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Murdoch University Electronic Journal of Law |
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Title : Review of Western Australian State Taxes -
: Payroll Tax
Author : Tax Policy Elective 1993
Organisation : School of Law, Murdoch University
Language : English
Keywords : PAYROLL TAX, TAXATION, WESTERN AUSTRALIA,
: EQUITY, EFFICIENCY, SIMPLICITY, REFORM
Abstract : See abstract to Preface and Introduction
Contact Name : The Editors, E Law
Contact Address : Murdoch University Law School, PO Box 1014,
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ISSN: 1321-8247
URL: gopher://infolib.murdoch.edu.au:70/00/.ftp/pub/subj/law/
jnl/elaw/comment/watax/chap4.txt
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1 INTRODUCTION
Payroll tax is a state tax levied on wages paid or payable
by an employer in Western Australia. Presently the tax
accounts for approximately 40% of the state's total tax
revenue and is a source of potential growth available to
the State.
The tax was first introduced by the Federal Government
during the period of the Second World War. It was used to
raise revenue for the purpose of building arms. In 1971
the Federal Government handed payroll tax over to the
states.
Payroll tax is self assessed by the employer using a
complex rate schedule under the provisions of the _Payroll
Tax Assessment Act 1971_. The rate of payroll tax applied
to any one employer depends upon the amount of wages paid
in the financial year. Currently in Western Australia the
rates of payroll tax range from 3.95% to 6.00%, dependent
on the level of wages paid.(1) A minimum threshold of
$395,000 exists where in any year the total taxable wages
of an employer fall below this amount, the employer is
exempt from paying payroll tax.
The provisions of the _Payroll Tax Assessment Act 1971_ are
complemented by the _Payroll Tax Act 1971_, an act which
sets out the intricate calculation methods.
It has been recognised that the economic burden of the tax
does not in fact fall solely on the employer, rather "the
true economic incidence will be spread between employers,
consumers and employees in a manner which is largely
independent of where the legal tax burden falls"(2)
While payroll tax is a major source of state revenue, it
has been widely criticised as being a tax which pays
little or no regard to capacity to pay and for
discouraging employment.(3) Thus the tax is often
considered to be lacking in terms of equity, efficiency
and simplicity; the three factors used in determining an
ideal tax.
After defining some of the more significant terms employed
in the legislation, the following chapter will analyse the
West Australian system of payroll tax under the heads of
equity, efficiency and simplicity. Problems in the
existing system will be highlighted and finally
recommendations for reform will be made.
2 DEFINITIONS
The _Payroll Tax Assessment Act 1971_ provides that "payroll
tax shall be paid by the employer by whom the taxable
wages are paid or payable".(4) Prior to analysing the
system it is therefore necessary to define two of the most
significant terms used in the legislation, these being
"employer" and "wages".
Under section 3, "employer" is defined as any person who
pays or is liable to pay any wages and includes the Crown
in right of the State of Western Australia and also a
person who is an employment agent.
An expanded definition of employer was added to the Act(5)
in 1975 when the West Australian Government passed
amendments to provide that certain classes of employers be
grouped together as one for the purposes of payroll tax.
The grouping provisions are complex,(6) the basic effect
being that where corporations are related,(7) employees of
one employer perform duties for a business carried on by
another person, businesses are commonly controlled,(8) or
one of the businesses is a branch, agency or subsidiary of
a head or parent business, and the head or parent business
exercises managerial control over the branch, agency or
subsidiary, such businesses constitute a group for payroll
tax purposes.
Under the West Australian legislation, "wages" are defined
to include wages, salary, commission, bonuses, allowances
or other benefits paid or payable to an employee as such.
"Wages" is therefore not restricted to monetary payments
but may also extend to a variety of non-cash benefits that
may be conferred upon the employee in the course of
his/her employment.
It is interesting to note that section 3 of the _Payroll
Tax Assessment Act 1971_ does not include a definition of
employee. The significance of this omission will be
highlighted at a later stage.
3 SIMPLICITY
The first criteria in determining an ideal tax is
simplicity. A tax will be considered simple if the
administrative costs involved in collecting and complying
with the tax are small, in terms of both money and
effort.(9)
As payroll tax is self assessed by the employer, it is
simple for the State Taxation Department in that there is
little work required in relation to assessing and
collecting the tax. There is, however, a greater emphasis
on ensuring compliance and time and effort must be spent
on checking employer returns and investigating any
employers who may be avoiding the tax.
As discussed above, payroll tax is assessed according to a
sliding rate scale. Such a method requires complex
calculation to determine what tax bracket an employer
falls within and the exact percentage of tax to be paid.
While the State Taxation Department does provide employers
with guidelines on how to complete these calculations, it
is nonetheless a difficult task for many employers. We
have been led to believe that many employers get the
calculations wrong. The tax is therefore not a simple one
for employers to comply with.
