Tax business hates creeps by stealth

27/02/2008 - 22:00


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Ask any business owner what the biggest issue facing their business is and staff shortages will be the most likely reply.

Tax business hates creeps by stealth

Ask any business owner what the biggest issue facing their business is and staff shortages will be the most likely reply.

Ask them what they would do as a priority if they were premier of the state and the majority would most likely say they would get rid of payroll tax.

Gleaned from a short survey and, in some cases, interviews with 15 private businesspeople, there is much to be learned from these two answers, some of it ironic, but much of it quite revealing about the realities of being in business.

The hint of irony is that businesspeople continue to hate a tax that stops them employing at a time when they simply can’t get any staff anyway.

But the reality is that, in payroll tax, they see not only the injustice of a levy that penalises them for creating jobs, but also something that they could change.

Payroll tax is an artificial creation of the legislature, whereas the skills shortage is largely the result of a boom and much harder to solve, though not impossible, at the stroke of pen or a vote in parliament.

For the pragmatic business people, staff issues are a short- to medium-term problem that will ultimately disappear, whereas payroll tax is here to stay unless someone has the will to end it.

“An insidious tax,” one executive told WA Business News.

Business people often lump the payroll tax in with superannuation contributions and the high cost of workers’ compensation premiums here, when compared with places such as New Zealand where such taxes were either non-existent or, at the least, much lower.

“You put those three together and you are taking another 10 per cent off the bottom line in any business,” another business owner said.

For Martin Black, co-founder of the Margaret River Chocolate Company, payroll tax is a very strong disincentive for employment.

“Businesses tend to look at other ways of getting things done rather than employing more people because you get hit with not only payroll tax, but huge workers’ comp premiums, et cetera,” Mr Black said.

This is especially the case for small business where the growth in wages has pushed increasing amounts of businesses above the $750,000 payroll threshold at which the tax kicks in.

Mr Black believes this is too low.

“I would like to see the payroll tax threshold up around $2 million,” he said.

The Chamber of Commerce and Industry WA recently highlighted the creeping nature of payroll tax due to the threshold being a set amount that is not indexed to anything, let alone the strong wages growth WA has experienced in the past three or four years.

In the five years since the threshold was amended in 2003, growth in wages has meant the number of people a small business would have to employ on average WA wages to start paying payroll tax fell by 25 per cent.

In other words, at the start of 2003 a business could have employed almost 16 people at the average WA wage; but by the start of 2007 that had slipped to a little over 12 people. Based on wage movements in the three months to November, which pushed WA’s average annual wage to $63,008, the number of employees would have dropped below 12.

CCIWA chief economist John Nicolaou said the erosion of protection for small business had been consistent since 1997 when a less complicated system was introduced with a minimum threshold of $675,000.

The exception to that was when the threshold was lifted to the current level.

Mr Nicolaou said a 12-employee business was well within the definition of small business, which was generally accepted as being below 20.

“Really it is the government’s call as to what it wants from this exemption,” he said.

“If it was going to be a true small business exemption the threshold for business would have to be $1.2 million.”

He said CCIWA was not promoting that particular rate. It would like to see payroll tax rates lowered and the minimum threshold indexed.

Mr Nicolaou said payroll tax hurt WA particularly because the economy was export focused and employers found it more difficult to pass on the costs as higher prices.

According to CCIWA, payroll tax collections have boomed in the past decade, rising from $723.5 million in 1997-98 to hit more than $1.6 billion last financial year, showing a growth rate well above the rate of inflation.

RSM Bird Cameron partner Rami Brass said one of the biggest issues with the rapid bracket creep for small business encountering the threshold was that many passed the milestone without realising it.

Mr Brass said this was often because businesses at the lower of the employment spectrum, the very ones the threshold was designed to protect, often did not have the accounting firepower to realise that they could have a new tax liability.

It could mean several years of failure to pay the tax.

Mr Brass said that often meant big tax bills when the Office of State Revenue did an audit and demanded back taxes with high penalty interest rates.

He believed more education of the market from the state treasury would be better than demanding big penalties after the fact.

“That would save a lot of heartache,” Mr Brass said.


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