Payroll tax a $1.2b burden for business

Nearly one in every three dollars collected by State Treasury over the coming financial year could be taken in payroll tax – a huge $1.24 billion – making it businesses’ biggest burden.

Currently, any business with an annual wages bill of $750,000 or more must pay 5.5 per cent of its wages bill above that amount to Treasury.

Not widely known is that this tax was initially used to fund child endowment payments to mothers.

Early last century, several European countries funded child endowment payments to public servants, municipal employees, and in one case, even to munitions workers.

In Australia, however, although Labor premiers and party leaders were attracted to this idea in the 1920s and 1930s, it was first promoted by Dr Richard Arthur, a NSW Nationalist (the predecessors to today’s Liberal Party) and a United Australia Party NSW Health Minister from 1922 until 1932.

In 1916 he had “moved in the NSW Legislature to impose a separate income tax on all net incomes of over £2 a week to be used for paying an endowment to mothers on all children after the first until they reached the age of 14 years.”

Eleven years later, NSW passed legislation providing five shillings a week payment for each child where a family’s income for the preceding year hadn’t exceeded the basic wage.

Thereafter, Labor premiers and leaders pressured the non-Labor Bruce-Page government to institute a national child endowment scheme. But Canberra resisted on grounds of cost and constitutional considerations.

More specifically it was worried that child endowment payment could not be separated from the general wages structure over which it had no constitutional jurisdiction.

Surprisingly, in 1941, the Menzies-Fadden-led United Australia Party and Country Party Coalition Government went ahead and introduced payroll tax as a Commonwealth funding source to institute child endowment.

Canberra struck a rate of 2.5 per cent and the level was unchanged until 1971 when the tax was handed to state governments, which had a nearly matching cut in direct Canberra grants.

The Fraser government retained child endowment, renaming it the Family Allowance. In more recent times this allowance was means tested and today is made only to lower income parents.

The decision to hand payroll tax to state treasuries was driven by longstanding state demands for a growth tax.

Initially, all states increased the threshold to 3.5 per cent. Over time they introduced varying tax-free thresholds and deductions, and by the mid-1990s were typically charging between 5 and 7 per cent.

The Gallop Government raised it from 5.5 to 6 per cent in its first budget of 2001-02, but on January 1 this year cut it back to 5.5 per cent.

Payroll tax today is thus a state-based charge on business for employing people and has been unrelated to child endowment payments – its initial purpose – for well over a third of a century.