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Payroll Tax

Of all the taxes in this country, surely payroll tax is the most absurd. It sends a very clear and succinct message to employers: do not hire any additional employees because, if you do, you’ll pay the price, literally.

Many are unconcerned about this impost, claiming it’s a hit that affects big businesses rather than small ones. But the little guys can be just as impacted.


The tax is calculated by applying a percentage to the cost of wages once an employer reaches a certain threshold. In some states such as Victoria, the threshold is quite low at just $550,000, which means more firms are caught in the net. Other states or, in this case a territory, are more relaxed. In the ACT, for example, it’s set at $1.85 million.


Based on the average full-time wage, payroll tax captures businesses with as few as seven employees and maybe even fewer if the jobs attract a hefty salary. And the tax to be paid varies from as low as 4.75 per cent in Queensland to as high as 6.85 per cent in the nation’s capital. It’s quite a blow for businesses that might not have sufficient cash flow, profit or bank balances.


An entrepreneurial friend of mine remarked a few days ago he’s preparing to pay it for the first time. He had mixed emotions. On the one hand, he saw it as a great problem to have, since it reflected the growing nature of his successful business. On the other, the tax bill came as an unbudgeted surprise and an unwelcome sting just when he was planning to reinvest surplus funds.


For him, though, it’s really not a big deal. He has enough money sitting in an account to easily meet his tax obligations. Others aren’t so fortunate.


This was evident in Western Australia last month. In response to the government’s decision to defer an increase to the threshold, the Chamber of Commerce and Industry surveyed 600 of its members. Approximately eight in ten said they were now less likely to take on new employees. A similar number were also disinclined to raise wages.

Now, whenever a lobby group releases a catastrophic survey, it’s always worth taking the findings with a grain of salt. They clearly have an agenda to push. In this instance, just because hundreds of businesses say they’ll hire fewer people doesn’t mean they’ll actually carry out the threat. If they think recruiting an extra person or two will lift their revenues by more than the subsequent tax implications, they’ll probably do it.


But why take the legislative risk? When there are other more logical avenues through which tax can be collected, why gamble with the one that could potentially prevent a rising unemployment rate?

The fact it’s an employment disincentive can be seen in the several states that offer payroll tax rebates to employers who hire the unemployed.


In New South Wales, there’s a $1000 rebate available to those who recruit a victim of a mass layoff, while in Tasmania there’s a generous rebate given to employers who create new positions. The fresh government in Queensland, too, has plans to introduce a rebate for every apprentice or trainee adopted in the sunshine state.

So clearly this is a detested tax that even politicians and their expert advisers implicitly acknowledge is an inefficient way to boost the budget. And yet, as the Federal Government’s recent tax discussion paper revealed, Australia “relies more on payroll tax than other OECD countries”.

But since it now accounts for 5 per cent of government revenues, don’t expect it to be eradicated anytime soon.




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