As an employer, there are some circumstances where you will be required to pay payroll tax. This is a state and territory tax that an employer pays to the local revenue office (or equivalent). This article will explain payroll tax and help you understand when your business needs to pay it.
What is Payroll Tax?
Payroll tax is a state and territory tax that an employer must pay to their local revenue office if they are over the payroll tax threshold in that state or territory.
When considering whether you have to pay payroll tax in a state or territory, you must look at the total amount of Australian wages paid to all employees in Australia, even if not all of those wages are paid to employees in that state or territory. Employers that run their business(es) through multiple company structures or entities should be aware that entities can be grouped for payroll tax purposes. Accordingly, the aggregate of the group’s wages will count towards the threshold in that state or territory.
Each state and territory has a different payroll tax threshold. Likewise, if your total Australian wages exceed that threshold, you must register for payroll tax in that state or territory. In addition, each state and territory has different payment due dates. For example, in New South Wales, you must pay payroll tax monthly; in the Northern Territory, you pay it annually. Therefore, checking your local state or territory reporting and payment requirements is critical.
Are Options Issued Under an Employee Share Option Plan Counted as “Wages”?
Yes, they are. If your business grants employees shares or options, you must declare the market value of the shares/options as ‘wages’ for payroll tax purposes.
You can determine the value of these shares or options either at the date of grant or the vesting date.
Importantly, the value of the shares or options for payroll tax purposes is not the net tangible asset value as determined by the ATO’s Safe Harbour method when issuing options under the startup concession for ESOPs.
LegalVision’s Employee Share Schemes Guide is a comprehensive handbook for any startup founder or business owner looking to attract and motivate top employees with an Employee Share Scheme.
Are Payments Made to Contractors Counted as “Wages”?
When you pay wages to your employees, these are considered taxable wages. They count towards whether you are over the threshold in that state or territory. In certain circumstances, payments to contractors can also be considered wages for payroll tax purposes. As such, you would include these payments when determining whether you meet the threshold in that state or territory.
Whether a payment to a contractor is considered wages for payroll tax purposes depends on whether the arrangement satisfies the “relevant contract” provisions. These provisions apply when:
- there is a contract, undertaking or arrangement from one person to another person or entity; and
- the person provides services for or in relation to the performance of work.
If the relationship fulfils the relevant contract test, the person providing the services is deemed an employee for payroll tax purposes. Likewise, the entity that receives the services from the person is deemed their employer. Accordingly, any payments an employer makes that relate to the performance of work are liable for payroll tax unless an exemption applies.
What are the Exemptions?
There are exemptions to the relevant contract provisions. These exemptions are similar across the states and territories. Below are the exemptions for NSW.
| Exemption | Description |
| 90-day rule | A contract is exempt if the contractor works for you for 90 days or less during the financial year. The contractor must be offering similar services to other businesses. |
| 180-day exemption | A contract is exempt if you ordinarily require the type of services for less than 180 days in a financial year. |
| Services ancillary to the supply of goods | An exemption applies if a contract is primarily for the supply of goods, and the services provided by the contractor are related to the supply of goods. |
| Services not ordinarily required | A contract is exempt if the services provided by the contractor are not ordinarily required in your business and the contractor performs the same type of services to the public generally. |
| Ordinarily rendering services to the public | A contract is exempt if the contractor performs similar services for the public generally. |
| Two or more persons | An exemption applies if your contractor conducts an independent business and engages two or more persons to provide your business with services under the contract. |
| Owner-driver contracts | A contract is exempt if the contractor’s services primarily relate to the transport of goods in a vehicle the contractor provides. Likewise, any services also relate to the carriage of goods by vehicle. |
What if I Have Workers in Multiple States/Territories?
Which State/Territory Do I Pay Payroll Tax In?
You might have employees in multiple states or territories. Suppose your business pays wages to an employee (or a contractor deemed an employee under the payroll tax legislation) who wholly performs their duties in one state or territory in a given month. In that case, payroll tax is payable in that state or territory for that month. Notably, you must calculate whether you meet the payroll tax threshold in that state or territory. This is the case even if that employee does not normally perform their duties in that state or territory.
Consider a business that operates in both New South Wales and Victoria, paying wages of $1 million in each state. Both states have different thresholds and rates. The business must register and pay payroll tax in each state based on their specific thresholds and apportion the wages accordingly.
Alternatively, your employee might not wholly perform their duties in one state or territory in the relevant month. In this situation, you would need to apply the “nexus test” to determine where you need to pay payroll tax. This test involves applying the following steps in order:
- payroll tax is payable in the state or territory where the employee’s principal place of residence is that month. If an employee has multiple principal places of residence, the one they are located in on the last day of the month is deemed their principal place of residence for that month;
- where the employee does not have a principal place of residence in that month, payroll tax is payable where the employer’s ABN address is located, or the employer’s principal place of business if they do not have an ABN;
- if the employee does not have a principal place of residence, and the employer does not have an ABN address or principal place of business, payroll tax is payable in the state or territory where the largest amount of wages are paid; and
- if none of the above applies, payroll tax will be payable in the state or territory where services were mainly performed.
How Much Payroll Tax Do I Have to Pay?
Further, the total amount of your Australian wages may exceed the threshold in a state or territory. In this case, payroll tax will be payable in that state/territory, even if you paid wages in other states/territories. However, the relevant state/territory’s threshold will be reduced to reflect the percentage of employees and wages paid in that state/territory.
Key Takeaways
If you are an employer who pays wages to an employee or payments to a contractor, or issues options or shares to an employee, you may have to pay payroll tax if the amount you pay across Australia exceeds the threshold in that state or territory based on the number of workers you have in that state or territory.
Unless an exemption applies, payments to contractors can be included as part of an employer’s wages for payroll tax purposes. Likewise, they can contribute towards going over the threshold. If an employer pays wages in multiple states/territories, they may have to pay payroll tax in more than one of those jurisdictions if they exceed the threshold. As each state and territory have slightly different rules, it is important to be across your payroll tax obligations in each jurisdiction.
For more information, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Payroll tax is a state and territory tax an employer must pay to their local revenue office if they are over the payroll tax threshold in that state or territory.
You have to pay payroll tax if the total amount of your wages to employees, payments to contractors or options/shares to employees exceed the threshold in a state or territory. The threshold takes into account wages paid across Australia.
If an employee performs their duties in one state or territory for a month, that is where payroll tax is paid. If not, the employer would have to work through the nexus test to determine where to pay payroll tax. Where an employer has to pay payroll tax in multiple states or territories, the amount is usually apportioned to reflect that wages have been paid in other jurisdictions.
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