Chapter 37 – Payroll Tax
PAYROLL TAX
This category comprises taxes collected from employers in general, levied either as a proportion of payrolls or as a fixed amount per person employed. More specifically, the category includes:
· net payroll tax collections, including the surcharges imposed on large employers by some States, less the tax paid by those government departments and authorities covered by the Commission’s expenditure comparisons; and
· payroll tax collected from trading enterprises.
The ACT’s position relative to the States, based on the 1999 Review methodology and using the latest available data is illustrated below. This sees the ACT being assessed by the Commission as having a below average capacity to raise revenue.
STANDARDISED, ACTUAL & AUSTRALIAN AVERAGE EXPENDITURE: PAYROLL TAX, 2000-01
Standardised revenue is the amount that the Commission deems the ACT could raise if it were to apply a standard revenue raising effort to its revenue base and raised revenue at the standard level of efficiency.
Actual revenue is the actual revenue spent by the ACT on this category in 2000-01.
A category structure is provided in the following table and illustrates the major components of the current assessment, together with comments on how the ACT is affected by the application of the different factors.
The ACT’s actual payroll tax collections are close to the national average per capita, notwithstanding its reduced tax base, mainly due to the constitutional exclusion of Commonwealth departments and agencies. This result reflects a higher revenue effort due to a higher than average tax rate, offset in part by higher threshold payrolls.
PAYROLL TAX:
SUMMARY OF THE CGC 1999 REVIEW METHODOLOGY
Component factors assessed ACT position
Compensation to Employees (CE) - also referred to as Wages, Salaries & Supplements (WSS) / The ACT was assessed as having an above standard capacity to raise revenue from payroll taxation due to the Territory’s high level of wages/salaries per capita compared to the Australian average.Private and PTE Sector Proportions Adjustment / The ACT has a higher proportion of wage and salary earners in the (excluded) public sector compared to other States. Hence, the Territory’s capacity to raise revenue was reduced due to the relatively low levels of private and PTE contributions that form the basis of the tax take.
Threshold Adjustment / The ACT’s capacity to raise revenue is further reduced due to the Territory having a larger proportion of employers in the excluded less-than 20 employees (very small businesses) category compared to the other States.
Value Distribution Adjustment / The ACT’s capacity to raise revenue from payroll taxation is increased due to the Territory having a greater proportion of wage and salary earners in higher salary ranges compared to the other States.
SUMMARY:
The ACT is assessed as having a below standard capacity due to the constitutional exclusion of Commonwealth departments and agencies from State taxes.
This chapter focuses on the following components of the 1999 Review methodology:
· the proxy tax base assessment approach; and
· the private and PTE sector proportions adjustment.
The ACT is also requesting the addition of two new adjustments to take into account:
· the inability of the ACT to levy tax on police force payrolls; and
· tax leakage to NSW.
Support for the proxy tax base assessment approach
The ACT supports the continued assessment of payroll tax revenue raising capacities given that the ACT’s largest employer, the Commonwealth Government, is exempt from paying payroll tax and is outside the scope of the revenue base. The largest States, NSW and Victoria, continue to have a high capacity to raise revenue, reflective of the high per capita compensation of employees in Sydney and Melbourne and the proportion of the workforce employed in the private sector.
The ACT supports the proxy tax base approach for the payroll taxation assessment. The Territory considers that this proxy tax base represents a sound foundation for calculating the relative revenue raising capacity of the States as it predominantly relies on independent data provided by the Australian Bureau of Statistics to measure the estimated value of payrolls subject to tax. That is, the Compensation to Employees (CE)/Wages, Salaries & Supplements (WSS) data which is calculated from the aggregate wages, salaries and supplements in each State.
The ACT notes that the current assessment structure is relatively complex, mainly to ensure that the resultant measure of taxable CE/WSS is a reasonable policy neutral proxy for the payrolls States choose to tax. Notwithstanding this fact, the ACT’s view is that it is superior to an assessment based on actual revenue collections.
