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This document was added or updated on 28/05/2020.
Classifying payroll tax changes in Victoria
Payroll tax in Victoria (Graph 1) is an other tax on production in the ABS economic accounts. It is reported using the Taxation Liability Method by both the Victorian Government and ABS economic accounts. This note (footnote 1) describes payroll tax changes announced by the Victorian Government, the classification of these changes, and time of their recording in ABS economic accounts. As most state / territory governments have similar schemes, these principles can be applied more broadly.
Time of recording
The economic accounts recommend that taxes are recorded using the accrual basis of recording - "when the related claims arise" (GFSM14, para 3.60). It ensures taxes are recorded in the same reference period as the taxable event (in this case, the payroll). It is rarely achieved in practice.
The Taxation Liability Method is an approximation which records taxes in the reference period when an assessment of a tax liability is made. As the tax authority typically issues an assessment after the period in which the taxable event occurs, this method typically records taxes in a later period. This may be significant when tax rates and/or thresholds change as their impact on the economy is deferred until a later reference period. It may also provide one explanation for the seasonal pattern in Graph 1 as September Quarter is likely to include “annual payers” who make a single final annual payment by 21 July.
Cash-based reporting is the least preferred approximation as it records taxes in the reference period when cash is received or paid (GFSM14, para 1.27). All other things equal, taxes increase (decrease) when compliance with timeliness requirements improves (deteriorates).
An example (for a hypothetical business) is provided in the Appendix to demonstrate these differences.
Classification of Victoria’s payroll tax change
The payroll tax change is not a tax refund within the system of economic accounts. Tax refunds comprise "adjustments for overestimation of taxes payable or the return of amounts to taxpayers due to overpayments" (GFSM14, para 5.27). The payroll tax change is not associated with overestimation or overpayment as payments made in the first eight months of 2020 (July 2019 to February 2020 inclusive) were calculated correctly.
The payroll tax change comprises tax relief in the form of a tax credit and therefore has a negative impact on tax revenue. Tax relief comprises "incentives that reduce the amount of tax owed by an institutional unit" (GFSM14, para 5.28). One of these incentives is a tax credit which is "an amount subtracted directly from the tax liability due by the beneficiary household or corporation after the liability has been computed". This arrangement deems the government to receive payroll tax revenue during 2019/20, and increase the tax credit (from zero) on 21 March 2020 to the value of payroll tax revenue received from eligible businesses since the start of the financial year. The tax credit is non-payable as its value cannot exceed the tax liability and limited to the size of the tax liability of the taxpayer. (GFSM14, para 5.29).
Time of recording of the non-payable tax credit
Prior to the 21 March 2020 announcement, registered businesses (footnote 6) had made eight monthly payments for 2019/20 reference period. For eligible registered businesses, the non-payable tax credit is “subtracted directly” from these monthly payments. As no further monthly payments are required, payroll tax for the 2019/20 reference period is zero.
The accrual basis of recording ensures the non-payable tax credits are deducted from the quarters of financial year 2019/20 in which tax is currently recorded. Values for September quarter and December quarter 2019 must therefore be revised (downward) to show no payroll tax was paid by eligible registered businesses in these periods.
The Taxation Liability Method ensures the non-payable tax credits are applied to the quarter when the assessments are issued allowing the credit. As refunds of payroll tax are paid in March, June Quarter and September Quarter 2020, the impact of the payroll tax change will be seen in these periods. Values for September and December Quarter 2019 remain unchanged.
Cash-based reporting ensures the non-payable tax credit is shown in the period when it is paid by the Victorian government. This is most likely to produce similar results to the Taxation Liability Method in this instance.
Appendix: Time of Recording for a hypothetical registered employer
A (hypothetical) registered employer commenced in 2018/19 with an annual payroll of $12m. The annual payroll increased to $12.12m (for 2019/20) when a new employee commenced on 1 July 2019. There were no other changes and the payroll remained evenly spread across all twelve months of the financial year. The registered employer ceased operation on 30 June 2020. The employer is not an eligible registered employer as its payroll ($12.12m) exceeds the $3m threshold.
The registered employer will make:
Table 1: Annual other taxes on production ($)
Table 2: Quarterly other taxes on production for 2019/20 ($)
1. This note has been compiled with assistance from by Sam Gow and David Lacy (Department of Treasury and Finance, Victoria). <back
2. 2.425 percent for regional employers reduced from 3.65 percent in 2018/19. <back
3. A subset of registered employers are identified as “annual payers” who are permitted to lodge once (by 21 July) and make a single final annual payment. <back
4. Payroll tax changes introduced by other state governments (eg. deferral of liabilities for a subset of businesses in NSW and South Australia) differ from Victoria. <back
5. https://www.premier.vic.gov.au/economic-survival-package-to-support-businesses-and-jobs/ <back
6. Other than “annual payers”. <back
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5261.0 - Economic measurement during COVID-19: Selected issues in the Economic Accounts, May 2020
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