The information in this video is correct at the time of publication. Legislation and other details may change without notice.

Intro

Welcome to today's video payroll tax understanding the basics: allowances, FBT (Fringe Benefits Tax), exemptions and rebates.

For those of you who are new to payroll tax or if you just like a refresher this video explores the key concepts of payroll tax and its Administration this video is the first in our three-part series on payroll tax. We recommend you also view the other videos for further information on contractor provisions and employment agents in video 2 and groupings in video 3.

The harmonised videos are the result of efforts from each of the respective Revenue offices while the content of this video is harmonised there may be some differences between the states and territories so where applicable the differences will be highlighted.

The information provided in this video is of a general nature if you have any specific queries please contact the applicable revenue office or seek independent professional advice. You can find other helpful information resources and links to revenue offices at payrolltax.gov.au.

In this video we will first provide an overview of how payroll tax operates and is administered. We will then go through the thresholds rates and deduction entitlements for each state and territory, provide clarity around which state or territory payroll tax needs to be declared in and how to declare wages. Then we will go through the detail around the various payments that constitute wages for payroll tax purposes and what to declare on your payroll tax returns. Finally we will provide information about the various exemptions from payroll tax and what you can exclude from your payroll tax returns.

Let's begin with an overview of payroll tax.

Payroll tax is a self- assessed and state-based tax paid by employers usually monthly, however some states and territories may allow half yearly or annual lodgement of returns - see each state and territory's website for more information.

Payroll tax is paid by employers on wages paid to employees or deemed employees, this could include certain contractors. Wages is a broad term that needs further explanation and we will cover this in more detail shortly.

Payroll tax is based on taxable wages paid to employees and deemed employees. Employers must register once their total Australia wide taxable wages or groups total Australia wide taxable wages exceeds the threshold. They must register in all states and territories where wages are paid and annual reconciliation must be lodged in July for each Financial year.

The legislation for payroll tax is harmonised across most of the states and territories in Australia so that the treatment of common payroll tax elements is consistent across the country. Differences in the treatment of certain elements of payroll tax will be highlighted throughout the presentation today.

Next we will discuss the payroll tax rates thresholds and thresholds, rates and deduction entitlements calculations. When it comes to payroll tax across Australia you will find that each state and territory will have their own thresholds rates and deduction entitlements that apply.

The legislation for payroll tax was harmonised across most of the Australian States and territories in 2007 so that the treatment of common payroll tax elements is consistent across the country. Differences in the treatment of certain elements of payroll tax will be highlighted throughout the presentation today.

When do you need to register for payroll tax?

if your total Australian wages exceed a state or territory's threshold in any month and wages are paid for services performed in that state or territory you must register for payroll tax in that state or territory. If you are a grouped employer it is your group's total Australian wages that determines if you need to register. The screen displays the annual payroll tax thresholds for each state and territory you can access the monthly or weekly thresholds on the registration page of payrolltax.gov.au.

To register for payroll tax in a state or territory is based on the total Australia wide taxable wages for a week or a month.Generally an employer must register within seven days after the end of the month in which the employer or group of employers wages exceed the the threshold. The employer must register even if they think that their wages will be below the annual threshold. Please check with the relevant state or territory revenue office for more details.

Threshold reduction

The threshold will be adjusted if you or your group of employers employ for only part of the financial year. For employers who do not employ for the whole of the financial year the threshold is calculated by taking into account the proportion of the year the employer operates. For information on part year threshold calculations in a particular state or territory you employ in visit their revenue office website.

Each jurisdiction also has different payroll tax rates which are shown on the screen. Employers may also be entitled to a deduction amount which is subtracted from the total wages before applying the applicable payroll tax rate. The maximum deduction entitlements are shown on the screen. It is also important to note that Western Australia, the Northern Territory and Queensland have a tapering deduction system where the deduction entitlement reduces as wages paid increase. Additionally in South Australia the deduction entitlement is not the same as the annual threshold. Please contact those revenue offices directly for more information if you employ in any of those jurisdictions.

Calculating payroll tax

Let's follow an example of how payroll tax can be calculated.

Here we have an employer that is based in Melbourne, only employees in Victoria employees for the full financial year and and pays annual wages of $1.65 million.

First we need to work out the amount of wages that are taxable by subtracting the deduction entitlement from the annual wages. We do this by taking the annual wages and subtracting the deduction threshold to get the taxable wages as shown on the screen

So what's the payroll tax liability? You take the payroll tax rate that applies and multiply that by the taxable wages to calculate the monthly payroll tax liability. You divide the annual liability by 12.

