By Ken Mansell
Keeping payroll records is important, and required by law, for every business, even one that employs only one or two people. But with all the forms and documents, it can be overwhelming and confusing to determine which records to keep. Not keeping these records can lead to penalties and can lead to substantial issues if certain government entities come visiting to ensure they have extracted the right amount of tax out of you.
So, let’s look at some general rules about record keeping and then let’s dig down into what you need to keep for each type of “payroll tax”.
1. General rules
First, and the question I get asked the most about, is that all records must be kept for five years. Remember that this is often 5 years from when you lodge the return, BAS, or make the payments. Second, these records may be paper or electronic but must be in English. If you keep them electronically and you ever upgrade hardware or change software, make sure the records don’t disappear with the old hardware or deleted software.
Finally, the records have to be available. The ATO and the state and territory revenue authorities have the power to require you to provide information, require you to attend locations with the records, and the power to attend your site to get the information. The police need a warrant to enter your premises to get information, but the ATO and the revenue authorities do not!
2. PAYG withholding records
At a minimum, for employees or contractors that you have had to withhold tax on under the PAYG withholding rules, you need to keep:
- Copies of tax file number declarations and withholding declarations;
- Copies of any contracts you have with contractors;
- Copies of payments and reports provided to the ATO; and
- Copies of payment summaries (if you have not used single touch payroll).
For any payments that you have excluded from PAYG withholding you will need to have records to explain why. Also, where you make calculations of PAYG withholding for specific payments, like employee termination payments or allowances, you will need to have records showing why you withheld the amount of PAYG withholding that you did.
3. Superannuation
For superannuation you must keep records showing:
- How you calculated the amount of super you contributed for each employee;
- What elements of the payments to the employee you applied super to and what elements you did not (what payments you have treated as “ordinary time earnings”); and
- That you've met your choice of super fund obligations, including that you provided the choice forms and have acted on the choices of the employees.
If you make super contributions under an award or employment agreement, you will have additional record keeping obligations in the award or agreement and you will need to read the award or agreement to understand what these are.
4. Fringe benefits tax
You must keep records that are adequate to assess if you have any fringe benefits tax liabilities. These records need to show how the taxable value of each fringe benefit provided to each employee and how it was determined.
But most importantly, the records need to show why you believed any benefits provided to employees on which you did not pay fringe benefits tax were exempt.
Fringe benefits tax is directly linked to salary packaging and so you will need to keep records of these agreements with employees to ensure the employee’s salary is reduced by the cost of providing the benefit, including any fringe benefits tax liability.
5. Payroll tax
As there are wage thresholds before payroll tax applies, if you don’t pay payroll tax because you are under these thresholds it is important that you have records to show you are under these thresholds.
If you are subject to payroll tax, then you need to keep records that show how you calculated how much payroll tax you paid for each month, and when you lodged your annual payroll tax return. Most importantly, you need to keep records on what types of payments you applied payroll tax to, and what payments you did not. For example, “What records do you have that show why you excluded contractor payments from payroll tax under the contractor rules?” is a question the revenue authorities like to ask in an audit.
Speaking of payroll tax audits, if you are selected for an audit, you will be asked to provide (on top of the information we have already discussed):
- Balance sheets and profit and loss statements
- Superannuation reports
- End-of-year payroll summary reports
- Fringe benefit tax returns
- General ledger accounts detailing payments made to contractors and details of arrangements with contractors
Getting each “payroll tax” right is important. But without the right records, you won’t be able to show you got it right when your friendly tax officer drops by to check up on you. Therefore, you need to have the right records.
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.
