It's time for payroll tax reform

South Australian Business News  •  Policy  •  Payroll Tax  •  Opinion
Andrew Kay
Tuesday, March 26th 2024

Abolish payroll tax! As a policy position it’s a headline grabber, but in reality, has a less than zero chance of success with any government. That’s why in our 2024/25 pre-budget submission, the SA Business Chamber has taken a considered approach to reform payroll tax to work for businesses and the state.

I’m yet to meet anyone who thinks payroll tax makes sense. Our Premier is even on record as denouncing it as a tax on jobs” and I’m sure if you caught the Treasurer in a quiet moment, he would begrudgingly admit the same. However, it’s projected to return $1685M to the State Government over the next twelve months and that’s not a sum they will give up easily, nor is it simply replaced without introducing an alternative impost on business.

When the government set its budget in 2021/22, they forecast payroll tax revenue would be $1597M by 2024/25. When they set last year’s budget, this projection had been revised to $1769M. This $172M bonus” is a result of the spike in wages that we have seen over the past two years. 

Many businesses now find themselves in the payroll tax window for the first time, not by employing more people or increasing profit, but simply because wages grew in a period of high inflation. It’s bracket creep for business and our members repeatedly tell us it is the most constraining state-based tax on their business.

Last year’s budget forecast payroll tax revenue jumped from $1553M in 2022/23 to $1961M in 2026/27. That’s a 26.3% increase in just four years. See the trend?

It’s time to return some of that windfall to those who deliver it, and that’s exactly what we have proposed across a suite of six tactical initiatives.

  • 1 — Lift the payroll tax threshold. It’s the bluntest and most effective means at the government’s disposal. The payroll tax threshold was last adjusted in 2019 in a time of low inflation, low wage growth and pre-COVID 19. Moving it from $1.5M to $2.1M would compensate for wage growth, fix bracket creep and give us the most competitive threshold in the country.
  • 2 — Introduce a 50% payroll tax discount for regional South Australia. Victorian regional businesses enjoy a payroll tax rate of just 1.2125% — a fraction of the South Australian rate. We want to encourage business growth in our regions rather than across the border. The Victorian and Queensland model which requires the principal address of the business to be located in a regional area and at least 85% of staff to live and work in a regional area could apply.
  • 3 — Introduce an exemption on wages paid to apprentices, trainees and new graduates. The government has many ambitious infrastructure goals, including Hydrogen Power Plant, Northern Water, AUKUS, the Women’s and Children’s Hospital and completing the North South Corridor. Meanwhile, increasing the state’s housing stock is crucial to accommodate the workforce to deliver these projects. South Australia is experiencing a prolonged and costly skills shortage, and it is particularly dire in trades. Incentivising businesses to employ new apprentices and trainees in areas of distinct need would help alleviate this problem. We don’t want businesses laying off staff to avoid payroll tax, we need to develop the workforce.
  • 4 — Boost employment through targeted payroll tax discounts. Like the previous recommendation, employment growth in specific sectors could be encouraged by offering aligned payroll tax deductions. The state’s low participation rates and high underemployment rates could also be addressed using this model. We recommend waiving payroll tax on wages for businesses hiring under-represented workers, long-term unemployed individuals, post-correctional individuals, and those undergoing re-skilling to enhance workforce accessibility. This measure could unlock a vital workforce segment and stimulate economic participation.
  • 5 — Widen the range at which payroll tax is scaled from 0% to 4.95%. The structure of the payroll tax scale hits growing businesses hard and quickly. Businesses in expansion mode are faced with significant tax obligations just as cash pressures hit. To encourage growing businesses to hire new staff, increase wages and expand their operations, the scale at which payroll tax is introduced needs to be reformed to soften the impact.
  • 6 — Relax grouping restrictions for small businesses in their first 12 months. We recommend the removal of grouping restrictions as they apply to new small businesses. For example, a newly purchased small business could be exempt from payroll tax grouping restrictions for its first 12 months of operation. During this period, it is not uncommon for a business to be running at a loss. We hear examples of a payroll tax obligation hitting the entire parent entity because they have taken on a new business whose payroll puts them over the threshold. The operator’s endeavours may have saved an ailing business and jobs, yet they are financially penalized even though the business is not turning a profit. We need to remove this disincentive for our successful entrepreneurs to expand their footprint.

As the peak business organisation in South Australia, we are committed to advocating for policies and initiatives that support the growth and development of businesses in the state. Our practical recommendations on payroll tax reform demonstrate this and provide a genuine opportunity for the government to show leadership in this area.

Author

Andrew Kay

Chief Executive Officer
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