Payroll tax: a crash course (Gist)  

Useful for: Employers looking to hire staff and/or learn the basics about payroll tax. Who has to pay, how much, to which state and when?

If you employ staff in your business you might have to pay payroll tax. Payroll tax is a tax on wages paid by employers if their staff's annual wages exceed a certain threshold. The thresholds are set at a State and Territory level.

Which state do I pay tax to?
To determine which state you have to pay payroll tax to, the location of your business is not relevant. It's worked out firstly by which state the work is performed in, and secondly where the wages are paid (eg where the employee's bank account is situated).

What if I have staff in different states?
If you pay wages in more than one state or territory, the threshold is based on the total Australian wages. For example, you may have to pay in NSW even if the total NSW wages doesn't exceed the NSW threshold of $623,000 (2008/09 rate).

Payroll tax exemptions
Some employers are exempt from paying payroll tax - this varies from state to state, but is usually Public Benevolent Institutions and registered charities.

Calculating payroll tax (not for the faint hearted!)
When you're trying to work out which pay items must be included to calculate payroll tax, you should consult the definitions of each state's Office of State Revenue. Most of the time the definitions will be the same, but sometimes there are small differences.

Here's a general guide to the rules that apply from 1 July 2008 - but you should get professional advice to clarify your individual circumstances.

Generally, when you're calculating payroll tax, you need to include all remuneration: salary, wages, commissions, bonuses, allowances, penalties, directors' fees, leave paid, accrued leave paid on termination, and leave loading.

All states also include employer superannuation payments and salary sacrificed superannuation in the calculation. The taxable value of Fringe Benefits (that's the grossed up value) is also included, but using a gross factor of up to 1.8692 (clear as mud, right?).

Most states also require that 'payments to third parties' are included - for example, payments to redundancy schemes and long service accrual schemes.

Employer contributions or discounts to employee share schemes or share options are usually included.

Payments made in Australia to workers who are working overseas are usually taxable unless the period away exceeds six months.

Contractors: Payments to contractors for services provided may be included under certain circumstances. If a contractor meets the criteria as an employee under common law, they'll probably need to be included.

Contracts most likely to be included:

-- If the contractor is engaged to do the work personally and is not free to hire someone else to assist

-- If the work performed is the normal activity of the business (eg if an architectural practice hires a contract architect)

-- If the contractor earns a significant proportion of his income or works on a significant proportion of his working days for the same employer. Some states provide a definition of what they consider to be 'significant'.

The fact that a contractor is a company, trust or partnership doesn't, in itself, remove the liability.

Possible exceptions

-- In most states, payments to injured workers under Workcover or Workers Compensation policies are exempt from payroll tax - but not any make-up amounts in addition to the amounts prescribed as compensation

-- Sometimes a concession applies (via exemption or a rebate) for payments to apprentices or trainees under recognised traineeship programs - although some states have time limits for the concession on such payments

-- Reimbursements are generally not taxed, but the payment may be taken into account using FBT valuation rules

-- The GST component of payment of wages is not assessable

-- The income tax free portion of a bona fide redundancy or early retirement payment is exempt in all states

-- Motor vehicle and travelling allowances may be fully or partly exempt. All states allow for an exemption on payment for business kilometres travelled up to a maximum amount per kilometre. Overnight accommodation where an employee is required to stay away from his normal residence will be payroll tax exempt up to certain amounts.

If you got this far, you deserve a gold star!

More information
This article is a guide to payroll tax - it's best now to consult the appropriate state agency for specific details.