In some circumstances you may only be entitled to a portion of the deduction entitlement, this will happen when you only employ for part of the financial year and or you employ and pay wages in more than one state or territory. In these circumstances you will receive a reduced deduction. we will now go through some examples of how this works.

If you only apply for part of the financial year you will only be entitled to a portion of the deduction amount in this example we are using Victoria's annual deduction entitlement.

If you employ only in Victoria and for the full financial year you would be entitled to the maximum deduction entitlement as shown on your screen.

If you only employ for part of the financial year your deduction entitlement will be calculated by dividing the number of days employed by the number of days in the year which is 365 or 366 in a leap year and then multiplying by the maximum deduction entitlement, for example if you employ for 292 days your deduction entitlement would be calculated by dividing 292 days by the number of days in the year and multiplied by the total deduction entitlement. In this example there are 365 days in the year. The reduced deduction entitlement for this example is shown on the screen.

Let's look add an example where an employer who pays wages in three states New South Wales, Victoria and South Australia.

The total Australian taxable wages are $2.5 million which are paid across the three states with wages of:

• $550,000 in South Australia
• $1 million in New South Wales and
• $950,000 in Victoria

The deduction entitlement is calculated as a proportion of the wages paid in the relevant state or territory to the total Australian taxable wages. The employer will be entitled to deduction in each state as a proportion of their total wages.

In this example the employer would be entitled to a deduction of

• $480,000 in New South Wales
• $132,000 in South Australia and
• $266,000 in Victoria

Applying the reduced deductions now applicable in Victoria, South Australia and New South Wales you can see on the screen the amount payroll tax will be calculated on.

Exemptions for payroll tax purposes are provided for public benevolent and charitable organisations, publ

ic hospitals, non-profit private hospitals, non-profit private schools and government, including governors, foreign representatives staff and some activities of local councils. Please note that an exemption for local councils is not available in Tasmania.

This may mean that you are not required to register for payroll tax but you may need to apply for an exemption. Should you have any queries in relation to how to apply for an exemption please contact the relevant revenue office for further assistance.

How to determine where wages are taxable?

Let's take a closer look at interstate and overseas workers.

A real confusion with payroll tax is how to treat wages paid to workers who work in other states and territories or overseas.

If a worker performs work in one state or territory in the month then the payroll tax liability arises in that state or territory, for example if a business head office is in Melbourne but the manager is working full-time in Sydney the liability arises in New South Wales.

Payroll tax liability is based on where services are performed, it doesn't matter where the head office is located or where the payment comes from. Therefore, in this example the manager's wages are taxable in New South Wales.

A harmonised position has been developed to ensure consistent treatment of this between states and territories, these are called their Nexus Provisions.  The Nexus Provisions are covered in Revenue ruling PTA39.

Employees working in multiple states/territories

The complexity arises when employers have employees working in multiple states and/or territories in a calendar month. These provisions are particularly relevant in our border regions where employees go back and forth across the border during the month or in transient type employment such as truck drivers or flight attendants.

If the work is not performed solely in one state or territory in the month the Nexus Provisions provide a four tier test to determine where the wages should be declared. The test requires that you start at tier one and only move to the next tier if you are unable to satisfy the requirements of the previous tier. In the majority of cases you will only need to go as far as the first two tests.

The first thing you would look at is where the employees principal place of residence is located. The total month's wages paid to that employee should be declared to that state or territory's revenue office. If you can't establish where the employees principal place of residence is located then you would move to the second tier of the provisions and look at where the employer's ABN is registered or business is located.

In circumstances where you cannot determine where the business is located then you would move to the next tier.

At tier three you look to where the wages were paid or payable that is where the bank account that the employees wages are paid into. If wages are are paid in a number of states or territories, payroll tax is paid in the state or territory where the largest proportion of wages is paid.

If you were still unable to determine where wages are taxable then you would look to where the services were mainly performed, for example if the services performed equate to greater than 50% in the Northern Territory then you would have a payroll tax liability in Northern Territory.

It is important to remember that you can't pick and choose a tier to suit, you must apply the test in order. If it turns out that you have been paying payroll tax to the wrong state or territory there is a Commissioner's Agreement that allows for you to seek a refund from the revenue office you paid the tax to and pay it to the correct revenue office without any penalty or interests applied.

