What your clients need to know about payroll tax and STP

For businesses and their accountants, payroll tax can be complicated and full of grey areas.

Single touch payroll – or STP – will soon be mandatory. Are you and your clients STP ready? Do your clients understand their payroll tax obligations?

By Zilla Efrat

On 12 February 2019, the Parliament passed the Treasury Laws Amendment (2004 Measures No. 4) Bill 2018 to extend Single Touch Payroll (STP) to all employers from 1 July 2019. The change is expected to subject a further 750,000 employers to STP reporting requirements.

These employers will need to undertake a review of their payroll software to ensure that it is STP-compliant. Businesses may need to contact their payroll software provider to find out whether their software is STP-compliant.

However, for those employers that do not currently use an electronic payroll solution, they will find the transition to STP more difficult. 

John Shepherd, assistant ATO commissioner charged with introducing STP, says when you get down to those businesses with less than five employees, there are large numbers of smaller employers who don’t use a payroll product. 

He says the ATO has been working closely with the tax profession and some small businesses to better understand how these small entities operate their payroll processes. It will also work with the software industry to ensure there are appropriate alternatives for small businesses.

Shepherd says the ATO is working on options for micro-businesses that don't have payroll software. 

“We don’t want to force everybody into a payroll solution or having to pay for it,” Shepherd says. “We are looking at low-cost alternative reporting options for those who don’t use payroll or don’t want to take up a payroll solution.” 

The ATO recently released a register of "no-cost and low-cost” STP solutions that are best suited to businesses with one to four employers.

Closely held employers may also find the transition difficult as they routinely do not have a regular payroll cycle and often determine or finalise their payroll for closely held employees after the end of the financial year, often as part of the annual compliance process. CPA Australia understands that the ATO is developing special reporting rules for such closely held employers.

Top tips for practitioners

Shepherd provides the following tips to tax practitioners to help their smaller clients get up to speed with STP:

Work with your clients to understand how their current payroll processes work.

• Consider their reporting requirements and what information needs to be reported each payday.

• Work out the best way to get clients to report the information required.

• The ATO has more resources available on its website to support business during the transition. 

The tricky world of payroll tax

STP could expose weaknesses in just how much some tax practitioners and their clients understand the tricky area of payroll tax.

As associate director at RSM Australia Jane Wood notes, many businesses are not familiar with payroll tax.

“It doesn’t get a high profile in the media or in business. And sometimes, small employers don’t even know they should be paying it,” she says.

Gavin Swan FCPA, a director of Absolute Accounting Services, adds that the general level of awareness of payroll tax among tax practitioners could be much better.

How can practitioners better inform their clients?

“As tax practitioners, we tend to deal with Commonwealth law, but the difficulty we have with payroll tax is that it is a state by state levy and each state has different rules and thresholds,” says Swan.

“Payroll tax is also a relatively small part of our work. We are trained day in and day out on income tax, GST, fringe benefit tax and so on, but state taxes are a weakness because they are complicated and completely divorced from concepts that we know relating to income tax.” 

Related: ATO Toolkit – Get ready for STP

Meanwhile, the various state revenue offices are known to be increasingly using data-matching to test compliance and some lawyers report seeing an increase in payroll tax investigations. 

Both Wood and Swan believe that the widespread adoption of STP this year, especially among smaller companies, will intensify the focus on payroll tax. 

“It will highlight some mistakes,” says Swan. 

For businesses and their accountants, payroll tax can be complicated and full of grey areas. 

Payroll tax challenge: every state is different 

Employers only have to pay payroll tax to the state where their employees work. Each state has a different threshold denoting when the tax must be paid. For example, in New South Wales, the annual threshold is $850,000. It’s $1.1 million in Queensland and $650,000 in Victoria.

Wood says companies have to combine the total amount of remuneration paid across the country to see whether they need to pay payroll tax. For example, if the business pays more than $1.1 million across Australia, it will need to register for payroll tax in each of the states it operates in.

However, if the company employs staff in Queensland and Victoria alone, and its payroll bill is $800,000 per year, then it will need to register for payroll tax in Victoria but not in Queensland.

“In isolation, you may think you are below the threshold, but each jurisdiction wants to know what the other is doing,” says Swan. 

Related: ATO Fact Sheets – Single Touch Payroll

“All the states are looking in each other’s pockets to ensure they are not missing out.”

It’s also not just about wages. The total amount of remuneration used to work out payroll tax can also include directors' remuneration, superannuation, allowances, fringe benefits, bonuses, commissions and termination payments.

“At a cursory glance, some clients may think they have paid, say, $500,000 in wages, but might not have considered that all other benefits that could take them over the threshold,” says Swan.

Some inclusions, such as bonuses and commissions, may vary greatly from year to year. There may also be unexpected one-off items – for example, a termination payment to someone who has worked in the business for more than 20 years.

Who qualifies?

It’s also not too hard for one person to go over the threshold on their own.

“For example, if you are doctor or specialist operating through a service company, it’s quite conceivable that you could go over the threshold when paying your own wages,” says Swan.

Further complicating things is that some businesses are considered part of a group for payroll tax purposes, although some of them may not realise it.

“When groups are assessed, the threshold is only available to one business in that group,” says Wood. “That means all other businesses in the group must pay payroll tax regardless of the group’s or the individual business’s total payroll bill.”

She says a group is considered to exist where there’s a corporation and related corporate bodies, where there are common employees used in the businesses, or where the same person or entity has a controlling interest in at least two of the businesses. This means that some types of businesses, such as franchises, can be considered groups for payroll tax purposes.

However, Wood says: “To determine whether a company is part of a group, it’s also relevant to consider how independent the company is with carrying on its own business. Recent Victorian case law noted that businesses within major franchises were considered as independent and separate businesses for payroll tax purposes because of the level of independence each business had from each other and from the franchisor.”

She adds if companies are considered to be grouped for payroll tax purposes, it’s important to note that the other companies in the group are potentially liable for the payroll tax liabilities of the other companies. This means that if all other companies in the group pay their payroll tax correctly and one company doesn’t, the other companies become liable for the outstanding company’s payroll tax.

Swan notes that another common grey area is whether contractors’ remuneration needs to be included for payroll tax purposes. To find out whether someone is an employee or contractor, he recommends visiting the ATO’s  Employee/contractor decision tool on its website.

Swan believes greater awareness can overcome payroll tax problems.

“Every time you look at a company’s profit and loss statement, you should be aware of wages, superannuation and other benefits. It should be part of your basic procedures,” he says.
Wood says the best thing is to always be educating your client.

“Keep close to them so that you understand their business activities and make sure they understand their obligations. Communications are vital.”

Read next: When is a contactor not a contractor?

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