Employment Tax

Australia | Payroll tax audits

Summary

There has been a significant increase in the level of scrutiny of payroll tax obligations for employers from Australia’s state revenue authorities. Real time reporting through single touch payroll and data sharing with other authorities such as the Australian Taxation Office (ATO) and state workcover authorities, has enabled better targeting of non-compliance with payroll tax obligations.

The detail

By way of background, payroll tax is a state-based tax imposed on employers in respect of taxable wages. Payroll tax is based on “self-assessment”, which requires employers to establish whether the level of their wages paid or payable requires them to register. Each Australian state and territory has their own payroll tax threshold and once the wages paid by an employer to their ‘employees’ exceeds a threshold for the tax year, payroll tax becomes payable to the relevant State Revenue Office (SRO).

Based on our experience, the state revenue authorities perform a certain level of data matching and analytics against other employer lodgements made to the ATO as part of their internal reviews in determining areas to review or audit in payroll tax. This can result in audits based on specific issues identified through this analysis (such as taxable wages for fringe benefits, contractors or employer share schemes) or a general investigation review. In relation to cases where specific issues have been identified through data matching and analytics, the payroll tax authorities have generally then extended their review to cover not just that specific issue but the entire payroll tax annual reconciliation, for a 5 year period. This increase in audit and investigation activity has been felt across many state and territory jurisdictions, with Victoria and New South Wales leading the way.

In our experience, the marked increase in investigation activity from the SRO’s have been in respect of the following aspects and their inclusion in payroll tax returns:

• Employee share schemes (ESS) – It is important to understand that equity awards such as shares, options and restricted stock units provided to any employee, including by a foreign related company, are also subject to payroll tax. In our experience, we have found that many organisations incorrectly exclude the taxable value of employee equity awards in their payroll tax returns, particularly where the equity awards are not processed via the Australian payroll.
• Grouping provisions – The total wages of related entities is directly relevant in assessing an employer’s liability to payroll tax as well as the payroll tax rate that may apply to the wages. Related entities include not only those that may be controlled by the employer, but can also include other entities which have a common holding company, or common ultimate parent company as well as where an employee of the employer may perform duties for one or more businesses carried on by the employer and another employer.
• Remote workers – As we continue to embrace hybrid ways of working, it is not uncommon for employers to hire employees who largely work remotely, including from a different state to where the main business is located. Where an employer is already registered in their main registered business state for payroll tax, it is not uncommon for the presence of just one remote employee in another state to cause an employer to also have to register in that other state jurisdiction.
• Contractors – Most states impose payroll tax on contracts for services, unless an exemption applies. The exemptions are quite specific and not all states adopt the same exemptions. Whilst assessing and including relevant contractors in payroll tax returns is not new, there is increased scrutiny through some states, such as NSW, adopting additional disclosure requirements in this regard in the year end annual reconciliation.
  In addition to reporting relevant taxable amounts for contractors, Revenue NSW has also asked employers to identify which contractor exemptions they have utilised to exclude amounts (if any). It is likely that this will ensure that Revenue NSW has the ability to match these disclosures to data shared from other sources (such as Taxable Payment Annual Reports (TPAR) and Company Tax Returns) and therefore may identify non-compliance via this process.

• Fringe benefits – In our experience, Fringe Benefit Tax returns are another item that the SRO
  can use to compare with lodged payroll tax returns during an investigation. Importantly, for payroll
  tax purposes, fringe benefit taxable amounts are required to be “grossed” up at the type 2 rate
  and included in annual payroll tax returns.
  Payroll tax includes benefits that may be excluded from the reportable amount shown on
  employees year end income statements. Accordingly, it is important that when employers report
  fringe benefits in their annual payroll tax reconciliation, they do not just utilise the value reported
  in payroll at year end for income statement reporting purposes.

What this means for employers

It is evident that payroll tax compliance is a key focus for the respective SRO. The increased availability of data has allowed the SRO to better identify non compliant employers. It is therefore more important than ever that organisations ensure that compliance and governance processes are up to date in relation to the completion of the annual payroll tax reconciliation, including:

• Undertake contractor reviews: Within relevant systems, reviews should be undertaken to ensure that payroll tax assessments for contractors are being performed regularly, including keeping a record of the particular payroll tax exemption for each contract. By proactively undertaking a review of contractors engaged, employers are mitigating the risk of any discrepancies and enhancing compliance accuracy.
• Conduct internal data comparisons: A review of other ATO lodgements which intersect with payroll tax, such as FBT returns, company income tax returns, ESS statements and year end reports, STP year end reports and TPAR, to ensure the information is consistent. This would allow an employer to perform a cross check and ensure the relevant amounts have been reported for payroll tax purposes, noting that amounts may not strictly align with payroll tax returns lodged.
• Staying informed in relation to recent tax changes and current audit trends can help you proactively manage your tax obligations and minimise the risk of non compliance and/or audit.

How we can help

To help you understand your risk profile, Vialto’s payroll tax health check process is an informative method of gaining valuable insights and to assist with limiting the potential exposure of non compliance.

Should you wish to understand more about the recent audits and investigations and your organisation’s risk level or if you are currently undergoing a tax authority payroll tax review or audit, our Vialto Employment Taxes team has significant experience in this area to support you through the process.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Maria Ravese
Partner

Kristy Whitnell
Director

Further information on Vialto Partners can be found here: www.vialtopartners.com

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