For more information on the Nexus Provisions refer to revenue ruling PTA39 which can be accessed from payroll tax Australia's website payrolltax.gov.au.

Payroll tax liability is in that state or territory, if work is performed in more than one state or territory you apply Test 2 to 4 of the Nexus

Employees working overseas

Provisions wages paid to an employee performing services wholly in another country or countries, that is an expatriate employee, for a period of up to 6 months are taxable for payroll tax. However wages paid in Australia are exempt from payroll tax if the employee has performed services entirely in another country or countries for a continuous period of more than 6 months after wages were first paid for the employee for the services.

The exemption includes wages paid in the first six months of service.

They are able to briefly return for meetings or a holiday but must return overseas and continue to work there.

What are taxable wages?

Let's now look at what taxable wages are.

Payroll tax is based on taxable wages the term taxable wages is very broad and covers most payments made to employees it includes salaries and wages.

Employers must ensure that the gross figure is reported for the purposes of payroll tax and also need to include leave, apprentice and trainee wages, superannuation, bonuses and commissions, allowances, director's fees, shares and options, fringe benefits and termination payments. Please note that this list is not comprehensive.

If you engage contractors these payments may also be liable to payroll tax. To learn more see the contractor provisions and employment agents video.

Let's now have a look at the components that make wages liable in more detail.

Leave payments

Leave payments which are taxable include sick leave annual leave leave loading and long service leave. There are a few exceptions including maternity and adoption leave, fire an emergency services duty and defense force duty.

Maternity and Adoption Leave

Maternity leave and adoption leave payments are exempt from payroll tax to a maximum equivalent of 14 weeks wages. The exemption does not include sick leave, annual leave or other similar leave taken in connection with a pregnancy or the birth or adoption of a child.

For any one pregnancy or adoption the exemption is limited to wages for a maximum of 14 weeks full-time leave for a full-time employee or the equivalent amount if taken over a longer period for example 28 weeks leave being paid at half pay. In the case of a part-time employee the exemption is limited to a maximum of 14 weeks leave paid at the applicable part-time rates of pay.

As an employer you must obtain and record evidence to substantiate the exemption, such as a medical certificate or statutory declaration.

Some states and territories have expanded this exemption to cover paternity parental and surrogacy leave or leave for the primary or secondary caregivers. Please check your relevant state or territory revenue office for details.

The Commonwealth paid parental leave scheme does not constitute wages and is not subject to payroll tax.

Fire and emergency services duty

The fire and emergency services exemption applies to wages paid to Emergency Services Workers while performing volunteer activities. The exemption covers volunteer firefighters and Emergency Services Workers such as state emergency service volunteers and volunteer Marine Rescue Services.

This exemption does not apply to wages provided in the form of annual leave, long service leave, recreation or sick leave.

For the period of absence the employer will be required to provide substantiation which can include records of the length of service by the employee along with all relevant calculations done by the employer to substantiate the total wages records of the period during which the employee was taking part in bush firefighting or emergency activities and/or evidence that the employee is a volunteer officer, for example identification or letter from Brigade leaders.

Defence Force Reserves duty

Wages paid to an employee who is absent from their regular employment to serve in their defense force are exempt from payroll tax.

Documentary evidence may include a statement or letter from the Defense Force to the taxpayer stating the dates of involvement.

Again this exemption does not apply to wages provided in the form of annual leave, long service leave, recreation or sick leave for the period of absence.

Apprentice and trainee wages

The treatment of apprentice and trainee wages varies across the states and territories.

In some states and territories trainee and apprentice wages are taxable however you may find that they are exempt or that other conditions apply in other states and territories.

We recommend that you contact the relevant revenue office or take a look at their website for further information regarding regarding apprentice and trainee wages.

Superannuation

Superannuation contributions including pre-tax contributions are fully taxable, this includes any contributions made on behalf of an employee director or deemed employee. This will include the superannuation guarantee charge, any amounts greater than the superannuation guaranteed charge, salary sacrifice and top up contributions made to defined benefit funds.

Bonuses and commissions

Bonuses and commissions paid to employees or deemed employees are taxable allowances and need to be included in your payroll tax declarations.

Allowances

Allowances are given many different names, for example first aid allowance, height allowance, uniform allowance tool allowance and home office allowance to name a few. Their title is not important, the purpose of the payment is what is relevant and allowances are considered wages for payroll tax purposes.

