Payroll burden on growing small businesses


Small businesses can suffer under the demands of payroll tax. Photo by Annie Spratt, Unsplash

OnCall DBA are one of many small businesses around Australia that believe payroll tax is unfair. Based in Western Australia, the company said it would have expanded faster without the struggle of the tax in place.

OnCall DBA’s General Manager Derek Harper said payroll tax was an unwelcome burden on the operation of the business. “There is little fairness in a regressive tax, with what OnCall DBA pay in payroll tax each year we could afford to employ another staff member, but we can’t as the money is given to the state government instead with really nothing in return,” he said.

Mr Harper said the tax was particularly unfair on small professional consultancies that have a small number of relatively high paid consultants, putting the business above the tax threshold quicker. “Businesses with far more staff than we have but where the average staff salary is much lower will pay much less payroll tax or even pay none at all, this seems unfair,” he said.

“I know the State Government needs income from somewhere to pay for state infrastructure and services, but to get a significant proportion of this from very small business just stunts our growth opportunities and is a direct disincentive to hiring more staff. The cash flow is another issue, we are only given seven days from the end of each calendar month to lodge and pay the tax, this is a very tight timeframe and penalties apply even if we are only a few days late.”

Payroll tax is a state tax on wages paid by employers when the size of their payroll exceeds a threshold amount. It has been under scrutiny for many years due to claims it unfairly targets small businesses. It has been accused as being one of the primary inhibitors for Australian companies to grow their staff numbers and their businesses.

The Chamber of Commerce and Industry WA (CCIWA) is one of the lobbyist organisations that have consistently called for the government to review payroll tax and consider other more equitable state level revenue raising options. CCIWA Chief Economist Aaron Morey said payroll tax was counterproductive to small business growth. “CCIWA intends to take recommended reforms to Government once we reach the [Covid-19] recovery phase, which will include reforms of some other fairer broad-based measures such as a general GST increase,” he said.

He also said the Western Australian State Government’s initial coronavirus relief package regarding payroll tax was helpful but not enough. “We were concerned with two things with that initial response,” he said. “One is a deferral that means that you’ve still got to pay at some stage which wouldn’t be good for business confidence and, secondly, that you’ve got to recognise there is a lot of businesses underneath a payroll tax threshold and so we needed to target those smaller businesses.

“We engaged with the State Government on those two issues, so what they have now done is actually waived payroll tax so there will be no payroll tax accrued for four months. They’ve also brought forward the lifting of the payroll tax threshold [to $1,000,000], that will be permanent.”

CCIWA chief executive Deidre Willmott told Perth Now the tax hurts businesses, workers and the unemployed. The Institute of Public Accountants, who represent small businesses in Australia, are also lobbying on the issue. They want the Federal Government to overhaul the tax and replace it with a more broad-based measure by raising GST rates across the board for everyone.

Employers Australia wide currently have to pay a mandatory superannuation guarantee contribution of 9 per cent of an employee’s salary into a complying superannuation fund. Payroll tax is calculated based upon an employer’s total salary bill and their total superannuation. Superannuation is gradually increasing. It was 9 per cent in 2002 but will be 12 per cent by 2025, which means these increases are also increasing payroll tax each year. If payroll tax thresholds increase, the burden of the tax on small business could get worse.

So, while the tax thresholds have gradually been on the rise, these state level concessions given in one hand, could be taken away in the other hand by the Federal Government’s superannuation increases.

Senator Gerard Rennick said in Parliament re-introducing 1.5 per cent stamp duty on share trades would raise around $20 billion a year which could be used to fund the elimination of payroll tax. “There is a broad consensus that payroll tax and other inefficient state taxes are punitive and economically destructive,” he said. “[It] inhibits employment growth and business development.”

Urban companies aren’t the only ones complaining. Some regional business owners have called it insidious and say that scrapping it would help them manage during times of drought. Grove Juice grower and processor Dick Estens told The Land that all payroll tax was doing was forcing regional companies to invest heavily in robotics and artificial intelligence, which will only reduce employment.

Nationals Minister for Agriculture David Littleproud said in Parliament that governments should remove the tax to support rural communities during times of need. “We have asked [the state governments] to come with us and pay the rates of small businesses and farmers and remove payroll tax in drought-affected communities,” he said.

There appears to be little collaboration between the states and territories regarding the application of payroll tax given the lack of consistency in its structure and taxation rates and thresholds. This is a headache for businesses that operate in multiple states and may be a catalyst for the movement of staff to lower taxation jurisdictions.

New South Wales town Inverell is lobbying to axe payroll tax for food producers during the Covid-19 pandemic to help major employers like Bindaree Beef. This is due to the NSW Government not waiving fees during the crisis for businesses with payrolls over $10 million.

Inverell branch chairman Steven de Gunst told the Inverell Times due to the lack of cattle available it was a really challenging time for the company and panic buying means food producers were vital. “Obviously we can’t let this business go under here, we’ll all be struggling,” he said. “We are a town that survives on beef.”

In 2014, Abbott Government minister Josh Frydenberg called for a tax reform saying payroll tax was never efficient. The Sydney Morning Herald also called the tax absurd in 2015, claiming  it sends a clear message to businesses not to hire additional employees. Apart from Covid-19 economic relief stimulus, long lasting change is still yet to occur.

Newspaper chippings from the 1940’s suggest that protests against the tax have been happening since it was implemented and lobbying against the issue has continued ever since. When the tax was first considered in Victoria in March 1941, a resolution was passed strongly opposing the tax which was forwarded to Arthur Fadden, the acting Prime Minister.

A journalist in the Perth Daily News wrote in 1941 payroll tax was a glaring injustice. “Drawing this tax from business people who are already almost crushed with taxation for war-needs, disgusted,” he said.

The tax was first introduced in Australia by the Federal Government during World War 2 through the Pay-roll tax Act 1941 and the Pay-roll Tax Assessment Act. When it was established, it applied to every business in Australia at the rate of 2.5 per cent. The money collected helped finance the Federal Government’s obligations to pay child endowment at the rate of five shillings per week to the carer of more than one child under the age of 16 years.

The tax didn’t get controlled by individual states and territories until 1971 and there have been many changes to legislation since then. Today, Australian businesses pay over $22 billion annually in payroll tax to individual state and territory governments and on average for every extra person a business employs it costs around $4000 in additional tax.

The tax isn’t only being slammed in Australia. Americans are also saying they think their payroll tax laws are regressive and unfair. The country’s payroll taxes represent the second-largest source of federal revenues in the USA after income taxes and the tax is governed at a federal level rather than state. The majority of their funds collected go towards Social Security and Medicare fees.

There is a general view of irony surrounding payroll tax. It raises funds from employers and, therefore, discourages them hiring additional staff. A removal of the tax would encourage further employment and those newly employed staff would pay income tax rather than claim unemployment benefits.