Exploring Australia’s Payroll Landscape

Australia is one of APAC’s most important business locations, if you’re doing business there, you’ll need to prepare an effective payroll solution…

Inhabited by indigenous Australians since prehistory, and colonised by Europeans from the 17th century onwards, modern Australia emerged in 1901 when its individual colonies unified and formed a federal government. Today, the Commonwealth of Australia is made up of six states: Western Australia, South Australia, Queensland, New South Wales, Victoria, and Tasmania - along with 2 mainland territories: the Australian Capital Territory (its federal district), and the Northern Territory, both of which are treated like states from a governmental perspective.

Since its unification, Australia has grown to become one of the most influential and powerful nations in the region, with the 13th-largest economy and the tenth-highest income per capita in the world. Unsurprisingly, that economic success is a reflection of its status as an international business hub: enterprise organisations from across the world have set-up in Australia and the country has a reputation as an attractive destination for entrepreneurs and start-ups.

Setting up a business successfully in Australia means getting to grips with regulations at the state and federal levels - and this is particularly important during the Australian payroll process. When it comes to payroll, Australia shares much of the standard regulation a business might expect in any modern developed country  - however, thanks to its federal infrastructure and often-diverse state legislation, employers should also be prepared for a range of unique considerations.

Wherever you’re planning to set up, make sure your business is up to speed in its new location, with activpayroll’s Australia payroll guide.

A Global Business Hub

Australia’s reputation as an international destination is built on its natural beauty and famous urban centres - but the country also represents a thriving continental gateway, offering excellent business connections to China and Japan and the wider APAC region, the USA, Canada, and the Central and South Americas. Australia’s economic profile embodies this aspect of its identity: in 2017, FDI stock grew to an impressive A$850 billion, reflecting the ongoing foreign interest in the country.

With this in mind, foreign businesses setting up in Australia must treat payroll as a priority. Essentially this means developing a global payroll solution which integrates Australian payroll concerns seamlessly - taking into account its state and federal regulations, and its unique tax challenges. Given the complexity of payroll in Australia, foreign businesses often engage a service provider to help them develop their global solution: a payroll provider is not only a way to access compliance expertise but can also offer time and cost-saving procedural efficiency.

The Foundations of Australian Payroll

As with any major international business destination, building a high-performance payroll in Australia means laying strong foundations.

The Basics: In Australia, employees are paid in Australian dollars (represented as $, A$, or AUD). Australia has no official language, but English is predominantly spoken across the country and in business contexts - along with indigenous languages spoken by the Aboriginal Australian population. 

Tax: When setting up payroll, businesses first need to obtain an Australian Business Number (ABN) and a Tax File Number (TFN) from the Australian Tax Office (ATO). Following those steps, businesses should register for GST and Pay As You Go (PAYG) withholding tax. The tax year in Australia runs from 1 July to the 30 June, and tax returns are generally due on the 31 October.

PAYG Withholding: In Australia, PAYG withholding is the primary mechanism for employers to collect and remit the tax to the ATO. Essentially PAYG withholding means that tax contributions (charged progressively) and the Medicare levy (2% of taxable income) from employees’ income are withheld at source by employers, and paid to the ATO. 

At the end of the tax year, employers must send their employees a PAYG payment summary, containing details of payments made throughout the year.

Income Tax

Income tax is collected at the federal level in Australia, by the ATO. Income tax in Australia is charged progressively, at the following rates:

Income (AUD)

Tax Rate

Up to $18,200

0%

Over $18,201 up to $37,000

9.65%

Over $37,000 up to $87,000

23.78%

Over $87,000 up to $180,000

30.13%

Over $180,000

45%

Superannuation: Employers also make mandatory superannuation contributions once Ordinary Time Earnings have exceeded $450 - these are calculated at a rate of 9.5%. Superannuation contributions are compulsory on OTE up to a maximum quarterly base of $54,030.00. Employers are not required to make superannuation contributions for employers under 18 (unless they earn over $450 a month, or work more than 30 hours per week).

