Everything You Need to Know About Payroll Tax
When paying employees, it is important to know whether you are liable to pay payroll tax. This type of tax is treated differently across the various states and territories in Australia, so it’s important to know which regulations apply to your business.
Failure to comply with your payroll tax obligations can lead to hefty penalties from your state or territory’s revenue office, so it’s important that you’re across the details. This not only includes how much tax you have to pay, but whether your company is ‘grouped’ for payroll tax purposes.
Below, we’ll detail everything you need to know about payroll tax, including where you can find further information tailored to your business.
What is payroll tax?
Payroll tax is a tax that you’ll pay to a state or territory government, based on wages paid each month to staff, such as employees, directors and contractors. It’s important to understand that in Australia, payroll tax is a state tax. It is unlike income tax or Goods and Services Tax, which are taxes imposed by the Federal Government.
Every state and territory across the country has its own different payroll tax laws, and each of the thresholds and rates will be different depending on where in the country your employees work.
So, if you have employees working in New South Wales, Victoria and Queensland, you may need to pay payroll tax in all of those states.
When do I have to pay payroll tax?
Not every business in Australia has to pay payroll tax. You’ll generally only need to pay it when:
- the total Australian wages you pay go over the tax-free threshold in the relevant state or territory; or
- you are a member of a “group”, and the total Australian wages paid by the entire group exceed the tax-free threshold (read more about this below) in the relevant state or territory.
If you do need to pay payroll tax, you’ll generally need to register to pay it.
How much payroll tax do I pay?
This differs across your state and territory. For example, the current payroll tax rate in Victoria is at 4.85% (except for regional Victorian employers). The tax-free annual threshold for 2022-23 is $700,000, with a monthly threshold of $58,333.
How payroll tax grouping works
Businesses operating in Australia may be ‘grouped’ with other businesses if there is a link between them.
If your company is a member of a ‘group’, that means there will only a single threshold payroll tax deduction between all members of the ‘group’.
If you are a member of a group, you’ll generally need to advise the relevant taxation commissioner of your state or territory’s revenue agency that you are part of a group.
Why payroll tax grouping is important
If you are a member of a ‘group’ for the purposes of payroll tax, that means your business will be liable for the payroll tax liabilities of the whole group.
In other words, if another business within the group does not comply with its payroll tax requirements, then your business may be liable.
Below, we’ll list the different ways a business may be ‘grouped’.
Companies will be ‘grouped’ for the purposes of payroll tax if they meet the definition of ‘related’ companies in the Corporations Act 2001. Two or more companies will be related if:
- One is a holding company, and the other is a subsidiary; or
- Two are subsidiaries of the same holding company.
The technicalities will differ depending on the relevant state or territory. However, if a group exists, then generally:
- the threshold will be based on the proportion of the relevant state or territory’s wages against total Australian wages
- only one threshold deduction applies to the group
- every group member will become liable for the any payroll tax owed by other group members.
It does not matter if the holding company is located overseas – any related company that is paying Australian wages may be grouped and liable to pay payroll tax.
If a person or a group of persons (whether that is a natural person, a company or a trustee) have what is called a “controlling interest” in two or more businesses, then those businesses will be ‘grouped’ for the purposes of paying payroll tax.
There are a number of definitions of ‘controlling interest’, and this will depend on the type of business you are operating.
- Sole owner: a person who is the sole (i.e. only) business owner
- Joint owners: a number of persons are sole business owners (together as trustees)
- Company: a person/s who is entitled to exercise over 50% voting power at directors’ meetings, or a person/s who has over 50% voting rights attached to voting shares issued by the company
- Body corporate (includes also unincorporated): a person who controls over 50% of the management board
- Partnership: a person who owns over 50% of the capital, or a person entitled to over 50% of the profits
- Trust: a person who is a beneficiary of over 50% of the value of the interest in the trust carrying the business.
Note that because payroll tax is regulated by different laws across different states and territories, the above definitions of ‘controlling interest’ may be different depending on where your employees are located.
Seek tailored advice from an accountant to ensure you know exactly what regulations apply to you.
A business may be grouped with another if one or more employees perform duties pursuant to an agreement between them.
For example, one business may agree to supply a secretary and a number of administrative staff to another. The employees perform duties for that other company, and so a grouping will arise for the purposes of paying payroll tax.
Tracing of interest
If a business has an interest (whether direct, indirect or aggregate) of a certain level (typically, 50%), that business will be grouped with that entity for the purposes of payroll tax.
This is where things can get a little complicated because interests are ‘traced’ through different corporate flows of ownership.
For example, let’s say you own 80 per cent of Company A, and 50 per cent of Company B. Let’s also say that Company A owns 40 per cent of Company C, and Company C owns 50 per cent of Company B.
You would have a 16% indirect interest in Company C. This is because the following calculation will be applied:
- 80% (your ownership of Company A)
- x 40% (Company A’s ownership of Company C)
- x 50% (Company C’s ownership of Company B)
=16% (indirect ownership)
Payroll tax grouping would add your direct and indirect ownership of Company B together, giving you an aggregate interest in Company C of 66% (50% directly, and 16% indirectly).
Companies A and B are therefore grouped because of your aggregate interest that is greater than 50%.
‘Subsuming’ is where a larger group can be formed out of many smaller groups, such as when a business is a member of 2+ groups at the same time, or when group members share that ‘controlling interest’ in another business.
For example, let’s say that Company A is grouped with Companies B and C.
Now let’s say that Company D is grouped with Company E and Company B.
Company B is in both groups. Payroll tax grouping would apply the “subsuming” rule, and a group consisting of Company A, B, C, D and E would be formed.
How to avoid payroll tax grouping
Sometimes, your state or territory’s revenue department will treat you as being as a group when you don’t expect it. Payroll tax groupings can result in quite significant tax liability, and this can have colossal consequences especially if your business is not prepared.
Apply for an exclusion
If your business has nothing to do with the other businesses that have been grouped, then there may have been a mistake. You will likely be able to successfully apply to your state or territory’s revenue office to be excluded from their grouping rules.
The catch is that you’ll need to present them with evidence to show that you truly operate independently.
Once you send an application for exclusion to the applicable revenue office, there are a number of factors they’ll consider, including:
- Whether there is common control or management
- The owners of the various businesses
- The financial relationship between the businesses (for example, if there are any loan arrangements between them)
- Whether the businesses work through premises or employees
Get in touch with expert accountants if you believe that your company has been wrongly grouped to another company or companies.
Further questions about payroll tax?
If you’re looking for further information about payroll tax, then get in touch with our specialist accounting experts here at 2account. Our qualified professionals are across all aspects of payroll tax, no matter what states or territories your company operates in.
We’ll be more than happy to ensure you are complying with your payroll tax obligations and help you work out if payroll tax grouping applies to you. Book a call with our team today and we’ll be in touch.