A common trap for growing businesses is payroll tax. It can be a complex area, particularly knowing when total wages reach a level that requires them to register for payroll tax in the states or territories where they have employees. There are also other risks that require careful attention.

The various state revenue offices, just like the ATO, increasingly use data-matching from several sources to test compliance with the rules, so we are seeing an increase in payroll tax investigations. Each state and territory has its own tax rates and threshold for when payroll tax becomes payable, and they can vary significantly. For example, the annual threshold in Victoria is $900,000 while in Queensland there are three ranges of threshold: under $1,300,000; between $1.3 million and $6.5 million; and over $6.5 million. Likewise, the tax rate varies from 0 percent for the smallest businesses in some states, to a flat rate of 6.85 percent in the ACT for any business under $2,000,000.

For payroll tax purposes, ‘wages’ can include any wages, salary, remuneration, commission, bonuses or allowances paid to employees, and taxable fringe benefits, employer superannuation contributions, benefits provided under an employee share scheme and payments to contractors.

A common risk for businesses is where they have interstate employees. Businesses with employees physically working in another Australian state or territory must report their taxable Australian wages in each jurisdiction, applying the relevant tax-free threshold and then apportioning the excess over the threshold to each state or territory.

This requires a business to register and pay taxes on wages relating to the second state or territory in which they have employees and also increase the payroll tax payable in their home state due to the resulting apportionment of the threshold.

Another key risk area for small businesses is the extremely wide grouping rules, which can apply to entities within the same state, and also to related entities in different states.

When entities are grouped in the same state, only one member (referred to as the Designated Group Employer) will usually claim the tax-free threshold while all other members will be taxed at the applicable flat rate on total wages paid for the period. However, when entities are grouped in different states, the thresholds must be apportioned by a business according to the total annual Australian taxable wages.

Perhaps one of the most complex, subjective and risky areas of payroll tax rules is contractors. It involves specific tests whether a business pays a person or entity under a “relevant contract”. It is critical to have a robust process for analysing all contractor arrangements for any potential payroll tax exposure.

It is critical for business owners to understand the rules and ensure that they have been applied appropriately by each affected business.