Principally, the use of CE/WSS data is preferred by the ACT because the use of actual data would make it more difficult to remove and adjust for the differences in State policy approaches to payroll tax and the varying structures put in place. Such an option is not attractive given the fact that these approaches, such as the definition of taxable wages, threshold levels, clawback arrangements, tax rates and exemption provisions, vary extensively between jurisdictions.
The ACT recommends the continuation of the payroll taxation assessment using the current proxy tax base approach as:
· it appears to accurately reflect the varied capacities of States to raise payroll tax;
· the use of independent data provided by the Australian Bureau of Statistics to measure the estimated value of payrolls subject to tax enhances policy neutrality and accuracy; and
· the likelihood of removing the majority of policy-influenced differences under the current proxy tax base approach is higher than under an assessment based on actual collections.
Support for the payroll tax threshold adjustment
Each State applies a salary threshold exemption for payroll tax which differs significantly between jurisdictions. The Commission adjusts each State’s total salaries (Private and PTE) to reflect the proportion of employers with payrolls above the threshold, and hence able to be taxed.
The proportion is calculated based on the size of the business rather than the salaries paid, because information on employers by annual salaries paid is not readily available. The current method uses businesses with more than 20 employees. The effective annual wage threshold is then as follows:
Effective annual wage threshold equals:
20 employees x Average Weekly Earnings x 52 weeks.
In the 1999 Review, South Australia argued that this method was unfair because SA salaries are lower than the national average and hence the effective threshold applied to SA was lower than elsewhere. Victoria stated that the threshold was too high because it would only need 15 people at AWE to be in line with their actual threshold of $515,000.
Other jurisdictions stated that threshold adjustments should not be applied at all because their level and application is purely a policy decision.
While the ACT supports the current threshold adjustment based on the employee size of business (20 employees), the Territory rejects the perceptions of several States that it could be considered to be arbitrary and not necessarily reflective of true salaries paid.
In this light the ACT examined the veracity of the threshold adjustment, based on businesses of 20 employees, by analysing the actual payroll tax threshold data of States. The results are shown in Table 37.1.
Table 37.1 – Payroll Tax Thresholds by STaTE,
As at 1January 2002
($’000) / Vic
($’000) / Qld
($’000) / WA
($’000) / SA
($’000) / Tas
($’000) / ACT
($’000) / NT
($’000) / Aust.
Avg.
($’000)
Payroll tax threshold /
600 /
515 /
850 /
675 /
456 /
1,000 /
1,250 /
600 /
743.25
Source: Interstate Comparison of Taxes 2001-02 – NSW Treasury.
Based on an Australian average threshold of $743,250, an appropriate business size for the threshold adjustment was calculated by employing the following formula:
$743, 250 / 52 weeks = $14,293.
Average Weekly Earnings (August 2001) = $672.60
Threshold (weekly) / AWE = $14, 293 / $672.20 = 21.3.
As can be seen from the above, based on the use of average threshold data, an appropriate business size for the threshold adjustment would be businesses of 21 employees or less. As such, the ACT considers that the current measure of 20 employees is a good proxy for the average payroll tax threshold.
The ACT considers that the current threshold adjustment based on businesses of 20 employees is sound and should be retained:
· the Territory rejects the perception of several States that this adjustment is arbitrary, as based on calculations using actual average threshold data, the appropriate threshold adjustment should be based on a business of 21 employees, which supports the status quo.
In the main, the ACT also supports the way in which the revenue base has been calculated and the type and number of allowances made for differences between the States. The Territory considers that the Commission has taken a balanced, consistent and effective approach to a relatively complex assessment.
The ACT notes that the Commission, in the Private and PTE Sector Proportions adjustment, which makes an allowance for differences between States in the types of employers who were taxable (private sector employers and PTEs), excludes public sector CE/WSS aggregates.
While this is a rational approach, the ACT notes that because of the special circumstances regarding the provision of policing services by the Australian Federal Police (AFP) in the Territory, the ACT’s revenue raising capacity has been overestimated.
