Read: Access full Victorian State Budget 2018/19 review here
Payroll tax rate reduction for regional employers
Eligible Victorian regional businesses will see a reduction in the payroll tax rate from 3.65% to 2.425%. In effect, from 1 July 2018, they will pay tax at half the rate of their Melbourne counterparts, which presents significant cost advantages.
To illustrate the savings, an eligible regional employer with an annual wages bill of $1 million will pay approximately $8,500 less in payroll tax than a Melbourne based employer with the same size payroll. In comparing employers with annual wages of $2 million, the savings for the regional employer increase to approximately $32,750 compared to their Melbourne equivalent.
Who is an eligible regional employer?
Not all businesses with wages paid to employees in regional areas qualify for the lower rate. To be an eligible regional employer, the ABN registered business address must be in regional Victoria and at least 85% of total Victorian wages must be paid to employees who work mainly in regional areas.
Annual threshold increase
The annual payroll tax tax-free threshold will increase from $625,000 to $650,000 with effect from 1 July 2018. This increase was first announced in last year’s Budget.
Based on the current payroll tax rate of 4.85%, the increase in the threshold will result in an annual tax saving of $1,200 per business group.
It is worth noting that even with the increase in the tax-free threshold, Victoria still has the second lowest tax-free threshold, the lowest being South Australia ($600,000). This is still significantly behind the highest tax-free threshold of $2 million in the ACT, and trails both Queensland ($1.1 million) and New South Wales ($750,000).
A case for payroll tax reform
Pitcher Partners has always supported significant reform to payroll tax to attract new business to Victoria and incentivise pre-existing Victorian businesses to employ more staff. Reform in this sense includes both increasing the tax-free threshold and reducing the rate of tax. However, recent changes have not kept pace with wage growth, meaning much smaller businesses are now caught within the payroll tax net and most others are paying much more tax.
Between 2002 and 2018, the tax-free threshold increased from $550,000 to $650,000, representing a modest increase of 18.2%. However, over the same period, full-time adult total earnings rose by 79.5%. What this means is that an employer now only has to employ the equivalent of 7.6 full-time employees to be liable for payroll tax compared to 11.6 full-time employees in 2002, so businesses with four less employees are now subject to payroll tax compared to their 2002 counterparts.
If we compare businesses with 20 employees in 2002 to now, based on full-time adult total earnings, the overall tax payable has increased by 136% compared to wages growth of 79.5%. Payroll tax has clearly outpaced wages growth over that time largely due to the reluctance of successive governments to adequately increase the tax-free threshold or reduce the rate of tax.
As part of a platform for employment growth, we will continue to encourage the government to consider significant structural reforms to payroll tax, ensuring smaller businesses are no longer liable for the tax and those that remain liable only pay their fair share.