What Is Payroll Tax? A Comperhensive Guide for Australian Businesses

Payroll tax is an essential but often complex part of running a business in Australia. As an employer, you may find yourself wondering what thresholds, rates, and regulations apply to your specific business. 

In this comprehensive guide, we demystify payroll tax. Read on to learn how payroll tax in Australia works and what tax laws apply in your state.

What is payroll tax?

Payroll tax is a state and territory-based tax that employers in Australia must pay when their total wage bill exceeds a certain amount. Think of it as a tax on employment — the more staff you hire and the more you pay them, the more likely you are to be liable for payroll tax.

Here are some highlights that you need to know as an employer. We’ll dive deeper into these later on in the guide. 

• It’s separate from income tax: Payroll tax is different from the income tax you withhold from your employee’s wages (PAYG withholding). You pay payroll tax on top of regular wages and other taxes.
• It’s based on your total wages bill: The tax applies to your entire payroll, including salaries, bonuses, commissions, and often superannuation contributions.
• Thresholds vary by state: Each state and territory sets its own threshold at which payroll tax kicks in. For example, in New South Wales, you start paying when your annual wages exceed $1.2 million, while in Victoria, it’s $900,000.
• Rates differ too: Not only do the thresholds vary, but the tax rates are also different in each state. They typically range from about 4.75% to 6.85% of your wages above the threshold – some states will offer reduced rates to rural and remote employers.
• It’s a self-assessed tax: As an employer, it’s your responsibility to register for payroll tax when you reach the threshold, calculate what you owe, and make regular payments (usually monthly).
• Group provisions apply: If your business is part of a holding company you might need to combine all the wages across the group to determine if you’ve reached the threshold.
• There are some exemptions: Certain types of businesses or specific categories of wages might be exempt from payroll tax. This often includes non-profit organisations or wages paid to apprentices and trainees.

For many small to medium businesses, reaching the payroll tax threshold is a significant milestone. It often coincides with substantial growth but also represents a new ongoing expense to manage. As your business expands, it’s crucial to factor payroll tax into your budgeting and financial planning.

How does payroll tax work in Australia?

Payroll tax in Australia is calculated based on the total taxable wages paid by an employer to its employees. When this amount exceeds the tax-free threshold set by the relevant state or territory, you’ll need to pay payroll tax. 

What counts as wages?

When we talk about wages for payroll tax, we’re not just talking about regular salaries. It includes:

• Regular salaries and wages
• Bonuses and commissions
• Superannuation contributions
• Fringe benefits
• Certain contractor payments

How payroll tax is calculated

The process generally works like this:

1. Add up your total wages: This includes all the types of payments mentioned above.
2. Check your state’s threshold: Each state has a different threshold, ranging from $700,000 to $2,000,000. 
3. Compare your total to the threshold: If you’re below, you don’t pay payroll tax. If you’re above, you’ll pay tax on the amount over the threshold.
4. Calculate the taxable amount: This is the amount that’s over the threshold. 
5. Apply the tax rate: Each state has its own rate, typically between 4.75% and 6.85%.

An example

Let’s say you’re an employer in NSW:

• Your total annual wage bill is $1,500,000
• The NSW threshold is $1,200,000
• The NSW payroll tax rate is 5.45%

Here’s how it would work:

1. Amount over threshold: $1,500,000 – $1,200,000 = $300,000
2. Tax payable: $300,000 x 5.45% = $16,350

So, you’d need to pay $16,350 in payroll tax for the year.

Tips for employers

When your business is growing, and you expect you’ll reach the payroll tax threshold soon, follow these tips: 

• Keep accurate records of all wages and benefits paid.
• Stay up-to-date with your state’s threshold and rates, as they can change.
• Consider the impact of payroll tax when planning business growth or expansion.
• If you’re close to the threshold, factor potential payroll tax into your budgeting.
• When in doubt, consult with a tax professional or your state’s revenue office.

Remember, payroll tax is a significant business expense once you hit the threshold. It’s crucial to understand how it works in your state and plan accordingly as your business grows.

Payroll tax harmonisation and its implications for employers

Since 2007 most states and territories have committed to the harmonisation of payroll tax in Australia, while the holdouts Queensland and Western Australia have enacted substantially similar legislation. As an employer, you’ll need to understand these to ensure business tax compliance. Let’s break down what this act means for you.

At its core, the harmonised Payroll Tax Acts set out the rules and regulations for payroll tax across Australia. It defines what counts as taxable wages, who needs to pay the tax, and how it should be calculated and reported. While each state and territory has its own specific rules, this act provides the overarching framework.

Key highlights of the harmonised Payroll Tax Acts: 

1. It defines what counts as wages for payroll tax purposes. This goes beyond just regular salaries, including things like bonuses, commissions, and even some types of contractor payments.
2. It also harmonises the definition of “grouping” for businesses. This means that if you have multiple related businesses, you might need to combine their wage bills when calculating payroll tax.
3. The Acts outline various exemptions and rebates that might be available to you. For example, wages paid to apprentices or trainees are often exempt from payroll tax. 
4. Reporting and payment requirements are another crucial part of the Acts. They set out how often you need to report your wages and pay your taxes (usually monthly) and what information you need to provide. 
5. Additionally, they outline the consequences of non-compliance. These can include financial penalties, interest charges, and in severe cases, legal action.

