Western Australian small and medium businesses (SMEs) have been feeling the weight of inflation, rising costs, and inefficient tax policies.
A recent Chamber of Commerce and Industry WA (CCIWA) Business Confidence Survey found that payroll tax relief is the top priority for many WA businesses leading into the upcoming state election.
The survey revealed that three in five (59 per cent) of the 576 businesses surveyed for the December 2024 quarter believe payroll tax is one of the most significant challenges hindering their growth.
Pasquale Princi, managing partner of SEER Financial Group, agrees and believes that payroll tax should be abolished, advocating for reform to the state’s tax policies to help businesses thrive and improve the broader economy.
“The need for payroll tax reform in Western Australia is urgent. Small and medium-sized businesses are struggling to cope with the high costs imposed by the current tax system, and many are calling for relief in the form of tax policy reforms,” Mr Princi reiterated.
“By replacing payroll tax with an increase in GST or the implementation of a federal land tax, the states can be re-distributed the necessary revenue while making the tax system more efficient and transparent.”
Calls for change
WA businesses are struggling with some of the highest payroll taxes in the country, and many report being unable to expand their services or workforce due to the rising tax burden. As WA faces an economic slowdown, businesses are dealing with declining profit margins, and an increasing rate of insolvency.
A growing number of SMEs are reaching the $1 million threshold for payroll tax, simply because of the increase in wages costs, which have soared by more than 14 per cent since 2020.
Despite these pressures, the state’s payroll tax revenue is projected to grow significantly, with WA’s payroll tax revenue forecasted to exceed $6 billion by 2025-26, according to State Budget papers. This is a burden that businesses can no longer bear, with calls for reform ringing louder.
Payroll tax is considered one of the most inefficient taxes at a state level. Mr Princi has argued that payroll tax hampers productivity and job growth, with businesses facing additional financial stress at a time when innovation and workforce expansion are essential for economic recovery.
In WA, as businesses struggle with increasing costs due to rising wages, inflation, and other economic pressures, the added burden of payroll tax only exacerbates the challenges they face. Many businesses report that these mounting costs prevent them from innovating and expanding their operations or hiring more staff, which leads to stagnant productivity.
Mr Princi suggests that WA’s tax policy needs to be restructured to foster economic growth, boost productivity, and create a more efficient system for both businesses and the state government.
Increasing GST
One of the major proposals to replace payroll tax is to increase in the goods and services tax (GST) rate.
Echoing the Parliamentary Budgetary Office’s report, ‘Australia’s tax mix’, published in November 2024, Mr Princi proposes raising the GST rate by 2.5 per cent to offset the revenue lost from eliminating payroll tax. This change, according to Mr Princi, would improve the economy’s overall efficiency, helping businesses reduce costs while driving growth.
Currently, Australia’s GST rate of 10 per cent is among the lowest in the developed world, with the OECD average sitting at around 19 per cent.
Increasing the GST to 12.5 per cent could generate significant revenue that would compensate for the abolition of payroll tax. This would allow businesses to benefit from a simpler, less burdensome tax system while ensuring the government can still raise necessary funds for public services and infrastructure.
The increased GST could be applied to some of the major exemptions that currently reduce the effectiveness of the GST, including food, healthcare, and education. By broadening the base of taxable goods and services, the government could generate additional revenue while also streamlining the tax system.
According to PwC’s 2020 report on GST reform, broadening the GST base or increasing the rate could raise between $14 billion and $40 billion in additional revenue, a figure that would far exceed the $26 billion generated by payroll tax in 2018-19.
The PwC report suggests that this revenue could be redistributed to states and territories, ultimately replacing their payroll tax revenue and creating a more efficient national tax system.
In addition to the revenue boost, shifting towards a higher GST rate would result in a lower marginal excess burden compared to payroll tax. The marginal excess burden for GST is estimated to be 8 cents for every dollar collected, compared to 25 cents for every dollar raised from personal income tax.
Land tax
Another potential alternative is the implementation of a federal land tax to replace all state-based taxes, including stamp duty.
One of the key advantages of land tax over payroll tax is its simplicity and efficiency. Unlike payroll taxes, which are remitted by businesses and passed on to households through higher prices, land taxes are more transparent and direct.
Land taxes are considered simpler, more efficient, and less volatile compared to taxes on business activities or payroll. They also do not discourage innovation or job creation in the same way that payroll taxes do.
Mr Princi suggests a 1 per cent federal land tax on aggregated land value to replace all state-based taxes and stamp duties.
“The scenario here is to eliminate all state taxes and increase land tax by the same amount. This change does not involve any switching between direct and indirect taxes, so that the overall tax mix remains unchanged at that level,” Mr Princi said.
“If we were to develop a 1 per cent federal land tax on aggregated value, all state-based taxes and stamp duty could be abolished.”
WA businesses surveyed in the CCIWA survey named stamp duty as the second most important priority ahead of the March election.
Improving efficiency
According to estimates, total state taxes amount to around $150 billion in 2025-26, with payroll tax, stamp duties, and taxes on gambling and insurance being some of the least efficient taxes.
A shift to land tax could improve efficiency of the tax system and increase GDP by over 2 per cent. This would also generate an additional $15 billion in tax revenue, as the increased economic efficiency would lead to higher income and consumption.
By focusing on land as the primary source of taxation, the government could generate a steady stream of revenue while reducing the inefficiencies associated with payroll tax and stamp duties. Overall, land taxes are less volatile, providing a stable source of revenue for the government.
Similarly, by increasing GST and shifting more of the tax burden to consumption rather than income, the Australian economy would become more efficient, also leading to a potential GDP increase of around 2 per cent, which correspondingly would boost the nation’s productivity and overall prosperity.
Boosting productivity
The central goal of these tax reforms is to boost productivity. As Mr Princi points out, Australia has seen stagnant productivity growth over the past decade, and the country’s economic performance has lagged that of other developed nations, including the United States, the United Kingdom, Germany, and France.
The Business Council of Australia has warned that productivity growth in Australia has been growing at a slow rate of only 0.5 per cent per year, a figure that needs to quadruple to 2 per cent per year by 2030 in order to match the performance of previous decades.
Increasing productivity is crucial to improving Australia’s global competitiveness and ensuring that businesses can operate efficiently. A reformed tax system that supports innovation, reduces inefficiency, and lowers costs for businesses would enable Australian enterprises to compete more effectively on the global stage.
With higher productivity, businesses can invest in new technologies, hire more workers, and increase wages without driving up inflationary pressures.
“These changes would not only benefit businesses but also boost productivity, improve the economy, and enhance Australia’s competitiveness on the global stage. The time for change is now,” Mr Princi said.