As mentioned previously, employers are exempt from paying
payroll tax where the total of their taxable wages falls
below the threshold of $450,000 per annum. As noted by
the NSW Tax Task Force in its recent review of the tax
system in NSW, this exemption removes many smaller firms
from the ambit of the tax, thus reducing both
administration and expense burdens on the smallest
businesses.
As mentioned above, the State Taxation Department must
expend both time and money in ensuring compliance. With
the exemption excluding many smaller employers, this task
is made simpler in that fewer employers must be monitored.
Under the present system, employers are required to
furnish returns to the State Taxation Department on a
monthly basis. This makes it difficult for large
employers with many branches or centres and employers
which are combined as a group as such employers must
combine payroll figures to determine taxable wages paid or
payable within the group and hence their total payroll tax
liability.
Some effort has been made to reduce this apparent
simplicity problem. Employers with large payrolls have
the option of applying to the Taxation Department for an
estimate of monthly payrolls so that the employer can pay
the tax on that estimate rather than actual figures. This
makes it simpler for the employer in that it is not
necessary to combine wage figures within the group. On
the part of the State Taxation Department however, it
creates additional administrative costs and duties. The
Department must first calculate accurate estimates based
on prior payroll figures of the group, a process which is
time consuming. In addition to this, at the end of each
financial year, the Department must compare the estimates
with the employer's actual payroll figures to determine
whether refunds or additional taxes must be paid. Hence
what is normally a self assessed tax on the part of the
employer becomes one that is primarily assessed by the
Taxation Department.
4 EFFICIENCY
The second criteria to be considered in assessing the West
Australian payroll tax system is efficiency. Efficiency
requires "economic decisions and resource allocation to be
made on the basis of market factors, not government
biases."(10) Therefore the tax system will be inefficient
where certain taxes encourage individuals to substitute
business processes which are less profitable for those
which are more profitable.
Payroll tax is not only an influence within the Australian
market, it also impacts on the competitiveness of
Australian exported goods. As mentioned previously, the
burden of payroll tax is shared by the employer, the
labour market and the consumer. It will therefore be a
cost reflected in the price of a good and will increase
the price at which Australian producers can sell their
goods overseas. As a result, it is difficult for an
Australian producer to compete on the world market, where
the price of many foreign goods will not include a payroll
tax component(11) and this may discourage producers from
exporting goods.
The most well recognised inefficiency in the payroll tax
system stems from the fact that payroll tax is a tax on
the payment of wages. It therefore "discriminates against
labour intensive industries and employment and encourages
capital intensive industries and unemployment."(12) This
inefficiency can influence an employer's decision in that
they may consider it more appropriate to expand into
capital related industries rather than labour related
expansion. Because labour intensive industries are
discouraged by the payroll tax, an over supply of
available labour is caused and, as a result of this
excess, the price at which labour can be obtained falls.
In addition to the above, the present payroll tax system
can also cause inefficiencies _within_ an industry. Smaller
firms and large capital intensive firms are provided with
a competitive advantage over large labour intensive firms
as they are not so heavily burdened by payroll tax.
Payroll tax is an expense to an employer that must be paid
in addition to wages. It is therefore a factor taken into
account by an employer in determining an employee's
remuneration package. Remuneration packages will often be
reduced in an effort to counteract the effects of payroll
tax hence an inefficiency is created as a result of the
payroll tax system.
Inefficiencies have arisen as a result of the treatment of
fringe benefits under the current payroll tax legislation.
Under the _Payroll Tax Assessment Act 1971_, fringe benefits
given to employees are only liable to payroll tax if they
are specified in the contract of employment and assigned a
monetary value.
To give an example, where one employee's remuneration
package includes a salary of $60,000 and a car to the
value of $10,000, the employer will be liable to payroll
tax on $70,000. On the contrary, where a second
employee's remuneration package includes $60,000 salary
and he or she also receives the use of a car, although
this is not included in the written remuneration package,
the employer will be liable to payroll tax on the $60,000
alone.
The exclusion of fringe benefits from the payroll tax base
where not included in the remuneration package creates a
distortion in the method of payment to employees. Because
payroll tax can be reduced merely by increasing the
component of certain fringe benefits, employers are more
likely to confer benefits on employees in the form of
fringe benefits not included in the remuneration package
than pay higher wages or assign written values to those
benefits.
The West Australian payroll tax system is also inefficient
as a result of the lack of a definition of "employees" in
the legislation. Because there is no definition, common
law tests must be relied upon to determine exactly who
will fall within the category of "employee". As a result,
there is scope for certain classes of people to be
excluded from the category and therefore remain unaffected
by payroll tax legislation.
Courts have traditionally applied two tests where
determining whether a person is an employee. The first of
these is the "control test", which assesses the ability of
the 'employer' to instruct the person on what to do, for
example what hours to work, where to work and so on. The
second is known as the "integration test" which is
satisfied where the work of the person in question is an
integral and essential part of the employers business.