Despite legislation, each state and territory has its own laws regarding payroll tax. As such, if you operate in multiple states, you’ll need to ensure compliance in each one.  

In practical terms, you need to:

• Keep accurate records of all types of payments that might count as wages.
• Regularly check if you’re approaching or have exceeded the payroll tax threshold.
• Understand how to calculate your payroll tax liability correctly.
• Be aware of any exemptions or rebates you might be eligible for.
• Set up systems to ensure you’re reporting and paying on time.

In the next section, we’ll discuss how legislation differs by state and territory. 

Payroll Tax Thresholds by State and Territory

As stated before, each state and territory in Australia sets its own payroll tax threshold and rate. Here’s a breakdown of the current thresholds, rates, and payment deadlines. 

Notes:

1. These rates and thresholds are current as of the 2024-2025 financial year.
2. Some states have variable rates or additional levies for higher wage bills.
3. Victoria offers a reduced rate of 1.2125% for regional employers.
4. Queensland has a reduced rate of 3.75% for regional employers (for wages up to $6.5M).
5. South Australia has a variable rate from 0% to 4.95% for wages between $1.5M and $1.7M.

These thresholds are subject to change, so you should check back annually for the latest information from your state or territory revenue office.

Payroll tax for employers: Exemptions and rebates

As an employer in Australia, you can save significant amounts of money by benefitting from exemptions and rebates. Let’s take a closer look at some of these. 

Exemptions

Exemptions are wages or organisations that are completely free from payroll tax. 

1. Non-profit organisations
   These are organisations that don’t operate for profit and typically serve community purposes. For example, a local animal shelter or a community food bank might be exempt from payroll tax.
2. Religious institutions
   This includes churches, mosques, synagogues, and other religious organizations. For instance, wages paid to staff at a local church would likely be exempt.
3. Educational institutions
   Many schools, colleges, and universities fall under this category. For example, a public primary school or a non-profit university would typically be exempt from payroll tax.
4. Wages paid to apprentices and trainees
   This exemption encourages businesses to hire and train new workers. For instance, if you own a plumbing business and hire an apprentice plumber, their wages might be exempt from payroll tax.
5. Maternity and adoption leave
   In many states, wages paid to employees on maternity or adoption leave are exempt. For example, if you have an employee taking 26 weeks of maternity leave, those wages wouldn’t count toward your payroll tax liability.
6. Volunteer emergency workers
   Some states exempt wages paid to employees when they’re performing emergency volunteer work. For instance, if your employee is a volunteer firefighter and takes time off to fight bushfires, those wages might be exempt.

Rebates

Rebates are refunds or credits on payroll tax you’ve already paid. They’re often used to encourage certain business behaviours. 

1. Employment growth rebates
   Some states offer rebates for businesses that increase their number of full-time employees. For example, in Queensland, if you increase your number of full-time employees from 10 to 15 in a year, you might be eligible for a rebate on the payroll tax for those new employees.
2. Regional rebates
   If you have staff outside of metropolitan areas, you may be eligible for regional area rebates. For instance, Victoria has offered payroll tax relief for businesses in regional areas to promote job growth outside of metropolitan areas.
3. Industry-specific rebates
   Certain industries might receive special rebates. For example, if you have a manufacturing business, certain states will provide payroll tax rebates to encourage growth in this sector.
4. Small business rebates
   If you own a small business, you might be eligible for a rebate. For instance, New South Wales has offered a Small Business Grant where eligible businesses receive a grant to offset their payroll tax.
5. Research and Development (R&D) rebates
   Some jurisdictions offer rebates for wages related to R&D activities. For example, if you run a tech startup and have employees working on developing new software, you might be eligible for a rebate on their wages.

It’s crucial to note that these exemptions and rebates can vary significantly between states and territories. Additionally, the rules and eligibility criteria can change from year to year.

As an employer, you should:

1. Regularly check with your state’s revenue office for current exemptions and rebates.
2. Keep detailed records of all wages paid, including categories that might be exempt.
3. Consider consulting with a tax professional who specialises in payroll tax to ensure you’re claiming all eligible exemptions and rebates.

By taking advantage of these opportunities, you can potentially save thousands of dollars in payroll tax.

How to calculate payroll tax for your business

Calculating payroll tax for your business in Australia involves several steps and considerations. While the basic concept is consistent across the country, the specific rates and thresholds vary by state or territory. Let’s break down the process in detail.

Step 1: Determine your total taxable wages

First, you need to calculate your total taxable wages for the year. This includes:

• Regular salaries and wages
• Bonuses and commissions
• Superannuation contributions
• Fringe benefits
• Certain contractor payments

It’s crucial to include all forms of remuneration that count as taxable wages in your state.

