The following outlines some Payroll Tax issues most commonly overlooked by employers.
(The Employers Guide to Payroll tax is a useful reference to assist with questions).
Employers who pay wages in Tasmania are required to register for payroll tax if their total Australia-wide (including Group members') wages exceed:
- the threshold of $1 250 000 during any financial year; or
- $24 038 per week during a month.
Not claiming the threshold correctly
If an employer pays wages only in Tasmania, the full threshold amount for the relevant period can be claimed. Monthly thresholds vary according to the number of days in the month and year and are rounded to the nearest whole dollar amount. Monthly threshold amounts can be found on the SRO website.
If an employer pays wages in Tasmania and in other states and/or territories the threshold amount will be apportioned in accordance with the ratio of taxable wages paid in Tasmania to taxable wages paid Australia wide.
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:
- failing to deduct Workers' Compensation (excluding any 'make up' payments made by the employer - which are taxable); and
- including the income tax exempt component of Eligible Termination payments (the 'lump sum D' payments have been included in error).
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. Please refer to the ATO's document TD 2016/13 for the 2016-17 rates.
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
The cent per kilometre rate is determined and adjusted each year by the ATO. Any amount paid in excess of this rate must be included in the taxable wages total. It is important to keep sufficient records to justify claiming this exemption.
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.
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.
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.
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:
- Companies are related under section 50 of the Corporations Act 2001 (Commonwealth).
- Businesses are commonly controlled - where a person or persons have control of two or more businesses; or
- Common Employees - where an employee of one business is used in another business.
Tracing provisions aggregate direct and indirect interests of entities and associated persons when determining who has a controlling interest in a corporation.
Members may be excluded from a group in the following circumstances:
- Common control - where the business seeking exclusion is carried on substantially independently of the other group members; or
- Common employees - where the employee works in the other business at arms-length; eg. payment made for employee at commercial rates.
- The power to exclude is not available where the group member is related under the Corporations Act 2001 (Commonwealth).
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:
- the employee's principal place of residence;
- the employer's registered ABN address/principal place of business;
- the place where the wages are paid to the employee; or
- the place where the services are mainly performed.
Further information is available in Revenue Ruling PTA039 Payroll Tax Nexus Provisions.