board members’ superannuation
Employers sometimes fail to include directors’/board members’ superannuation payments as wages for payroll tax purposes. In some circumstances, this omission arises because the payroll records for the directors are completely separate from the general payroll records. Another common reason for failing to include these payments is where directors receive a lump sum payment that was paid directly to their superannuation fund.
Not including wages sacrificed for superannuation
Any remuneration foregone by an employee under a salary sacrifice arrangement is taxable wages “payable in cash or in kind”.
Specifically, salary that has been sacrificed and paid to an employee’s superannuation fund is a payment “in kind” and must be included in taxable wages as wages or as employer superannuation contributions.
Where salary has been sacrificed to a superannuation fund on a contribution holiday and no employer contributions were made to that fund, the salary-sacrificed wages must be included as taxable wages.
In any other circumstances, the total value of salary that is sacrificed to obtain a benefit that is exempt or excluded under FBT legislation must be declared in full as taxable wages.
Not declaring the grossed-up taxable value of fringe benefits
Employers have been found to declare variously the grossed-up value, the pre-grossed-up taxable value or the tax paid on fringe benefits. The correct amount to include is the grossed-up taxable amount of the fringe benefits provided to Tasmanian employees. This should be the same amount that appears on the ATO Fringe Benefits Tax return if all benefits are paid to Tasmanian employees. All fringe benefits are grossed up by the lower Type 2 Factor for payroll tax purposes.
Making payroll tax payments to another state or territory
There are two tests to determine where payroll tax will be paid on wages where the services are provided in one jurisdiction and the wages are paid by an employer in another jurisdiction.
The first test relates to where the services are performed. For example, if services are performed by an employee in Tasmania for the whole calendar month, payroll tax is payable in Tasmania on these wages for that period.
The second test applies where services are performed in more than one jurisdiction in a month. In these circumstances, payroll tax is payable in the jurisdiction where the employee receives their wages. For example, if an employee spends one week in Victoria and three in Tasmania and their wages are paid to a Victorian bank account, payroll tax is payable in Victoria.
Not understanding the wage nexus provisions
The nexus provisions of the Act determine in which Australian jurisdiction (State or Territory) payroll tax is to be paid. The nexus provisions were amended effective from 1 July 2009.
To determine whether the wages paid or payable in respect of each monthly return period are subject to Tasmanian payroll tax, section 11 of the Act firstly requires an employer to determine whether the employee has wholly performed services in Tasmania in a calendar month.
Where an employee has not wholly performed services in Tasmania in the month, the nexus provisions provide four tiered tests, which require the following factors to be considered:
Determining where wages are taxable – sections 11 - 11C
Sections 11, 11A, 11B and 11C need to be applied by employers in determining where wages are liable for payroll tax.
A. Where services are performed wholly in one jurisdiction - section 11(1)(a)
If services in a month are performed wholly in one jurisdiction, payroll tax is payable in that jurisdiction.
Section 11(1)(a) considers the place where services are performed by the employee in the month that the wages are paid or payable even if that place is not where the employee usually performs services.
For example, Joe normally performs his duties in Tasmania. In June 2010, he is sent to Victoria for a temporary project and performs all his services in Victoria that month. Wages paid to Joe in June 2010 for those services are liable to payroll tax in Victoria.
B. Where services are performed in more than one Australian jurisdiction and/or partly outside all Australian jurisdictions - section 11(1)(b)
If services are performed in a month:
the new nexus provisions provide four tiered tests for determining payroll tax liability. These tiered tests must be applied in sequence.
Test 1 - Employee’s Principal Place of Residence - Section 11A
Payroll tax is payable in the Australian jurisdiction in which the employee’s principal place of residence (PPR) is located in that month.
If an employee has more than one PPR in that month, the employee’s PPR on the last day of that particular month is the one taken to be the PPR.
