Navigating the complex world of taxes can be daunting for business owners in Australia. One of the most important taxes to understand is payroll tax. In this comprehensive guide, we'll explore what is payroll tax, how it works, and what you need to know to ensure compliance with Australian standards.

Accountant what is payroll tax

What is Payroll Tax?

Payroll tax is a state-based tax levied on wages paid by employers to their employees. It is calculated as a percentage of the total wages paid by the employer and payable to the state revenue office.

According to the Australian Taxation Office (ATO), payroll tax is "a tax on wages paid by employers. It is calculated on the amount of wages paid each month and is payable in the state or territory of Australia where the services were performed" (ATO, 2023).

How Payroll Tax Works:

Determining Payroll Tax Liability

The first step in understanding payroll tax works is determining whether your business is liable for paying it. Each state and territory in Australia has its own payroll tax threshold, which is the minimum amount of taxable wages an employer must pay before they become liable for payroll tax.

For example, in New South Wales, the payroll tax threshold for the 2022-2023 financial year is $1.2 million. If your business has a total Australian wage of $1.2 million, you must register for payroll tax and start paying it to the NSW government.

The threshold applies to the total Australian wages paid by your business, not just those paid in a particular state or territory. It means that even if your business only has employees in one state, you may still be liable for payroll tax if your total Australian wages exceed the threshold.

Calculating Taxable Wages

Once you've determined that your business is liable for payroll tax, the next step is to calculate the total taxable wages paid to your employees each month. Taxable wages include salaries, allowances, and fringe benefits but exclude certain superannuation contributions and workers' compensation payments.

To calculate taxable wages, you must keep accurate records of all monthly payments to your employees. It includes their regular salaries and any bonuses, commissions, or other types of compensation they receive.

Applying the Payroll Tax Rate

After calculating your monthly taxable wages, the next step is to apply the relevant payroll tax rate. The payroll tax rate varies between states and territories but is generally around 4-6% of taxable wages.

For example:

In New South Wales, for the 2022-2023 financial year, the payroll tax rate reverted to 5.45% of taxable wages for businesses with total Australian wages exceeding the payroll tax threshold of $1.2 million per year.

The temporary reduction of the payroll tax rate to 4.85% was only applicable for the two years ending 30 June 2022. If a business has taxable wages of $1.5 million for the entire financial year, the payroll tax calculation would be as follows:

If a business has taxable wages of $1.5 million for the entire financial year, the payroll tax calculation would be as follows:

Taxable wages: $1,500,000

Threshold: $1,200,000

Taxable amount above the threshold: $1,500,000 - $1,200,000 = $300,000

Payroll tax rate: 5.45%

Payroll tax payable: $300,000 x 5.45% = $16,350

It's important to note that payroll tax is calculated on the total taxable wages paid throughout the financial year, not every month. The monthly thresholds mentioned in the sources are used for calculating monthly payroll tax instalments, which are then reconciled with the annual payroll tax return.

For example, in Victoria, the payroll tax rate is 4.85% for businesses with Australian wages with a threshold of $700,000, and additional charges may apply if they cross this threshold.

Lodging Returns and Making Payments

The final step in the payroll tax process is lodging returns and making payments to the relevant state revenue office. Most states and territories require employers to lodge payroll tax returns and make payments every month, although some may allow quarterly or annual lodgments for smaller businesses.

When lodging your payroll tax return, you must provide details of your total taxable wages for the period and any other relevant information, such as the number of employees and any exempt wages. You'll also need to calculate the payroll tax owed based on the applicable tax rate and make payment by the due date.

Failure to lodge returns or make payments on time can result in penalties and interest charges, so it's important to stay on top of your payroll tax obligations and seek professional advice if you're unsure about any aspect of the process.

Payroll Tax Thresholds and Rates:

New South Wales$1.2 million5.45%
Victoria$700,0004.85% / 1.2125% (regional employers)
Queensland$1.3 million4.75% ($6.5 million or less) / 4.95% (more than $6.5 million)
Western Australia$1 million5.5%
South Australia$1.5 million0% to 4.95% (exceeds $1.5 million but not $1.7 million) / 4.95% (exceeds $1.7 million)
Tasmania$1.25 million6.1% / 4% (taxable wages between $1.25 million and $2 million per annum)
Australian Capital Territory$2 million6.85%
Northern Territory$1.5 million5.5%

The Bottom Line

Payroll tax is a complex and important aspect of business in Australia. Understanding how it works, including tax rates, thresholds, and lodgment requirements, ensures that your business remains compliant and avoids costly penalties.

As with any tax matter, it's always a good idea to seek professional advice from a qualified accountant or tax specialist to ensure that you meet all your obligations and take advantage of any available exemptions or concessions.

By staying informed and proactive about payroll tax, you can focus on growing your business and providing value to your customers while also contributing to your state or territory's broader economic and social well-being.

Frequently Asked Questions:

What is included in taxable wages for payroll tax purposes?

Taxable wages for payroll tax purposes include salaries, allowances, bonuses, commissions, director's fees, and fringe benefits. Superannuation contributions are generally not included in taxable wages.

How often do I need to lodge payroll tax returns?

The frequency of lodging payroll tax returns varies between states and territories. In most cases, businesses need to lodge returns and make payments monthly. However, some states may allow quarterly lodgments for smaller businesses.