Payroll tax is an extremely important component of the Australian Taxation System. It plays a very important role in generating revenue for state and territory governments.
It is the tax levied on the wages the employees receive from the employers, and the received amount becomes a means to fund numerous public services and initiatives.
In this article, you will get an in-depth overview of payroll tax in Victoria, along with things like payroll tax rates, thresholds and more.
What is payroll tax?
Payroll tax is a state and territory tax, and it is paid by the employers to the employees on wages. The tax is calculated on the basis of the amount of wages paid to the employees Australia-wide per month.
Not every business is required to pay payroll tax, as there’s a payroll tax threshold. As an employer, you will be required to pay this tax if the total taxable wages exceed the payroll tax threshold amount.
The tax-free annual threshold is $700,000, from 1 July 2022 to 30 June 2022, with a monthly threshold of $58,333. In case you are not an employer for the entire financial year, this annual threshold is adjusted.
The payroll tax rate is 4.85%, with the exception of regional Victorian employers.
Since this is a self-assessed tax, it is your responsibility as an employer. You are the one that needs to ensure that the information you provide is correct, and you must comply with the tax obligations.
Payroll tax and income tax – what’s the difference?
The difference between Australia’s payroll tax and income tax is that the former is based on the total wages paid to the employees and contractors. In contrast, the latter is based on the business’s taxable earnings.
When calculating your payroll tax, the income of your company is not a factor to be considered.
Payroll tax surcharge
There are two payroll surcharges that apply if you pay Victorian Taxable wages and your Australian wages also exceed the first annual threshold of $10 million. The first monthly threshold of this amount is $833,333.
From 1 January 2022 onwards, the mental health and wellbeing surcharged commenced. Along with this, the COVID-19 debt temporary payroll tax surcharge started on 1 July 2023. It will apply for a decade (10 years) until 30 June 2033.
Both of these surcharges are calculated based on the following criteria:
- Businesses that have a national payroll above $10 million will pay a combined 1%.
- Businesses that have a national payroll above $100 million will pay a combined 2%.
Note: These surcharges are only applicable to businesses’ Victorian share of wages over the thresholds mentioned above.
Register for payroll tax
As an employer in Victoria (or a group of employers), you have to pay payroll tax on your employee wages if your total Australian wages exceed the weekly threshold during any month.
You have to self-assess your payroll tax liability in the majority of cases. Payroll tax is paid monthly by the seventh day of the following month. You will also have to submit an annual reconciliation by 21 July or at the end of every financial year.
If you are liable for payroll tax but are not registered with the State Revenue Office, you must register for payroll tax. Interest and/or penalties may be imposed if you fail to register.
Once you are registered with the SRO, you can use their Payroll Tax Express (PTX express). It is a secure online system to lodge monthly returns, complete your annual reconciliation, pay your tax, update your records and apply for a refund.
Taxable wages
The payroll tax applies to the payments that are taxable wages. Taxable wages can be any payment provided by an employer provides to an employee in return for services. Taxable wages defined under the Payroll Tax Act 2007 (the ACT) include:
- wages
- remuneration
- allowances
- bonuses
- salaries
- commissions
- employer (pre-tax) superannuation contributions like Superannuation guarantee payments, the value of non-monetary contributions, salary sacrifice contributions, superannuation contributions to defined benefit funds
- fringe benefits (as defined in the Fringe Benefits Tax Assessment Act 1986 Cth)
- the value of options and shares granted to directors, employees, former directors and a few contractors
- contractors’ payments
- payments by employment agencies because of the employment agency contracts
- remuneration paid to the company directors by the company
- employment termination payments, as well as accrued leave
Payments to employees that are engaged on a casual, temporary and permanent basis are always subject to Payroll tax.
Exempt wages
The following are some wages that are exempt from payroll Tax:
- Primary and Secondary caregiver leave (previously adoption and maternity parental leave);
- Contributions to redundancy benefit schemes;
- Commonwealth paid parental leave;
- Wages paid to an individual while on military leave as a member of the Defence Forces;
- Wages paid to the employee who is absent from office (or work) to volunteer as a firefighter or respond to such emergencies;
- Bona fide redundancy;
- Early retirement payments;
- Wages are paid from a non-profit group training organisation. From 1 July 2018 onwards, wages paid from for-profit group training organisations are also added.
Contractors
Payments made to contractors are classified as wages and are taxable in specific circumstances. The entity or the person engaging the contractor is considered to be an employer and, thus, is liable to pay payroll tax on the wages made in such a case.
Contractors include outworkers, consultants, and sub-contractors. These provisions are applicable regardless of whether the contractor is providing services via a partnership, a company, a trust or even as a sole trader.
There are numerous exemptions allowed, and if an exemption applies to a specific contract, then the payments aren’t taxable. Along with this, the people who are ‘hired under an employment agency contract’ are subject to some different provisions.
Employment Agencies
As an employment agent, you are liable for payroll tax on the payments you made under employment agency contracts to ‘on-hire’ a service provider (worker) to your client. In such a case, the client and service provider has not entered into an agreement between themselves.
In the presence of an employment agency contract, the employment agent is the one classified as an employer. On the other hand, the on-hired person is deemed as an employee; as a result, the payments are deemed as wages.
Keep in mind that a contract will not be considered an employment agency contract when it is a contract of employment between the client and the service provider. It is called a placement arrangement, and in these cases, the payroll tax liability falls on the client, or simply, the client has to pay payroll tax.
In case you still have some confusion, reach out to the State Revenue Office to learn more about this state tax.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.