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.



Payroll Tax in Victoria

Payroll tax in Victoria (Graph 1) is established by Victoria’s Payroll Tax Act (2007). Rates and thresholds for financial year 2019/20 were announced in May 2019. A registered employer must pay 4.85 percent (footnote 2) of their payroll in excess of the $650,000 annual threshold. The rate and annual threshold were unchanged from financial year 2018/19.

Most registered employers (footnote 3) lodge returns and make monthly payments within seven days of the reference month’s conclusion. Monthly payments are calculated based on a proportionate share of the annual threshold (i.e. $54,166 = $650,000 / 12 months).

Returns for June relate to the financial year (not June reference month), with the final annual payment due within twenty-one days of the financial year’s conclusion. The final annual payment (or refund) reflects the difference between the payment calculated in the return for June and amounts paid over the previous eleven months. This allows the registered employer to access the full annual threshold (e.g. an employer with a seasonal payroll may fall below the monthly threshold in some months) and have revisions to their payroll reflected in their final annual payment.

A payroll tax change was announced by the Victorian Government (footnote 4) on 21 March 2020 to all registered employers with Victorian payrolls below $3 million (eligible registered employers). The payroll tax change provides "full payroll tax refunds for the 2019-20 financial year to small and medium-sized businesses (payroll less than $3 million). This assistance is a refund, not a loan." (footnote 5) The value of the payroll tax change is estimated at $550m and provided in three tranches:

• The first tranche involves identifying, and working with, eligible registered employers that make monthly payments to refund payments made since the start of financial year 2019/20. Most refunds were paid by the end of March 2020 and are estimated to comprise 50 percent of the value of the payroll tax change. Most of these eligible registered employers will receive a refund of amounts paid for July 2019 to February 2020 in March 2020, however a small number may receive refunds after March 2020.

• The second tranche involves monthly payments for eligible registered employers for March to June 2020 (notionally to be paid in April to July 2020). Eligible registered employers continue to lodge monthly returns, but will not make any payment - the Victorian Government recognises receipt of payroll tax revenue and a subsequent refund equal to this amount. Amounts refunded (to ensure no payment is required) for March to June 2020 are estimated to comprise 25 percent of the value of the payroll tax change.

• The third tranche comprises “annual payers” (registered employers expected to pay less than $40,000 of payroll tax over the entire financial year). These registered businesses lodge once (by 21 July) and make a single final annual payment, rather than lodge and pay monthly. Refunds for these eligible registered employers will be processed (to ensure no payment is required for the 2019/20 financial year) during July 2020 and are estimated to comprise 25 per cent of the value of the payroll tax change.

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:

• Eleven monthly payments during 2018/19 commencing on 7 August 2018 (for July 2018 reference month) and concluding on 7 June 2019 (for May 2019 reference month). Each monthly payment will comprise $45,872.95 [= ($1m monthly payroll - $54,166 monthly threshold) x 0.0485)].

• Twelve payments during 2019/20 comprising:
  • One final annual payment on 21 July 2019 comprising $45,872.55 [= ($12m annual payroll - $650,000 annual threshold) x 0.0485 less $45,875.95 x 11 monthly payments during 2018/19].
  • Eleven monthly payments during commencing on 7 August 2019 (for July 2019 reference month) and concluding on 7 June 2020 (for May 2020 reference month). Each payment will comprise $46,357.95 [= ($1.01m monthly payroll - $54,166 monthly threshold) x 0.0485)].
  • The monthly payment for February 2020 was due on 7 March 2020, however the registered employer made a late payment (on 4 April 2020).
• One payment during 2020/21 comprising the final annual payment on 21 July 2020 for $46,357.55 [= ($12.12m annual payroll - $650,000 annual threshold) x 0.0485 less $46,357.95 x 11 monthly payments during 2019/20].

Table 1: Annual other taxes on production ($)

	2018/19	2019/20	2020/21
Accrual Basis	550 475	556 295	0
Taxation Liability Method	504 602	555 810	46 358
Cash based recording	504 602	555 810	46 358

Table 2: Quarterly other taxes on production for 2019/20 ($)

	Sept 2019	Dec 2019	Mar 2020	Jun 2020
Accrual Basis	139 074	139 074	139 074	139 074
Taxation Liability Method	138 588	139 074	139 074	139 074
Cash based recording	138 588	139 074	92 716	185 432

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