Whilst the Victorian Government has announced several positive and welcome reforms, it has also introduced an additional tax for medium and large employers.
In its State Budget handed down on 20 May 2021, the Victorian Government announced the following initiatives that are favourable for taxpayers:
- Increase in the tax-free threshold for payroll tax from $650,000 to $700,000 brought forward to 1 July 2021
- Decrease in the payroll tax rate for regional employers from 2.02% to 1.2125% brought forward to 1 July 2021
- Reduced compliance burden for businesses with an annual payroll tax liability of $100,000 or less. From 1 July 2021, these businesses can move from monthly to annual reporting and payment of payroll tax. This is an increase from the previous threshold of $40,000
However, the Victorian Government introduced the following additional tax:
- Mental Health & Wellbeing Levy to be imposed from 1 January 2022. The Levy will be implemented as a payroll tax surcharge on Victorian wages paid by businesses with annual Australia-wide wages above $10 million. Those businesses with annual payrolls above $10 million will pay a surcharge of 0.5% on the value of their wages above $10 million, while those with annual payrolls above $100 million will pay a surcharge of 1% on the value of their wages above $100 million.
Increase in the payroll tax threshold
The increase in the tax-free threshold for payroll tax from $650,000 to $700,000 will be brought forward to 1 July 2021. The Victorian Government estimates that approximately 500 businesses will no longer be liable for payroll tax in 2021-22 due to the increase in the tax-free threshold and a further 42,000 businesses will pay less tax.
Whilst Pitcher Partners welcomes this initiative, Victoria remains well out of step with all other States and Territories in this key area. Following this announcement, the Victorian threshold at which a business must register for and pay payroll tax will be annual wages of $700,000. All other States and Territories have an annual threshold of between $1,000,000 and $2,000,000.
For example, at present, NSW’s payroll tax threshold is $1,200,000 with a tax rate equal to Victoria’s of 4.85%. In effect, this means that NSW employers with wages over the threshold will pay approximately $24,250 less in payroll tax than an equivalent employer in Victoria. While increasing the tax-free threshold is a welcome change, we implore the Victorian Government to undertake a fundamental reform of payroll tax. Increasing the tax-free threshold to levels comparable with other States would mean that Victorian businesses could compete on a more equal footing to businesses predominantly operating in other States and Territories and in doing so, help to attract new business to Victoria.
Reduction in the regional employer payroll tax rate
A decrease in the payroll tax rate for regional employers from 2.02% to 1.2125% will be brought forward to 1 July 2021.
This is a very positive change for existing businesses operating in regional Victoria and may also create an increased incentive for businesses to relocate to regional Victoria. However, employers may still face challenges in attracting the right talent in order to be able to relocate to regional Victoria.
Reduced compliance burden
From 1 July 2021, Victorian businesses with a payroll tax liability of $100,000 or less will have a reduced compliance burden resulting from the announcement that they can now move from monthly to annual reporting. Previously, annual reporting only applied to businesses with a maximum payroll tax liability of $40,000. As a result, the Victorian Government estimates that approximately 7,000 more businesses will qualify to pay payroll tax on an annual basis.
Pitcher Partners welcomes this change as it will have a positive impact on business’ cashflow and will relieve many small businesses of an administrative burden of lodging monthly returns.
The Mental Health and Wellbeing Levy
In order to implement a range of mental health services as recommended by the Royal Commission into Victoria’s Mental Health System, the Government will introduce a Mental Health and Wellbeing Levy from 1 January 2022. The Levy will be implemented as a payroll tax surcharge on Victorian wages paid by businesses with Australia-wide wages above $10 million per year, as follows:
- Businesses with annual Australian wages over $10 million will be subject to a surcharge rate of 0.5% on the portion of their Victorian wages above $10 million; and
- Businesses with annual Australian wages above $100 million will be subject to a surcharge rate of 1% on the portion of their Victorian wages above$100 million.
For employers who are members of a group, the surcharges will be based on the group’s total wages. The two surcharges will be separately calculated from payroll tax albeit they will be included in the same return. All existing payroll tax exemptions for private schools, hospitals, charities, local councils, and wages paid for parental and volunteer leave will continue to apply for the purposes of the Levy.
The Government will introduce legislation requiring all revenue raised by the Mental Health and Wellbeing Levy to be specifically directed towards mental health services.
As a business and an employer Pitcher Partners absolutely supports initiatives directed towards additional funding of mental health services. It is vitally important that we have a healthy workforce and population more generally and that anyone suffering from a mental illness gets appropriate support and care.
However, the introduction of a Mental Health and Wellbeing Levy as a payroll tax surcharge, on top of the primary payroll tax liability rate of 4.85%, will impact medium sized businesses at a time when they are just beginning to recover from the impacts of last year’s lockdowns. We believe that the new levy should kick in at a much higher level, for businesses with annual Australian wages of at least $50 million. Businesses with wages below this level have less capacity to absorb the cost of the levy and they need to be encouraged to continue growing and employing new staff.
What are the next steps?
Clients should contact their Pitcher Partners’ representative to review their existing arrangements and determine how these announcements will impact on them.