Payroll tax is costing Western Australian businesses more than $2,700 per employee on the back of strong wages growth in the state during the past decade, according to a report released today.
Payroll tax is costing Western Australian businesses more than $2,700 per employee on the back of strong wages growth in the state during the past decade, according to a report released today.
The dramatically higher wages during the resources boom, combined with the shortage of workers in some sectors, has placed the cost of labour among the most significant imposts on the WA businesses, ‘The costs of doing business in WA’ report by Bankwest Curtin Economics Centre found.
The report also found WA was one of the highest taxing states when it comes to payroll, the Curtin centre’s director, Alan Duncan, said.
“Payroll tax thresholds have not been increased in line with wage inflation in WA, leading to payroll tax bracket creep,” he said.
“This has effectively brought more small businesses into the payroll tax system over time.
“For the WA payroll tax system to have remained neutral over the last decade would have required the July 2015 threshold to be nearly $1.1 million; 37.5 per cent higher than the current threshold of $800,000.”
The report said WA was the most expensive state to do business in terms of payroll tax for those businesses with payroll costs between $1.5 million and $7.5 million.
“WA ranks first in payroll tax costs for businesses with a total payroll of $2 million (a $73,881 liability, or 3.7 per cent of payroll costs), first for businesses with a $5 million payroll ($258,582, or 5.2 per cent of payroll costs) and second for businesses with $10 million in payroll costs ($550,000, also 5.5 per cent of payroll costs),” the report said.
“Payroll tax revenues in WA have increased as a proportion of total state tax revenue over the last decade, rising from 26.1 per cent in 2005-06 to some 40.5 per cent on latest projections for 2015-16.
“This can be explained in part by the growth of businesses in WA over the past 10 years, both in number and in the size of the workforce employed.”
Labour costs are around 28 per cent of total costs, on average, Professor Duncan said.
“Wage cost measures that standardise for workforce quality (show) that labour in WA has become more expensive over the past 10 years,” he said.
“If we look at wage cost measures that control for changes in quality and quantity of work performed, we still see that labour costs in WA increased by 46 per cent from 2005 to 2015; for Australia (overall), the increase has been 38 per cent across the same period.”
In the most recent WA state budget, payroll tax was forecast to raise just less than $4 billion this financial year, making it the single largest income source of any state-based tax.
Projected growth in payroll tax collections was more than 9 per cent.
There was some positive news, however, with WA workers generally more productive, the report found.
The labour cost per dollar of income earned by businesses is lower in WA compared with the national average, by 16 per cent in mining, 13 per cent in agriculture, and 22 per cent in manufacturing.
Reform?
An unpopular tax with many economists in its current form, payroll is one tax that is under review in the federal government’s current white paper.
Modelling undertaken for the 2010 Henry tax review by KPMG found that the ‘marginal excess burden’ of payroll tax nationwide was 41 cents per dollar of revenue raised.
That means for every $1 billion going to governments through the tax, there is an additional cost to society of $410 million, and a total cost of $1.41 billion.
It compares extremely unfavourably with the GST, which comes in at 8 cents per dollar raised.
Part of the high cost of payroll tax is due to the narrowness of its base, the review said, with large numbers of businesses exempt.
Just 12,000 of 220,000 businesses are covered by the tax in WA, according to the state’s Economic Regulation Authority.
In its microeconomic reform review last year, the ERA said payroll could be a more efficient tax if levied properly.
“The efficiency of payroll tax is reduced because of the high exemption threshold (which results in a large number of small businesses being exempt from the tax base) and the number of concessions and exemptions, which together equal 57 per cent of the revenue collected,” the ERA review said.
That includes exemptions for charitable organisations, schools and hospitals.
To improve the tax’s efficiency, the ERA suggesting drastically expanding the number of businesses covered by the tax and cutting the rate.
“The exemption threshold would need to be set at a payroll of $110,000 per annum if taxation collections were to exceed compliance and administration costs of $2,100 per annum (assuming a payroll tax rate of 1.91 per cent),” it said.
A further option could be abolishing the tax completely and replacing it with a broader, higher GST.
Surprisingly, in addition to having the heaviest payroll tax burden for many businesses, the WA government has for a long time touted its low levels of land tax, of which WA ranked first of all states last year.
Yet land tax, according to KPMG’s modelling, is one of the most efficient forms of revenue collection available to governments.
