Payroll tax: A handbrake on business and wages growth

Payroll tax is an insidious tax that ultimately manifests as a tax on jobs, which reduces employment opportunities, or a tax on workers incomes, reducing take home pay.

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Back in the 1890s, in response to New Zealand local authorities licensing the ownership of dogs at a cost of two shillings and six pence per collar, a Maori by the name of Hōne Riiwi Tōia prophesised that, “if dogs were to be taxed, men would be next”. How prophetic! 

Move forward to 2021. Imagine a tax levied on businesses for not just employing workers, but for the amount they pay their workers, and the amount of tax is irrespective of the profitability of the business. 

Australia has such a tax, which is called payroll tax and levied on many businesses by all states and territory governments. 

Surveys of businesses by the Australian Chamber of Commerce and Industry (ACCI) and those of our member chambers consistently show state and territory taxes to be among the most important areas of reform sought by businesses, particularly reform of payroll tax.  

The simple, clear conclusion drawn from these surveys is that payroll tax is a handbrake on business and wages growth. Unfortunately, this finding is in stark contrast to the views held by many policy makers.  

recent national survey of businesses by ACCI found that 90 per cent either agree or strongly agree that payroll tax comes at the cost of jobs, and almost three-quarters of businesses indicated that removing payroll tax would lead to them increasing either the number of employees or wages.  

Furthermore, respondents overwhelmingly reported that payroll tax adversely affects the profitability and competitiveness of their businesses, and that the administrative burden in complying with the tax is significant.  

If the Australian economy is to have a sustainable business-led recovery from the COVID-19 pandemic driven by investment and jobs growth, then governments must set as a priority how to deal with the vexed issue of payroll tax. 

The need for reform of the payroll tax is not new. ACCI and its state and territory member chambers have actively called for payroll tax reform leading to its abolition for over two decades. Also, there has been no shortage of government reviews highlighting the inefficiency and economically damaging nature of the tax. For example, the Australia’s Future Tax System Review 2010 (The Henry Tax review), found every dollar raised from payroll tax resulted in a welfare loss to the broader economy of 40 cents. 

The difficulty facing state and territory governments in meaningfully reforming payroll tax is that it provides between 27 per cent and 42 per cent of their own source revenue, amounting to over $26 billion in 2019. This is almost half the revenue they receive in GST redistribution from the Commonwealth.  

Since 1971 when payroll tax was transferred from the Commonwealth to the states and territories, the way it is applied has differed significantly among the jurisdictions. Rates vary from a low of 4.75 per cent in Queensland to 6.85 per cent in the ACT. Similarly, tax-free thresholds based on the total wages paid by a business vary between a low of $650,000 in Victoria and high of $2 million in the ACT. In addition, there are differences in exemptions, allowances, deductions, definitions and interpretations of the legislation, which contribute to the tax being very inefficient. A Mental Health and Wellbeing levy in the form of a payroll tax surcharge on businesses with annual national payrolls over $10 million was introduced in this year’s Victoria state budget, adding an additional $800 million per year tax burden on affected businesses. 

Despite efforts under the COAG National Partnership Agreement to harmonise legislation and administration of the tax, progress has been disappointing with businesses subject to the tax wearing the cost.  

Ideally, there needs to be a national approach involving both tiers of government to phasing out payroll tax and replacing it with a more efficient tax system for Australia. However, as history has shown, achieving reform that supports federal and state budgets over the long term, promotes economic growth, and is politically acceptable takes time. 

An important and necessary step on the road to substantial tax reform is for the National Cabinet through the Council of Federal Financial Relations (CFFR) to agree on how to increase the efficiency of payroll tax and reduce its burden on businesses. 

It is interesting to note that New Zealand does not have payroll tax. The late 19th Century rebellion to the ‘dog tax’ may explain why. 

Advocacy and campaigns 

For more information on the Victorian Chamber’s advocacy work and current campaigns, along with submissions and taskforces, visit the Policy and Advocacy section of the VCCI website

If you have any questions or would like to be involved in our advocacy work, please contact policy@victorianchamber.com.au

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