Step 2: Check your state’s threshold

Each state and territory has its own payroll tax threshold. Refer to the table earlier on in this article for details. If your total taxable wages are below this threshold, you generally won’t need to pay payroll tax. However, you may still need to register in some states.

Step 3: Calculate the excess amount

If your total taxable wages exceed the threshold, you’ll need to calculate the excess amount. This is the portion of your wages bill that will be subject to payroll tax.

Excess Amount = Total Taxable Wages – State Threshold

Step 4: Apply the payroll tax rate

Each state has its own payroll tax rate. Apply this rate to your excess amount to determine your payroll tax liability.

Payroll Tax Liability = Excess Amount × State Payroll Tax Rate

Example Calculation

Let’s consider a business operating in Victoria:

1. Total taxable wages for the year: $1,000,000
2. Victoria’s threshold: $900,000
3. Excess amount: $1,000,000 – $900,000 = $100,000
4. Victoria’s payroll tax rate: 4.85%
5. Payroll tax liability: $100,000 × 4.85% = $4,850

This business would need to pay $4,850 in payroll tax for the year.

Additional Considerations

1. Progressive rates: Some states have progressive rates. For instance, in South Australia, the rate varies from 0% to 4.95% depending on your total wages.
2. Interstate wages: If you pay wages in multiple states, you’ll need to apportion your threshold and calculate payroll tax for each state separately.
3. Group businesses: If your business is part of a group, you may need to calculate payroll tax based on the group’s combined wages.
4. Deductions and exemptions: Be aware of any deductions or exemptions you might be eligible for, such as those for apprentices or trainees.
5. Mental health levy: Some states, like Queensland, have additional levies that apply to very high wage bills.
6. Regular reporting: Most states require monthly reporting and payments, with an annual reconciliation.

To ensure accuracy, you should use your state’s official payroll tax calculator or consult with a tax professional. Remember, payroll tax obligations can change, so it’s important to stay updated with the latest rates and thresholds in your state.

Key payroll tax compliance deadlines

Payroll tax compliance in Australia involves regular reporting and payment obligations that vary by state and territory. You should mark these deadlines in your calendar to ensure payroll tax compliance. Here’s a comprehensive breakdown of the key deadlines across Australia. 

Additional important points to note:

1. If a due date falls on a weekend or public holiday, the deadline typically moves to the next business day.
2. Some states offer annual reporting options for smaller businesses. For example, in NSW, businesses with annual taxable wages under $10 million can opt for annual reporting.
3. Many states don’t require a separate June monthly return, as June wages are included in the annual reconciliation.
4. Some states have different deadlines for businesses that are part of a group. Always check with your state revenue office for specific group requirements.
5. New registrants may have different initial reporting deadlines. It’s important to check with your state revenue office when first registering for payroll tax.
6. Some states offer electronic lodgment options, which may slightly extend deadlines. For instance, in Victoria, electronic lodgment extends the monthly deadline to the 10th of the following month.

To ensure compliance:

• Set up calendar reminders for these deadlines.
• Consider using payroll software that automates tax calculations and provides deadline alerts.
• Regularly check your state’s revenue office website for any changes to deadlines or reporting requirements.
• If you operate in multiple states, create a consolidated calendar of all relevant deadlines.

If you’re having difficulty meeting a deadline, make sure to contact your state revenue office as soon as possible to discuss your options.

What happens if you don’t pay payroll tax?

Failing to pay payroll tax can result in severe consequences, including:

• Financial penalties and interest charges
• Legal action by the State Revenue Office
• Damage to your business’s reputation

State revenue offices conduct regular audits to ensure compliance. To prepare for these, maintain accurate records of all wages paid, including details of any exemptions or rebates claimed.

Common pitfalls in payroll tax compliance include misclassifying workers (e.g., treating employees as contractors), failing to register when reaching the threshold, and overlooking taxable benefits. To avoid these issues, consider seeking professional advice or using specialised payroll software.

If you find yourself unable to pay or meet a deadline, make sure to contact your state revenue office as soon as possible to discuss your options. 

FAQ

What is the difference between payroll tax and PAYG withholding?

Payroll tax is a state-based tax paid by employers on their total wage bill. Meanwhile, PAYG withholding is a federal tax system where you withhold a portion of an employee’s wages to pay their income tax.

Are contractors subject to payroll tax?

In some cases, payments to contractors can be subject to payroll tax. The specific rules vary by state, but generally, if a contractor arrangement is deemed to be an employer-employee relationship, it may be subject to payroll tax.

How often do businesses need to lodge payroll tax returns?

Most businesses must lodge monthly payroll tax returns. However, some states allow annual lodgment for businesses with lower wage bills. It’s best to check with your state’s revenue office for specific requirements.

Final Thoughts

Navigating the complexities of payroll tax in Australia can be challenging, but understanding your obligations is crucial for compliance and financial planning. By staying informed about thresholds, rates, and deadlines specific to your state or territory, you can ensure your business meets its payroll tax responsibilities. 

Need some help? Lawpath offers a suite of business tax compliance services, helping you navigate Australia’s tax laws.