Payroll tax for good?

South Australian Business News  •  Policy  •  InDaily  •  Payroll Tax
Andrew Kay
Tuesday, April 16th 2024

Ask any business owner what’s the one tax they’d like to see the back of and there is a good chance payroll tax will be top of the list. Why? It’s a tax on jobs, a tax on growth, and it serves no purpose other than to fill the government coffers. With that off our chest, it might be expected that the South Australian Business Chamber push to see payroll tax abolished. While that might suit our narrative and score an easy headline, the reality is that payroll tax is well entrenched in state government playbooks around the country and there is no chance of them giving it up. Payroll tax is projected to return $1685M to the state government over the next twelve months. If they were to pass that up, it would be only to replace it with a different impost on business to recover that sum or more.

History shows calls for payroll tax abolition have regularly fallen on deaf ears. So as part of our 2024/25 pre-budget submission, the Chamber has taken a more enlightened approach to reform payroll tax to work for business and the state.

It’s an approach that addresses the most contentious pain points for business, as well as offering incentives that can help alleviate the current jobs and skills crisis that will only compound as our state’s economy continues to grow and diversify.

Our reform presents in a suite of six tactical initiatives, targeted to reduce costs and encourage investment in people and productivity.

The number one grievance for small business is payroll tax bracket creep. Many businesses are now in the payroll tax window for the first time, not because they have taken on more staff or their business is booming, but simply because of significant wages growth during a period of high inflation. Once they start to incur payroll tax, every new staff member they bring on the books comes at a higher cost.

The bluntest and most effective means to tackle bracket creep is to lift the payroll tax threshold. This was last adjusted in 2019 in a time of low inflation, low wage growth and pre-COVID 19. An increase from $1.5M to $2.1M would compensate for wage growth and give us the most competitive threshold in the country.

Creating a competitive environment to attract business investment from interstate and overseas should be a primary objective of a business-friendly government. Payroll tax is an area where our state government can influence outcomes. 

Other states do this by offering regional tax discounts to encourage investment in these areas. As key projects developing in our regional centres, the time is right to get up to speed with our interstate counterparts. 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, which is why we are asking for a 50% payroll tax discount for regional businesses. We could adopt 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.

Businesses in many sectors have gone through a prolonged period of struggling to find skilled staff. The state is embarking on an ambitious infrastructure agenda including Hydrogen Power Plant, Northern Water, AUKUS, the Women’s and Children’s Hospital and completing the North South Corridor. At the same time, increasing the state’s housing stock is crucial to accommodate the workforce to deliver these projects. 

How can business work with government to fast-track the skilled trades required to build a workforce that can deliver on this agenda? Easing the payroll tax burden to encourage investment in training and upskilling new employees would be a positive start.

We are proposing two initiatives here. Firstly, introduce an exemption on wages paid to apprentices, trainees and new graduates and secondly boost employment through targeted payroll tax discounts.

Encouraging the taking on of apprentices and trainees is clear cut, however there is another opportunity to address the low participation and high underemployment rates that exist in SA. 

Unemployment might be at an all-time low, but we index poorly with participation. There is an opportunity to unlock an untapped workforce by waiving payroll tax on wages for under-represented workers, long-term unemployed individuals, post-correctional individuals, and those undergoing re-skilling to enhance workforce accessibility. 

As businesses grow, payroll tax can come like a bolt out of the blue and when it hits, it hits hard, challenging cash flow. We propose a softer landing” for business incurring this tax, asking government to widen the range at which payroll tax is scaled from 0% to 4.95%. We don’t want to put the handbrake on businesses as they start to scale. Let’s ease the transition into the payroll tax environment and encourage their growth and investment.

Entrepreneurs often take a successful business model and roll it out across other acquisitions or start-ups. Unfortunately, the government is grouping all these businesses under a single entity. For example, a café owner might run a business that is not eligible for payroll tax. Another café is about to go out of business in a neighboring suburb, they buy that business and set about rebuilding, saving jobs in the process. Like many new businesses, the new café may not turn a profit in the first year, but now with the combined payroll across two separate businesses, they have tipped over the threshold. It hits the existing payroll and is compounded by any plans to grow and bring in new staff in either business. There is an easy fix here, relax grouping restrictions for small businesses in their first 12 months. Entrepreneurs who want to expand their footprint should not face such a clear disincentive.

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. 

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

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

Find out more about the South Australian Business Chambers efforts to reform payroll tax here.


Andrew Kay

Chief Executive Officer
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