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Queensland Economic Advocacy Solutions

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The Issue with Payroll Tax – PART A

With election speculation mounting one of the biggest issues for businesses, that will be repeatedly raised during an election campaign, is Payroll Tax.

Requests to abolish payroll tax are in reality unrealistic given the lack of holistic tax reform in Australia at present.  We need to be sensible about what we can afford and action. However, I think there is one particular initiative worthy of consideration, one that I first pitched in 2011.

Undoubtedly the single biggest bang for buck, the absolute number one symbolic action of any to give a nod to business is to lift the payroll tax threshold. Payroll tax is one of the most burdensome taxes as it is essentially a tax on giving a person a job and one that is levied without any regard to a firm’s capacity to pay.

Payroll tax first originated in 1941 under the Menzies Government applied as a 2.5 per cent levy on payrolls. In 1971 payroll tax was handed to State Governments as a means of ensuring that States were provided with a ‘growth tax’ in which revenues would rise in line with economic activity. Since 1971 every State has used this tax to meet a significant part of its revenue requirements.

It has been reviewed again and again, as recently as the Ken Henry review, whereby he concluded and recommended:

 “In the long run, the burden of a stable labour income tax, such as payroll tax, is likely to fall on workers rather than on capital. The burden of a relatively narrow-based labour income tax, such as the current State payroll taxes, is likely to be shared between workers in the taxed and non-taxed sectors. This also means that some workers are not working in their most productive jobs, with the result that overall labour force productivity is reduced.”

Recommendation 57: State payroll taxes should eventually be replaced with revenue from more efficient broad-based taxes that capture the value-add of labour.

To this day it shockingly remains and in 2017-18 Queensland will collect $3.8 billion in payroll tax, representing just under 30 per cent of our own-source tax revenue.  It is forecast to grow to $4.6 billion across the forward estimates of the State Budget

Interestingly a Right to Information request to the Office of State Revenue reveals that increasing the exemption threshold to say for example $2 million would remove over 42 per cent (8,683) of all Queensland businesses that currently pay the tax yet the State Government would only lose $185 million in revenue or 5.2 per cent of its Payroll tax revenue.  Hence this is a really sensible option for Government to ween itself off this addictive tax that stings both large and surprisingly small business swell.  I will explain this shortly.

A key consideration when lowering taxes is the tension between taxation acting as an impediment to business growth and taxation providing a revenue stream to deliver frontline services to the broader community. However I believe carefully crafted business tax reductions ultimately do not reduce Government income as they generate improvement in economic activity further stimulating tax receipts.  Research reveals businesses would predominantly spend payroll tax savings on investment in plant and equipment, employment of more staff, investment for future use and training of staff.  Things that drive economic activity.

In short lifting the payroll tax threshold addresses three major flaws with the tax particularly for small business:

  • Firstly because of wages creep many small businesses inadvertently grow into having to pay a tax on giving their existing employees a job.  This is wrong and should stop.
  • Secondly many small businesses are presently structuring their workforces to sit just under the threshold. By lifting the threshold we are allowing these small businesses to grow their workforces.
  • Thirdly payroll tax is one of the most complex taxes for business to administer due to interstate and company grouping provisions as well as definitional issues around who is a contractor and who is an employee. Lifting the tax essentially removes those businesses who are worst placed to administer the tax …… small business.

Lifting of the payroll tax exemption threshold was a 2012 election commitment from the LNP to raise the threshold from the then $1 million to $1.6 million. We got to $1.1 million on 1 July 2012 but then had it stalled in light of the LNP’s priority to pursue getting the Budget back into Surplus by 2015-16.

We again saw it as a policy from the LNP in 2015 but Queensland Labor formed Government and went in a different direction instead offering payroll tax rebates for apprentices and trainees and holidays for interstate companies relocating to Queensland.  These have some merit.

However, I would ultimately like to see lifting the exemption threshold as a policy from both sides.  In assessing the dollar per job created under 'Advance Queensland' initiative for example compared to jobs created by increasing the threshold, the Payroll Tax option is a clear stand out.

​Next week I will publish Part B to this discussion around the merits of delivering payroll tax relief to Queensland businesses.

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