Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 136

Payroll tax distorts competition and penalises jobs

Imagine a tax payable by Myer, David Jones and JB Hi Fi that doesn’t apply to Harvey Norman. What about charging a tax to Footlocker but not Athlete’s Foot? Most extraordinary of all, what about charging this tax to grocery businesses like Harris Farm on the wages of hundreds of staff who unpack and sell fresh produce grown by Australian farmers but don’t charge that same tax to a Ferrari dealership with a handful of staff selling expensive imported sports cars. Surely Australia doesn’t do that. We’re not that stupid are we?

The not-so-level playing field

Actually, we are that stupid – it’s called payroll tax and it’s charged based on the total wages, above a threshold, of a company. In NSW, the rate is 5.45% of a business’s NSW wages above $750,000. Employers like the Ferrari dealer, with few staff, don’t pay and others providing many jobs, like the grocery shops, do. The grouping provisions of Australia’s payroll tax allow franchised businesses like Harvey Norman and Athlete’s Foot (and many others) to avoid the tax even though via their franchise agreement they are heavily ‘controlled’ by a single entity. In considering whether multiple employers are centrally controlled, the grouping provisions consider only ownership, instead of a wider sense of what entity is actually in control and how. Gerry Harvey has been pushing for a level GST playing field on overseas purchases but he won’t want a similar level playing field on payroll tax.

You can own Australia’s largest and most valuable hotel and not pay any payroll tax on the small staff needed to manage the investment. But the hotel management company who leases the building and runs the hotel has to pay payroll tax on the hundreds of jobs needed to serve the food, clean the rooms, and make the beds. Why do we make it cheaper to be a billionaire owner of a hotel but dearer for the hotel management company to provide these low skill, entry level jobs?

Thousands of entry level jobs were lost some years ago when Starbucks closed 100 of their 120 stores in Australia. No doubt it was partly because they were paying millions in payroll tax but their four-fold bigger direct competitor, Gloria Jeans, with 400 franchised stores, paid no payroll tax on store wages. Payroll tax costs jobs, many jobs.

Why favour capital over labour?

Australia is having a tax debate and supposedly, ‘everything is on the table’. If we are going to reform our tax system, let’s start with this distortionary tax that favours capital intensive business whilst penalising labour intensive business. It favours franchising by distorting competition between similar businesses based on their ownership structure. Providing lots of jobs should be celebrated and encouraged, not taxed and discouraged. Payroll tax should be completely abolished and the revenue replaced in another form that encourages employment and does not distort competition.

Eliminating payroll tax removes seven State taxes with the resultant massive removal of compliance and surveillance issues. Entire departments can be eliminated in every state giving significant savings and removal of duplication. If we are not going to eliminate payroll tax at least change it substantially so that it is not linked to the size of payroll. Link it to turnover, add it to GST, add it to company tax, do anything but don’t penalise job creation and don’t allow it to distort competition.

 

Peter Pitt is a Director at a leading national retailer. These opinions are his personal views and not necessarily those of his company.

 

5 Comments
SP
December 16, 2018

It is how payroll tax is computed that does not make any sense. Some companies outsourced entire call centers overseas and paid zero payroll tax on these payroll costs. Payroll costs should be based on overseas payroll costs and not local payroll costs so that companies will hire locals and not all wanting to outsource to cheaper countries.

Warren Bird
November 27, 2015

The economic incidence of payroll tax is identical to that of a value added tax like the GST. This is why Ken Henry's tax review back in 2010 discussed in the chapter on taxes on consumption.

The labour substitution effect that so many fear is a fallacy. It is not a tax on jobs!

All these arguments arise from confusing the legal incidence of payroll tax with its actual economic impact.

One of the best analyses of these matters was written by the NSW Treasury back in 1999. Here's a link to their paper, which is worth a read. http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0017/6650/TRP99-3_Pay_Roll_Tax.pdf

Paul Meleng
November 26, 2015

Payroll tax has to go. It blocks efficiencies. For example , in the USA there are labour aggregating services whereby you choose the employee ( not the labour hire firm) , but they are then "employed" by the service and hired to to you. THe service looks after all the payroll and employee benefits with massive efficiencies from the scale.. in admin, compliance, tax processing, IR, reporting, employee benefits, superannuation processing and so on, and the employees get the bulk buying that people in large orgs and unions etc can organise like travel discounts and health care deals. Employers like Doctors and Dentists and millions of others too small to have a professional HR manager don't have to get their head around all the zillions of beaurocratic "one off" knowledge bites. Payroll tax works against such efficiency.

ALL taxes on real productivity, income, work, innovation, trade , eduction, health care, food etc should go. According to the Henry report some 250 of the bloody things, gumming up the works and sapping the mental energy of the best and brightest. Almost all can be replaced easily with the appropriate level of land rent paid to the government of the people for the use of their common wealth. Add resource royalties, proper payment for environmental damage, user pays for government to business or not social services and the whole system would start to make sense. Good accounting would be used for business to business and management purposes and not for playing endless games with the nonsense ATO. And you cant shift land to a tax haven.

When you've paid your rent you've paid your tax.! I'd like to see that !

Alex Jones
November 26, 2015

Fair comment but payroll tax differences are small when comparing investments in companies within an industry.

Gary M
November 26, 2015

At a policy level, since small business is the largest aggregate employer, most employees don’t incur payroll tax for their boss, so it encourages small business. This is good since innovation, enterprise, productivity growth, etc generally come from small businesses, not institutions.

 

Leave a Comment:

     

RELATED ARTICLES

Taxing the ‘rich’: the potential tax consequences of inequality

Will our government embrace these three reforms?

Taxation reform: is Canberra serious?

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.