Rather than getting rid of a tax business hates most, Joe Hockey's White Paper wonders if it should be expanded

Payroll tax delivers 5% of the tax take. Photo: Getty / Paula Bronstein

Here are two words guaranteed to raise the ire of Australian business owners: payroll tax.

It’s a state-based tax, applied at different rates across the nation – and sometimes used by politicians as an incentive to lure businesses across borders.

In New South Wales, for example, once your company’s payroll hits $750,000, the state takes 5.45% of the total value as payroll tax. In Victoria, it’s 4.5% above $550,000. In Queensland it’s 4.75% and doesn’t kick in until $1.1 million.

It’s a tax that can have a dramatic effect on the cost of doing business, depending on what state you’re in, but as the White Paper points out, rakes in 5% of Australia’s tax take, so it’s a nice little earner for state treasurers.

As the White Paper observes:

While the states and territories have substantially harmonised legislation and the administration of payroll tax in recent years, some business groups, particularly those operating across state borders, remain concerned about the complexity associated with differing thresholds and rates across states.

But business hates it, viewing it as a penalty for attempting to employ people.

Rather than taxing consumption, governments are taxing the inputs to production.

Small business owners expends an inordinate amount of time trying to calculate whether they’re going to take on an extra staff member if it will tip the payroll over the threshold, because there isn’t a graduated introduction of the tax. That means that, for example, if you’re already on a wages bill of $745,000 in NSW and want to put on another employee at $40,000, then you’ll need to find another $36,375 – almost another worker – to cover the cost of payroll tax.

The Business Council of Australia estimates around half of the potential payroll tax base is exempt paying it, which reflects the fact that the vast number are small or micro businesses.

The White Paper offers arguments for, and against, expanding the tax base. On one side, the rate could drop if more businesses are handing over payroll tax, but on the other side “a zero threshold would also likely impose significant administrative costs and compliance burdens on very small businesses”.

It addresses the issue on page 143, pondering the effect of increasing payroll tax by saying:

In the short run (around 12 months), business are unlikely to be able to change existing wages and prices. As such, business owners will bear any costs associated with increased payroll taxes. In the long run, the cost of the tax is likely to be passed onto employees (through lower wages) and consumers (through higher prices).

The White Paper goes on extol the virtues:

Broad-based payroll taxes have similar economic consequences to a broad-based consumption tax, making them a relatively efficient way of raising revenue.

For governments, payroll tax revenue grows with wages. Without increases to the threshold, average payroll tax rates on businesses will increase as the payrolls of businesses grow.

But it says “in practice, payroll tax in Australia is less efficient and more complex than it could be” and that enormous effort and cost goes into collecting it, which is contrary to the Abbott government’s express wish to cut red tape.

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