Unlike all other State run police forces in Australia, the AFP is exempt from paying payroll tax on legislative grounds. As the Commission would be aware, the ACT is constrained from employing a police force other than the AFP as, legislatively, the AFP is responsible for the provision of the policing function in the Territory. Two Acts support this latter conclusion:
· Section 23(1)c of the Self-Government Act, which states that: “…the [ACT Legislative] Assembly has no power to make laws with respect to: the provision by the Australian Federal Police of police services in relation to the Territory”; and
· Section 8 of the Australian Federal Police Act 1979 which lists the functions for which the AFP is responsible, of which, in particular, Section 8(1)(a) states that a primary function of the AFP is “…the provision of police services in relation to the Australian Capital Territory”.
In regard to the levying of payroll tax on the AFP, Section 28 of the Self-Government Act highlights the extent to which the AFP is quarantined from the influence of Territory laws. Section 28 states that any law passed by the ACT Legislative Assembly will have no effect if it is inconsistent with “…a [Federal] law in force in the Territory…”.
Legislative provisions effectively ensure that any ACT legislation regarding the AFP is overridden by the Federal legislation.
According to the Productivity Commission, the States collected just under $172.0m in payroll taxes from their police forces in 1999-2000. Although WA did not apply tax to its police force payroll, a long standing policy decision taken by successive Governments, the Productivity Commission estimated that with a notional payroll tax rate of 5.56% in WA, this would have equated to $18.4m being collected in payroll tax in 19992000.
Unlike the ACT, WA is not constrained in taxing its police force payroll, and as such this represents a policy choice of the Government. Table 37.2 provides a comparison of the payroll tax collected by the States.
Table 37.2 - Payroll Tax Collections emanating from state police forces (police and non-Police), 1999-2000
NSW / Vic / Qld / WA(a) / SA / Tas / ACT / NT / AustPayroll tax collected ($m) /
66.127 /
36.901 /
26.591 /
18.449 /
14.471 /
4.570 /
0 /
4.887 /
171.996
Payroll tax collected per capita ($) /
10.28 /
7.79 /
7.52 /
9.86 /
9.68 /
9.71 /
0 /
25.18 /
9.03
(a) The Productivity Commission noted that WA did not collect any payroll tax in 1999-2000. As WA’s notional payroll tax rate is 5.56%, this equated to $18.4m being collected in payroll tax in 19992000.
Source: Report on Government Services 2001, Steering Committee for the Review of Commonwealth/State Service Provision, Productivity Commission, Volume 1, Attachment 8A.
The extent of the payroll tax collected in per capita terms by the States is shown in the following Figure 37.2.
figure 37.2 – Payroll Tax Collections PER capita emanating from state police forces (police and non-Police), 1999-2000
Source: Report on Government Services 2001, Steering Committee for the Review of Commonwealth/State Service Provision, Productivity Commission, Volume 1, Attachment 8A.
Clearly, the average State policy is to levy payroll taxes on their police force. To overcome this anomaly, the ACT requests that the Commission ensure that the compensation to all police force employees, with the exception of the ACT’s police employees, are included in the payroll tax revenue base measure.
It would appear that to address the deficiencies with the current payroll tax assessment, there are two options by which the Commission could reflect States’ relative capacities to raise taxes on police force payrolls (police and non-police). That is, by modifying the Private and PTE sector proportions adjustment, by either:
· excluding all of the public sector CE/WSS aggregates other than the policing CE/WSS aggregates (data relating to the AFP in the ACT would still be excluded); or
· excluding all of the public sector CE/WSS aggregates and then adding back States’ police force salaries data (excluding those relating to the AFP in the ACT).
If the ABS CE/WSS data poses difficulties in splitting out the aggregates relating to State policing, it is suggested that the Commission use the salaries data compiled by the Productivity Commission as an alternative source (the second dot point referred to above).
The following Table 37.3 provides an outline of the wages paid to State police forces (comprising police and non-police members) that should be incorporated into the payroll tax assessment to reflect the relative revenue raising capacities of the States.