In many cases, work undertaken by contractors such as
bricklayers and carpenters does not satisfy the Common Law
tests and money paid to such workers will not be included
as wages for the purposes of payroll tax. An illustration
of this problem occurred recently in an unreported case
involving a motor company. The State Taxation Department
claimed the defendant was liable to payroll tax on monies
paid to panelbeaters who performed work on cars sold in
the defendants business. The court applied the two tests
and found the panelbeaters to be contractors and not
employees. The defendant was found not to have had
sufficient control over what the workers did. They could
choose their own working hours and even paid rent for the
space they used in the defendant's workshop. They did not
therefore fall within the provisions of the payroll tax
legislation.
The result of this lack of definition is that employers
will be less inclined to employ staff full time but rather
will contract work out so as to avoid paying payroll tax.
While inefficient in many respects, it should be noted
that the payroll tax legislation has previously been
amended in an effort to increase efficiency. With the
introduction of grouping provisions, companies are no
longer encouraged to separate or fragment into smaller
units solely to avoid payroll tax. This is due to the
fact that regardless of the number of smaller units, they
will all be grouped together for the purposes of payroll
tax. Where as prior to 1975 employers could avoid payroll
tax by employing this fragmentation method, grouping
provisions have solved this problem and made the tax more
efficient.
5 EQUITY
The final criteria in analysing a tax is that of equity.
Equity is divided into the components of horizontal equity
and vertical equity. Horizontal equity requires
individuals in the same economic situation to be treated
equally, while vertical equity requires people in
different circumstances to be treated differently, with
those in more favourable situations bearing a greater
share of the tax burden.(13)
The major problem in terms of equity within the West
Australian payroll tax system is that the tax is in no way
determined by a person's ability to pay. Rather it is
wholly calculated in reference to the amount of wages paid
by an employer and thus bears no relation to an employer's
economic situation. Horizontal equity is offended in that
employers in the same economic situation are not
necessarily treated equally as one may be paying more
wages than the other and hence have a greater payroll tax
liability. Vertical equity is also offended. A company
with a large payroll may be paying payroll tax in the
highest bracket. However their profits may be small; they
may even be operating at a loss. A small company, on the
other hand, with no payroll tax liability, could be making
a larger profit.
In addition to the above, the fact that payroll taxes are
a deduction for income tax purposes suggests that
companies with the least capacity to pay, that is those
with small or nil profits, will incur a proportionally
higher net cost as a result of payroll taxes than
profitable companies.(14) This occurs because of the high
rebate that the more profitable companies will receive
compared to the lower rebate that companies with lower
incomes will receive. Thus in real terms the companies
with the smaller incomes will be paying more payroll tax
than the more profitable ones with the same payroll tax
liability.
The fact that there is no payroll tax to be paid on money
paid to contractors results in a further inequity. From
the employer's point of view, there is a horizontal
inequity as employer's will be subject to payroll tax on
their employees while those who use contractors will not
be subject to payroll tax. Further this may theoretically
result in employees being paid a lower salary than
contractors in an effort by employers to counteract the
effects of the tax, adding to the horizontal inequity
problems.
As mentioned previously non-cash benefits are not included
in the assessment of payroll tax unless they are mentioned
in the contract and assigned a monetary value. This is
horizontally inequitable in that employers effectively
paying employees to an equal value may be liable to
differing amounts of payroll tax depending on the ratio of
non-cash benefits given. This also results in a vertical
inequity as employers paying larger effective salaries may
not necessarily be paying more payroll tax than employers
paying smaller salaries as the former may be paying a
greater ratio in non-cash benefits.
Section 10 of the _Payroll Tax Assessment Act 1971_ provides
that wages paid by persons such as "a religious, public
benevolent, or charitable institution" are exempt from
payroll tax. Such exemptions are horizontally inequitable
in that these institutions are treated differently from
other employers paying the same figure in wages.
Although the payroll tax system is quite inequitable,
amendment to the legislation(15) has increased the equity of
the tax to some degree. The grouping provisions outlined
above have made the tax more equitable in that employers
are now treated the same for payroll tax purposes
regardless of whether they consist of a number of small
companies or one large company.
6 RECOMMENDATIONS
The above analysis has highlighted a number of problems
existing in the present West Australian system of payroll
tax in terms of equity, efficiency and simplicity.
The current West Australian government has suggested the
abolition of payroll tax and its replacement with a
broader based tax such as a Federal consumption tax. This
is not feasible due to the fact that the consumption tax
was a policy of the Liberal Government, whom do not
presently have power at the Federal level. In any event
we recommend this course not be followed as the economic
effects of the latter would be very similar.(16) While a
number of problems do exist, payroll tax raises a huge
amount of revenue. Rather than recommend the payroll tax
be abolished completely, we recommend improvements be made
to the current system.
