A tax on wages paid by employers was first introduced by the Federal Government during the Second World War by two Acts of Parliament:
- Pay-roll Tax Act 1941; and
- Pay-roll Tax Assessment Act
The Acts levied a tax on wages paid by employers in Australia from the 1st July 1941 at the rate of 2.5% on wages paid by employers to employees.
It was simple and straightforward.
It applied across the board to every business around Australia.
Unlike today where the States apply threshold amounts for businesses, no threshold amounts applied when the Federal Government administered the Pay-roll Tax Act 1941.
The Acts were introduced to finance the Federal Government’s obligations to pay child endowment at the rate of five shillings per week to the carer of more than one child under the age of 16 years.
Interestingly, the USA has a similar history where business also pays payroll tax on employees’ wages. The tax is then used to help fund the social security system and other insurance objectives. However, in the USA payroll tax continues to be administered by the Federal Government.
There were significant changes to Australia’s taxation system during the Second World War, not just the introduction of payroll tax. It was during this time that the States handed over exclusive control of the collection of income tax to the Federal Government and replaced it with Federal Government Grants to the States.
In 1971 the power to tax payrolls was transferred from the Australian Government to the States and Territories. Queensland introduced its own Pay-roll Tax Act in 1971. Each of the other States and Territories introduced their own Pay-roll Tax Acts about the same time.
Since taking over control of payroll tax there have been many changes to the legislation by the States with the two most significant changes being:
- Grouping provisions introduced in the mid-1970s
- Harmonisation of the payroll tax systems of Queensland, New South Wales and Victoria introduced in 2008
Before the grouping provisions were introduced it was easy for sophisticated businesses to get around paying payroll tax by setting up various companies to employ their workforce. The trick was to keep the payroll of each of the companies under the threshold amounts so no tax was payable.
It didn’t take long for the States to work out this avoidance measure and they introduced the grouping provisions only a few years later.
However, those provisions were not comprehensive enough and a lot of businesses found a way around them so in 2008 most of the States and Territories around Australia agreed to harmonise the payroll tax legislation. They toughened up the legislation and made it more difficult to get around.
The Payroll Tax legislation is a comprehensive but unfortunately, complicated piece of legislation. It is not helped by there being no definition of “employee” in the Act.
Payroll tax advice has become a specialised area where it is important to seek assistance from a firm of experienced legal practitioners. At Tobin Partners we offer comprehensive payroll tax advice where we treat each business differently and address their areas of concern quickly and professionally.