There are a couple of exceptions to this rule which we will talk about in a moment.

It is important to note that reimbursements are not considered to be wages as they are a business expense and therefore not taxable for payroll tax purposes. The expense has already been incurred by the employee is substantiated with a receipt or claim and the precise amount is reimbursed to the employee.

Motor vehicle allowance

The exemption for motor vehicle allowances has a few conditions in that:

• it must be the employees own car which is either leased or owned by the employee
• the travel must be business travel and
• the distance travel needs to be substantiated through log books, diary entries or expense claim forms

The motor vehicle allowance for calculating payroll tax for the current financial year is shown on the screen. The exempt rate is the rate prescribed under the income tax legislation for calculating a deduction for car expenses use the cents per kilometre method in the financial year immediately preceding the financial year in which the allowance is paid or payable, in other words if you paid it this year you must use the ATO's rate from last year.

There are two methods of substantiation which are accepted:

• the averaging method can be used for 5 years or
• writing down the odometer reading at the start and end of the journey

The revenue ruling for motor vehicle allowance is PTA5, there is an additional revenue ruling for motor vehicle allowances paid to real estate sales persons which is PTA25. If you or your clients are in the real estate industry you should have a look at both revenue rulings.

Let's look at an example. In this scenario the employee is paid a fixed allowance of 2 $100 and travels 100 km.

The exempt component is calculated by multiplying the kilometers by the exempt rate per kilometre. The allowance paid in addition to this amount is taxable.

Accommodation allowance

the next exemption we have is for an accommodation allowance.

For business travel, similar to the motor vehicle allowance exemption, these amounts are exempt to a certain point, but unlike the motor vehicle allowance the accommodation allowance exemption rate uses the ATO rate for the current financial year.

The accommodation allowance amount per night is shown on the screen. This amount consists of three components room, meals and incidentals and is based on the ATO rates for the lowest capital city in the lowest salary band.

These amounts may only be claimed as exempt where they are paid to the employee, for example if the organisation arranges the accommodation and pays for this separately the exempt amount will be for meals and incidentals only.

Reimbursements are not considered to be an allowance and are not taxable for pay tax. If the employee pays for everything and then brings receipts for reimbursement, these amounts are not included for payroll tax.

Chargebacks are also not considered wages and so do not need to be included.

The accommodation allowance covers periods of up to 21 days. If accommodation is required for a longer period of time, the employer must continue to maintain a domestic dwelling for the purpose of accommodating themselves and all their family. If they don't this may be classed as living away from home allowance.

The revenue ruling for accommodation allowances PTA5. There is also an additional ruling PTA24 which is for overnight accommodation 
allowances paid to truck drivers.

In example one, Alex has been paid an accommodation allowance of $250 which is below the accommodation allowance and therefore no declaration for payable tax purposes is required.

In example two Alex's employer has paid for their accommodation but they received a daily allowance of $180 to cover meals and incidentals. This is above the exempt am amount for meals and incidentals, the amount shown on the screen will need to be declared for payroll tax purposes.

Living Away from Home Allowance

A living away from home allowance paid to employees will trigger a liability for fringe benefits tax.

As you can see from the extract of the FBT return on screen this allowance type will therefore be included as part of the fringe benefits amount declared in your pay payroll tax return.

It is important that this amount is not also included as part of the allowances section of the payroll tax return as this results in a double 
declaration.

Directors' fees

Director's fees need to be included regardless of whether they are paid to a working or non-working director. It also doesn't matter where the fees are paid to, they may be paid to the director themselves or possibly to a director's trust or company. All of these amounts need to be included.

It is important to make the distinction between wages or fees paid to directors and payments made to them in their capacity as an owner of the business. Profit distributions are not considered wages and do not need to be declared for payroll tax purposes. Revenue ruling PTA16 covers profit distributions and loan accounts in more detail.

Shares and options

if you provide or give your employees shares or options, the value of the shares or options granted also need to be included in your payroll tax return. This includes shares or options granted by the employer to employees or deemed employees which can include contractors and director or former directors of companies.

Payroll tax applies to the value of an employer's contribution. to any grant of a share or option. The granting of a share or an option occurs if a person acquires a share, or in the case of an option a right to the share the value of the share or option. For the purposes of payroll tax is its value on the relevant day employers can elect to treat the relevant day as either the date that the share or option is granted to the employee or the vesting date. It's up to the employer to decide which of these dates is used as long as they always use a consistent approach.

