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Just how competitive are our State's Payroll Tax arrangements for Queensland Businesses?

We often hear how competitive Queensland’s payroll tax regime is with politicians boasting that we have the lowest rate at 4.75% and one of the highest exemption thresholds. However our competitiveness is not as straight forward as many people think.  So just how competitive are Queensland's payroll tax arrangements?  Well the answer to that question depends on what size of business you happen to be.

I was reminded by one of Brisbane’s key businesses in responding to an earlier blog on Payroll tax that Queensland is one of only two States (WA is the other) where by we have a diminishing payroll tax exemption threshold as opposed to a flat exemption threshold like in NSW and Victoria.   What this means is that our exemption threshold reduces to zero between payrolls of $1.1 million and $5.5 million.  More specifically our $1.1 million exemption threshold phases to zero at a rate of $1 in every $4 of taxable wages above the threshold.  What this means is that businesses with taxable wages above $5.5 million in Queensland actually have no exemption threshold at all!

So what does this practically mean?  Well for smaller businesses they benefit from our higher exemption threshold and for larger businesses they benefit from our lowest payroll tax rate that makes up for the fact that they do not have exempted wages at all.  However for middle sized businesses they miss out on the benefit of an exemption threshold that places them in an uncompetitive position against interstate rivals.  The lower payroll tax rate unfortunately for these businesses is not enough to make up for this.  The trouble zone for medium sized businesses is between payrolls of $4 million and $20 million and there are approximately 5,000 businesses who find themselves in this uncompetitive zone.  To put this into perspective just a little over 20,000 businesses pay payroll tax in Queensland so about 25 per cent of these find themselves uncompetitive to businesses for example in Victoria or South Australia.

Queensland Treasurer, Andrew Fraser, diligently recognised this specific aberration in his 2008-2009 State Budget:

The Queensland Government recognises the effective marginal payroll tax rate immediately above the exemption threshold has a particular impact on the tax payable by medium sized businesses. This Budget further improves the competitiveness of Queensland’s payroll tax regime by extending the $1 million deduction such that it phases out at a rate of $1 in every $4 of taxable wages above the threshold, rather than $1 in every $3. ………….The Queensland Government has also announced a policy decision to review the rate at which the deduction phases out in subsequent Budgets.

However, since June 2008 wages have grown by 30 per cent and it is now time to review our exemption threshold arrangements because our competitiveness is compromised for medium sized businesses. We should pause and spare a thought for this often overlooked demographic of the business community.   Medium sized businesses compete against three groups: small businesses who don't pay payroll tax, large business who have the scale to offset payroll tax and international businesses who chances are don't pay payroll tax, a woeful tax on giving a person a job!

In summary if any politician tells you Queensland has the most competitive payroll tax arrangements in Australia take this with a grain of salt because for about 5,000 businesses this is simply not the case.  This is particularly relevant as we currently frame the State Budget for 2018-19.

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