IN a state where fast-growing wages costs have been identified as the biggest financial burden on business, it is not lost on employers that payroll taxes are rising at the same pace and further inhibiting their ability to expand.
Employers have vilified state-based payroll tax for years, vexed by what they see as a tax on jobs.
Payroll tax raised $2.3 billion in 2009-10 and, due to forecast double-digit growth, the state budget anticipates it will nearly double to $4.17 billion in 2014-15, making it the state government’s second biggest source of revenue after royalties, which are forecast to be $5.34 billion.
In the recent Cost of Doing Business survey conducted by the Chamber of Commerce and Industry WA and WA Business News, payroll tax headed the list of tax nasties that business highlighted as a major cost. It is notable that this state tax took precedence over federal company tax, with nearly 50 per cent pointing to payroll as the biggest driver of tax pressure.
Payroll tax in Western Australia is 5.5 per cent of wages bills over $750,000, a percentage that is the second highest rate in Australia behind Tasmania but actually raises the biggest amount per capita due to the low unemployment and high labour costs here.
While the state’s employment figures are remarkably healthy, there are plenty of non-resources businesses already saddled with higher wages bills than they can afford, without such a significant additional cost to erode their margins.
Even in the robust resources sector payroll tax is an issue, because the state’s high labour costs are making local manufacturers uncompetitive and prompting project managers to order works offshore where possible.
The report based on the findings from the CCI-WA Business News Cost of Doing Business Survey refers to payroll tax as a “perverse incentive to limit recruitment or cut employment”.
CCI has long called for reform in the area but the state government has been reluctant to make changes to payroll tax rates, mainly due to the impact of GST distributions. In the first instance, WA’s share of GST has been falling, which means it has been seeking other forms of revenue.
Furthermore, payroll tax rates are taken into account when the GST distributions are calculated, and having a higher rate is beneficial from the state’s point of view.
Nevertheless, 5.5 per cent on gross payroll above $750,000 is a significant impost on businesses that are less interested in the state’s revenue raising ability than their own desire to employ people and still make a profit.
And, as wages rise, more and more businesses are caught up by this tax even without adding extra employees.
CCI’s research shows that, based on average wages of just over $75,000 a year, a business would only be able to employ nine people before going above $750,000, a threshold that has remained unchanged since 2003.
Eight years ago, when the threshold was last adjusted, a business could have employed 15 people on the average weekly earnings before being obligated to pay payroll tax.
CCI is especially critical of this bracket creep, which has occurred because the threshold has not been indexed to inflation or average weekly earnings, meaning employers with relatively small workforces have lost their exempt status.
“The strong growth in employment and wages in recent years has also meant that many small businesses have now been caught in the payroll tax net – not necessarily because they are employing more people, but because they are having to pay existing staff more due to increased competition for scarce labour,” CCI said in its report based on the survey.
The indexation issue is a common one across business taxation, with land tax being rated as another cost that 20 per cent of businesses found notable.
CCI said land tax raised by the state was $568 million in 2009-10, up 35 per cent on the previous year and more than 160 per cent higher than in 2001-02.
“Concerns also exist about the assessment process for land tax, with some businesses in recent years facing land tax bills 10 times higher than the previous year, due to the growth in property prices between 2001 and 2007,” CCI said.
Under the Metropolitan Region Improvement Tax, the WA government also collects an additional 0.15 per cent on the unimproved value of the land that is liable for land tax and located within the metropolitan region.
“WA is the only state to apply such an additional tax on land, which added $78 million in taxation revenue in 2009-10,” the CCI said.