In the case of a corporation that is deemed to be an employee under the Act (for example, a corporation that is deemed to be an employee under the contractor provisions or under the employment agency provisions), the corporation’s PPR is taken to be in the jurisdiction where its ABN address is located or, if it does not have an ABN address, or has two or more ABN addresses in the jurisdiction, where its principal place of business (PPB) in Australia is located. If the corporate employee has more than one PPB in a month (for example, where the corporate employee changes its PPB address part way through a month) the PPB is the address on the last day of that month.
Test 2 - Employer’s ABN address or Principal Place of Business - section 11B
If an employee does not have a PPR in an Australian jurisdiction during that month, payroll tax is payable in the jurisdiction where the employer’s ABN address is located.
If the employer does not have an ABN address, or has two or more ABN addresses in different jurisdictions, payroll tax is payable in the jurisdiction where the employer’s PPB in Australia is located.
If the employer has more than one PPB in a month (for example, when an employer changes their PPB address part way through a month) the PPB is the address on the last day of that month.
Test 3 - Where wages are paid or payable - sections 11(1)(b)(iii) & 11C(5)
If the employee does not have a PPR in an Australian jurisdiction and the employer does not have an ABN address or a PPB in an Australian jurisdiction, payroll tax is payable in the jurisdiction where the wages are paid or payable.
If wages are paid or payable in a number of jurisdictions, payroll tax is paid on the aggregate of the wages in the jurisdiction where the largest proportion of wages is paid.
For example, Mary is employed by ABC Pty Ltd and Mary does not have a PPR in an Australian jurisdiction and ABC Pty Ltd does not have an ABN address or a PPB in an Australian jurisdiction during October 2010.
Mary performs services in more than one jurisdiction and is remunerated for those services in Tasmania ($200), Victoria ($300) and South Australia ($1 000). The payments are aggregated and tax is payable on the total amount of $1 500 in South Australia because that is where the largest proportion of wages is paid.
Test 4 - Services Performed Mainly in Tasmania - Section 11(1)(b)(iv)
If the employee does not have a PPR in an Australian jurisdiction and the employer does not have an ABN address or a PPB in an Australian jurisdiction and wages are not paid in an Australian jurisdiction, payroll tax is payable in Tasmania if the services were mainly performed in Tasmania during the month. Services are mainly performed in Tasmania if the actual time worked in Tasmania is more than 50 per cent during the month.
C) Employment in another Country
Assignment for less than six continuous months
Wages paid or payable in Tasmania to an employee performing services wholly in another country (or countries) (that is, an expatriate employee) for a period of up to six continuous months, are taxable in Tasmania.
If only part of the wages earned by an expatriate employee is paid in Tasmania and the remaining part is paid in another country, the part of the wages paid in Tasmania must be declared for payroll tax. If the wages earned by the expatriate employee working in another country or countries is paid in more than one Australian jurisdiction, payroll tax is payable on the aggregate of the Australian wages in the jurisdiction where the largest proportion of wages is paid.
Assignment more than six months
Wages paid in Tasmania are exempt from payroll tax if the employee has performed services wholly in another country (or countries) for a continuous period of more than six months after wages were first paid for the employee for the services. The exemption includes wages paid for the first six months of service.
The six month period does not have to be within the one financial year but must be a continuous period. Providing an employee immediately returns to another country to continue the assignment, it will not be considered to be a break in continuity of service if they return to Australia in the following circumstances:
If an employee returns to Australia in any other circumstances, the previous period of continuous service in another country is ended. A fresh period of continuous service starts again on the date that the employee recommences performing services in the other country.
Services Performed Offshore
Wages paid in Tasmania for services performed wholly outside any Australian jurisdiction are taxable in Tasmania irrespective of the duration of the assignment. This would typically apply to oil rig workers.
If wages are paid in more than one Australian jurisdiction, payroll tax is payable on the aggregate of the wages in the jurisdiction where the largest proportion of wages is paid.
As the services are not performed in another country, the exemption for services provided outside all Australian jurisdictions for a continuous period of more than six months does not apply.
*The grossed-up taxable value of fringe benefits provided to an employee as calculated under the Fringe Benefits Tax Assessment Act 1986 are included as taxable wages.
#Exempt and excluded benefits are not subject to fringe benefits tax.