Shares and options should be declared at the market value or amount determined by the Income Tax Assessment Act.

Fringe benefits

Fringe benefits are taxable for payroll tax purposes the Fringe Benefits Tax Assessment Act is closely aligned with the Payroll tax Act and something taxable under the Fringe Benefits Tax Assessment Act is subject to payroll tax.

If a benefit is exempt under the Fringe Benefits Tax Assessment Act, for example a laptop computer, it is also exempt from payroll tax, This means that you you can use the figures from your fringe benefits tax information and declare them for payroll tax purposes.

However some states and territories may not require some specific types of fringe benefits to be declared please check with the relevant state or territory revenue office.

To use your fringe tax benefit information for payroll tax purposes look to question 14 on your fringe benefits tax return. For payroll tax you will add together your type one and type two fringe benefits and gross them up by multiplying by the type two rate.

Let's have a look at the different declaration methods. There are two methods you could use to declare your French benefits, you can choose which method:

• you use for the actual method you will declare the actual fringe benefits paid in that calendar month for the estimated method
• you will declare an estimate of the fringe benefits each month and then reconcile your fringe benefits in your annual reconciliation

Let's have a look at each of these methods in more detail.

The actual method requires the employer to declare the actual value or fringe benefits provided to employees in the return period. This method may be undesirable to some employers where benefits are provided over a period of time and cannot be pinned down to a particular month.

The estimated method would be used if the actual value of fringe benefits are not tracked on a monthly basis. For the monthly returns you take the previous year's fringe benefits tax return add together the type one and type two fringe benefits, gross by the type two factor and divide by 12. Because there are 12 months in the year this amount is used to declare a monthly estimate of your FBT.

As you move through the financial year when you lodge your annual reconciliation you will need to include the taxable value for payroll tax purposes of fringe benefits declared in the fringe benefits tax return submitted to the ATO for the year ending 31 March. You need to include the fringe benefits tax return submitted immediately before the annual reconciliation in July. You will take the type one and type two fringe benefits on the FBT return, gross up by the type two factor and declare this total amount as the actual fringe benefits for the year. Any differences in the estimated amount and the actual amount will be reconciled at this time .

That final amount will be the figure you will divide by 12 and then declare for your ongoing monthly returns next year, so make sure you take note of it.

For employers who employ in more than one state or territory it is recognised that it may not be possible for an employer to identify state specific components of fringe benefits. This is a common area of over decoration and you should refer to revenue ruling  PTA3 which outlines the method for declaring fringe benefits.

Where the state-by-state component is not readily ascertainable in these circumstances, the fringe benefit amount may be declared on an apportionment basis with reference to the ratio of wages paid paid in each state and or territory.

In the example on screen, the employer employees in Victoria and South Australia. Victorian wages comprise 75% of the total Australian taxable wages. Using the apportioning method 75% of fringe benefits would also be declared in Victoria and 25% would be declared in South Australia.

Termination payments

Payments made on termination are taxable and need to be declared. This includes pay in lieu, contract payouts, severance payments, golden handshakes and leave paid on termination.

The exception to this rule is the income tax-free component of a genuine redundancy or early retirement scheme, this amount will be listed as item D on the PAYG summary.

All other payments made on termination need to be included. The revenue ruling for termination payments is PTA4.

Workers' compensation

Workers compensation payments made in accordance with the applicable workers compensation scheme are exempt from payroll tax in all states and territories.

For many workers compensation claims the compensation amounts won't be reimbursed for the first two weeks . For payroll tax we deem that those compensation amounts have been received therefore the amount of the compensation paid is exempt in these 
first two weeks even though the employer has not received any compensation payments.

If the compensation amount is less than the employees regular pay any top up or makeup payments provided by the employer to the employee to cover the difference is subject to payroll tax.

Rebates

To finish let's take a quick look at rebates.

A rebate is a one-off payment paid to eligible employers to offset their payroll tax liabilities these are determined by the respective state and territory governments and generally come into into effect at the beginning of a financial year or are applied at annual reconciliation.

Each state and territory offers different rebates and these are often only available for a set period of time. We recommend that you contact the relevant revenue office for further information.

End

That brings us to the end of today's video.

If you would like to know more the harmonised payroll tax website payrolltax.gov.au provides plenty of useful information on harmonised payroll tax matters.

Should you have any queries as a result of the information presented in today's video, please contact the relevant revenue office via the websites currently displayed on your screen.