By Ken Mansell
Once you decide to get your head around the maze of rules regarding employing staff in Australia, soon enough you will get to the various taxes that apply, commonly known as “payroll taxes”.
Some are actually taxes (payroll tax and FBT), some are just a way of collecting taxes (PAYG withholding) and some are not classic taxes at all (Superannuation).
In this short blog, we will consider a summary of each of these taxes, covering just the core concepts. You could spend day on each and still have more to learn, but hopefully by the end of reading this you will have a better idea of what the tax is, and why we have such a tax.
1. Pay As You Go (PAYG) Withholding
In Australia we LOVE our tax refund. You may not know this, but our tax system is actually built in a way to ensure most individuals get a tax refund each year – making them keen to complete their tax return. And the PAYG withholding system is the way to make this happen.
Without the PAYG withholding system, we would have to pay our tax as a lump sum at the end of the year or pay our own tax by instalments throughout the year. But under the PAYG withholding system our employer withholds some of our pay each time they pay us, and they send it to the ATO. The amount our employers withhold does not take into account certain exemptions and rebates of tax and so most of us get a tax refund at the end of the year.
Under PAYG withholding, before an employer make payments like wages and salary, allowances, back payments, commissions, bonuses, long service leave and holiday pay or termination payments, they need to undertake a specific calculation and withhold that amount from the payment and remit the withheld amount to the ATO. ADP’s Electronic Payment Services (EPS), supports our clients manage PAYG payments.
When the employee lodges their individual tax return, they treat the withheld amounts as payments of their tax liability. And because the amounts withheld are generally more than what is actually owed, most people get that LOVED tax refund.
So, all employers are doing with PAYG withholding is collecting tax for the ATO and helping employees with their tax liabilities… But if employers get it wrong, or don’t do the withholding at all, there are some pretty massive penalties. For example, if an employer does not withhold on the salaries it pays at all, they can be denied a tax deduction for the salaries – effectively a penalty for a company employer as high as 30% of their salary bill. Ouch!
Since 1992, employers have had to make superannuation payments for their employees (and even some contractors who are paid primarily for their labour).
Generally, if you pay an employee 18 or older $450 or more before tax in a calendar month, or the employee is under 18 and works for more than 30 hours per week, then you have to pay super on top of their wages.
The minimum the employer has to pay is called the super guarantee and is currently 9.5% of an employee’s ordinary time earnings. Ordinary time earnings is usually the amount your employee earns for their ordinary hours of work. It includes things like commissions, shift loadings and allowances, but not overtime payments.
These super payments must be made at least four times a year, employers must pay and report super electronically in a standard format, and the super payments must go to a complying super fund, which an employee has a right to choose. ADP assists our clients in managing super payments though our EPS solution.
Worse than every other of these “payroll taxes” are the penalties that can apply if you get this wrong. There are some amazingly draconian rules that can apply so this is not something you want to get wrong.
3. Payroll Tax
This is a tax on the wages paid or payable to employees by an employer (or group of employers) whose total Australian taxable wages exceed certain threshold amounts and at certain rates. Of course, each state and territory must have a different rate and threshold just to make it that much harder for employers.
The real challenge for payroll tax is what is included in the definition of wages. For example, if you pay motor vehicle allowances up to a certain threshold it is not subject to payroll tax but the amount above the threshold is. Also, payments to contractors will be treated as wages subject to payroll tax unless they fall within a very long list of exclusions. All this makes payroll tax a minefield if you pay employees anything other than classic wages or if you pay contractors for labour.
4. Fringe Benefits Tax
To avoid income tax on their salary, employees have always looked for find a way to get “paid” for their work in a different form to salary or wages. Fringe benefits tax is designed to tax these indirect “payments” to an employee.
Unfortunately, while the employee gets the benefit, fringe benefits tax is paid by the employer, effectively discouraging employers from providing employees benefits rather than salary and wages. So, get this wrong and it is not the employees that suffer, but rather the employer.
Examples of fringe benefits include:
- Allowing an employee to use a work car for private purposes
- Giving an employee a discounted loan
- Paying an employee's gym membership
- Providing entertainment by way of free tickets to concerts
- Reimbursing an expense incurred by an employee, such as school fees
- Giving benefits under a salary sacrifice arrangement with an employee.
So, every time an employer provides benefit to employees (or their family and friends) rather than giving them money through payroll, they need to consider fringe benefits tax.
So, all you need to know when working in payroll are four complex and changing “payroll taxes”. And this blog was just a summary. Wait till you get your head around them and you will see why so many businesses outsource their payroll.
About Ken Mansell
Ken takes the label “tax nerd” as a badge of honour. He has worked for KPMG and Deloitte, as the tax counsel for ASX and NYSE listed entities, worked on tax policy for the Federal Government, as an advisor to the Assistant Treasurer, and on the secretariat of the Henry Review of Taxation. Ken runs “Tax Rambling” where he tries to share his love of tax with the rest of the world.