Firstly it is recommended that there be some sort of
harmonisation achieved between the states. By this it is
envisaged that all States should change their policies
toward the same direction. This would solve the problems
for many of the larger national companies who would no
longer have to determine their payroll tax liability using
different calculations and legislation. Although they
would still have to determine their liability separately
between the states, the task would be made simpler.
Unfortunately, this is not practical in reality as it is
unlikely that the States would be able to achieve such
uniformity. Such a measure could only be achieved if the
payroll tax system once again became a Federal tax, an
unlikely event as the revenue raised by payroll tax
accounts for approximately 40% of most State's revenue.
The idea behind using a sliding rate scale to determine
payroll tax is that it is more equitable. This is based
on the erroneous assumption that the more wages employers
pay, the more profits they are making, and thus the more
they can therefore afford. As has been outlined above,
this is not necessarily the case and the tax is in fact
highly inequitable. We therefore recommend that the rate
scale presently used in assessing payroll tax be abolished
and a flat rate method be implemented in it's place.
In addition to dealing with equity problems, a flat rate
system would also improve simplicity. Employers will no
longer face the complex and difficult task of calculating
the rate of payroll tax applicable to the amount of
taxable wages they have paid. Following from this, the
Taxation Department will not be required to expend as much
time and money in ensuring the tax has been calculated
correctly. It is recommended for simplicity reasons that
a minimum threshold of $450,000 be retained.
A flat rate of tax would make the task of calculating
payroll tax for employers who are members of a group
simpler as there would be no need to regularly combine
payroll figures so as to determine the groups rate of tax.
Instead, members of the group could individually assess
the tax.
A flat rate of payroll tax would also be advantageous in
terms of efficiency as it removes the disincentives of
employing labour so as to pay a lower percentage of
payroll tax, or no tax at all.
The _Payroll Tax Assessment Act 1971_ contains no definition
for "employees" and instead the Common Law has had to be
relied upon. This has excluded from the realm of
employees contractors, consultants and direct sellers,
causing problems in both equity and efficiency. To
overcome these problems, we recommend the legislation be
amended to add an expansive definition of "employees"
which includes contractors.
Finally, we recommend that to prevent the inequities and
inefficiencies caused by the present treatment of fringe
benefits, the legislation be amended so that all such
benefits fall within the provisions of the payroll tax
legislation. We also recommend that the method used to
value these benefits be that used for the purposes of
Commonwealth Fringe Benefits tax.
Notes:
1 0-$450,000 - nil; $450,000-$1,500,000 - 0-3.95%;
$1,500,000-$2,500,000 - 3.95%-$.95%; $2,500,000-
$3,125,000 - 4.95%-6.00%; Over $3,125,000 - 6%
2 Economic Planning Advisory Council, _The Economic
Effects of Payroll Tax_, October 1985 at 11. See also
NSW Tax Taskforce Report at 203.
3 Ibid at p3.
4 _Payroll Tax Assessment Act 1971_; s8
5 _Payroll Tax Assessment Act 1971_
6 Part IVA _Payroll Tax Assessment Act 1971_
7 Corporations are related for payroll tax
purposes if they are by reason of the _Corporations
Act 1990_ deemed to be related to one another. This
refers to holding and subsidiary companies or
subsidiaries of a common holding company.
8 Section 16D of the _Payroll Tax Assessment Act
1971_ provides that where the same person or persons
have a controlling interest in each of two
businesses, the persons who carry on those businesses
are a group where:
(i) a director or majority of directors of a
corporation can exercise a majority of voting power
at directors meetings;
(ii) a person has or persons have a controlling
interest in a corporation where that person or those
persons acting together can influence 50% or more of
the voting power attached to the voting shares of
that corporation;
(iii) a person or persons have together a controlling
interest, if that person owns, or those persons
together own 50% or more of the capital of, or
entitled to 50% or more of the profits of a
partnership; or
(iv) a person has a controlling interest in a
business carried on under a trust if he is a
beneficiary in respect of 50% or more of the value of
the interest in the trust.
9 Asprey Committee, _Taxation Review Committee
Preliminary Report_, June 1974, Australia at p17
10 Krever, R "Companies, Shareholders and Tax
Reform", September (1985) _Taxation in Australia_ 163
at 165
11 Ibid at 4
12 Supra Footnote 2 at 6
13 Commonwealth of Australia, _Reform of the
Australian Tax System (Draft White Paper)_, June 1985,
Australia at 14
14 Supra Footnote 2 at 6
15 _Payroll Tax Assessment Act 1971_; Part IV
16 See New South Wales Tax Taskforce, _Tax Reform
and New South Wales Economic Development_, Sydney 1988
at p203 and Supra Footnote 2 at 7