Payroll Tax Annual Threshold Tapering

Payroll Tax Annual Threshold Tapering

In case you missed it, we are taking this opportunity to remind our WA Business Clients of the changes applicable this year to the WA Payroll Tax Annual Threshold Tapering.  This reminder will be most relevant for those businesses reporting annually, as their Payroll Tax Return for 2016 will be prepared and lodged this coming July, and they may be in for a shock when they realise their Tax-Free Threshold is not what it used to be!  (Businesses reporting on a monthly basis will likely have already had this shock back in August 2015!)
Introduced on the 1st of July 2015, WA Payroll Tax now has a diminishing Tax-Free Threshold.  This means that the annual tax-free element applied when calculating a business’ Payroll Tax obligation now gradually phases out where taxable wages are between an Annual Threshold and an Upper Threshold.  For the 2016 year the Annual Threshold is $800,000 and the Upper Threshold is $7.5 million.  The thresholds are subject to change each year.
Gladly, if you are an employer with taxable wages less than the Annual Threshold of $800,000 you are still not liable to pay Payroll Tax.
However, if your taxable wages are over the Annual Threshold of $800,000, not only are you required to pay Payroll Tax on your taxable wages that are above the Annual Threshold, but your applicable tax-free element will gradually diminish as your taxable wages move closer to the $7.5 million Upper threshold (at which point no tax-free element remains).  This means you will pay some Payroll Tax on wages below the Annual Threshold as well!
Confused yet?

Payroll Tax Annual Threshold Tapering Calculations

Your Payroll Tax liability is calculated as follows –
Payroll Tax Liability = (Total Taxable Wages (per your Payroll Records) – Deductible Amount (being your applicable tax-free element calculated below)) x the Payroll Tax Rate (currently 5.5%)
The Deductible Amount is calculated as follows –
Deductible Amount = Annual Threshold (currently $800,000) – ((Total Taxable Wages (per your Payroll Records) – Tax-Free Threshold (currently $800,000) x Tapering Value)
The Tapering Value is calculated as follows –
Tapering Value = Annual threshold (currently $800,000) / (Upper threshold (currently $7.5 million) – Annual threshold (currently $800,000))
Accordingly the Tapering Value for 2016 is equal to 8/67ths!!!
So at least there is one element of the above that is simple (sort of), as the Tapering Value for everyone (with taxable wages over $800,000) for 2016 is 8/67ths!

An Example …

An example will help demonstrate the other calculations –
Assume your business’ Total Taxable Wages are $1million.
As you are above the Annual Threshold of $800,000 you have to pay some Payroll Tax.  However as you are below the Upper Threshold of $7.5 million, you do get a tax-free element, known as the Deductible Amount.
Your Deductible Amount will be –
800,000 – (($1,000,000 – $800,000) x 8/67) = $776,119
And your Payroll Tax Liability will be –
($1,000,000 – $776,119) x 5.5% = $12,313

Another way to illustrate it

i) If your taxable wages are $799,999 you are not required to be registered for Payroll Tax, you are not required to go through the calculations and you are required to pay $0 Payroll Tax.
ii) If your taxable wages are $800,000 you are required to be registered for Payroll Tax, you are required to go through the calculations, however they will result in you being required to pay $0 Payroll Tax because your Deductible Amount will work out to equal $800,000,
ii) If your taxable wages are $800,001 you are required to be registered for Payroll Tax, you are required to go through the calculations, and because you are over the $800,000 threshold, your Deductible Amount (ie. the tax-free component) is now less than $800,000 and the calculation will result in you being required to pay Payroll Tax on both the $1 above the $800,000 plus on a portion of your wages below $800,000.  In fact you will pay Payroll Tax on $1.12 resulting in Payroll tax payable of $0.06.  With every dollar your wages increase above the $800,000 Annual threshold, your Payroll Tax liability will exponential increase as your Deductible Amount becomes less and less.
And don’t forget, when we say taxable wages that includes other benefits provided to employees, not just their basic wage (ie. super, car allowances, fringe benefits, etc).  Further, taxable wages also include wages, salaries and other benefits paid to the busness’ Owners and Directors!

Can we just say once again, how inefficient and disincentivising Payroll Tax is!

We have discussed it before, but in our minds Payroll Tax is just the worst tax out there.  And this was before the Payroll Tax Annual Threshold Tapering.
We have no problem with paying tax.  We completely understand that paying the taxes we all do lets us live in what is a fantastic, safe country and is what allows us to live the lifestyles we do (with so many public amenities that we take for granted).
But to have a tax that penalises businesses for growing and more importantly directly penalises a business for employing more Western Australians (and paying them more) is irreconcilable.
Further, it has been forgotten by all, but Payroll Tax was supposed to be abolished as part of the deal to introduce the Goods and Services Tax (“GST”) back at the turn of the century and yet successive WA Governments have reneged on this commitment time and again (as admittedly have other State Governments).
And the reason they can do so is because the majority of people in WA don’t care about a tax they can’t see, and about a tax that they (naively) assume is just a tax on big business and the rich.
Whereas the reality is, it is a tax that directly reduces the amount an employer has available to pay to its staff.  Because take it from us as Accountants who advise businesses every day, when determining how much a WA Employer (who is subject to Payroll Tax) will pay a staff member the calculation goes like this –
Budget for the Staff Member $100,000 less Payroll Tax ($5,500) less Super ($8,198) less Workers Compensation Insurance (say $1,000, this varies greatly depending on the type of business) equals Gross Wages of $85,302!  So who do you think is really paying the tax?
P.S. The WA Department of Finance have produced a video further explaining how the tapering works, see it here, though we are not sure it helped much 🙂