Payroll Taxes: Payroll taxes are imposed at the state level in Australia and based on employee wages, so withholding rates are different in each jurisdiction. Wages must be above a certain threshold to trigger payroll tax. In 2018, the payroll tax landscape across Australia’s states and territories involved the following rates and thresholds:

State/Territory Payroll Tax Rate

Monthly/Annual Caps

Australian Capital Territory

6.85% 

$166,667 (monthly), $2,000,000 (annually)

New South Wales

5.45%

$57,534 (28 days), $62,644 (30 days), $63,699 (31 days), $750,000 (annually)

Northern Territory

5.50%

$125,000 (monthly), $1,500,000 (annually)

Queensland

4.75%

$91,666 (monthly), $1,100,000 (annually)

South Australia

2.5% to 4.95% dependent on wage

$50,000 (monthly), $600,000 (annually)

Tasmania

6.1%

$95.890 (28 days), $102,740 (30 days), $106,164 (31 days), $1,250,000 (annually)

Victoria

4.85% (3.65% for regional employers)

$52,084 (monthly), $625,000 (annually)

Western Australia

5.5%

$70,834 (monthly), $850,000 (annually)

Other taxes: While income tax, payroll tax, and social security contributions might be withheld as standard in most tax jurisdictions, Australia does have certain specific tax withholding requirements, including:

  • Fringe Benefits Tax: Intended for most non-cash benefits provided to employees such as company cars or private healthcare. FBT is charged to the provider of the benefit, that is, the employer, at the current tax rate of 47% (applicable to the “grossed up” taxable value) - although contributions may be deductible against an employer’s taxable income. Reportable FBT must be included on an employee’s Payment Summary if their value exceeds $2000: although not subject to income tax, that amount is relevant where income testing is required.  
  • Medicare Levy: Australia’s public health insurance scheme, the Medicare levy is charged at 2% for most employees – although high-earning employees pay an additional surcharge of 1%-1.5%.

Public Holidays in Australia: Australia observes the same statutory holidays as much of the West, including New Year’s Day, Good Friday, and Christmas Day. Unique public holidays in Australia include Australia Day (26 January), and Anzac Day (25 April). 

Unique Challenges of Australian Payroll

Australia’s tax landscape is characterised by fairly constant regulatory evolution: new and unique measures are introduced or moderated, on a regular basis, and businesses must be on their toes to ensure a satisfactory compliance performance. Some of the most significant, unique regulatory considerations for the Australian payroll landscape are:

Single Touch Payroll: Introduced 1 July 2018, Australia’s Single Touch Payroll (STP) streamlined the payroll reporting process. Essentially, STP is a mechanism to report PAYG and other essential pay information, such as gross earnings and superannuation, to the ATO in ‘real time’ - in other words, every time there is a payroll ‘event’ rather than on a monthly or quarterly basis. The mechanism itself is implemented via payroll software – which means businesses must check with their provider that their system is compliant. STP will be mandatory for all businesses by 1 July 2019.

Employee Share Schemes: Australian employers who offer their employees access to Employee Share Schemes (ESS), have certain reporting obligations at the end of the tax year. Unlike regular income, ESS are never subject to PAYG withholding - thanks to the accuracy issues that can arise when dealing with shares - and employees are liable for tax due when lodging personal income tax returns. The ATO has issued guidelines for employers to report the taxable value of their ESS through annual reports and statements. Employers should ensure their employees understand their own tax obligations as part of the ESS reporting process, too.

Labour Laws: Australia has quite a generous climate when it comes to workplace laws and protections for workers. Employees are covered by the National Employment Standards (as governed by Fairwork Australia), and may be working under an Industry Award, or Enterprise Bargaining Agreement (EBA). Additionally, every employer in Australia is required to implement Workers Compensation Insurance to provide financial coverage in the event of workplace accidents and injuries - this obligation extends to every Australian state (or territory) where they are hiring employees.

Statutory leave laws are similarly generous: full and part-time workers receive 4 weeks of paid leave per year, plus 10 days paid sick leave. In addition to the leave offered by their employers, new parents may receive up to 18 weeks’ leave paid by the Australian government (at minimum wage). Parents may also take 12 months of unpaid leave, and even request an additional 12 months on top of that.

Employee Demographics: Australian society is amongst the most diverse in the world, and this characteristic is reflected in its business community. Australian businesses experience a high degree of global mobility, with workers arriving from locations in every part of the world. That trend is set to continue: 89% of large Australian employers expect a continuing increase in global mobility over the coming years. With that in mind, your payroll solution in Australia should account for a potentially higher number of international workers - and accommodate the relevant compliance standards.

Logistics: While payroll is primarily an admin and tech-focused process, don’t forget the practical considerations of doing business in Australia. Covering three time zones and spanning 7.692 million km², Australia is a vast geographic territory, home to some of the most challenging and inhospitable terrain on the planet. While this may not be immediately relevant to payroll, it might be necessary to factor in the logistical challenges of distance and accessibility when developing your solution for payroll in Australia.

Recent Developments: Australia’s 2018 Federal Budget came on the back of positive economic forecasts, prompting the government to make several tax changes - with obvious consequences for Australian payroll departments. The most significant changes from the 2018 budget include:

  • A new ‘Low and Middle Income’ tax offset worth up to $975 a year.
  • Tax bracket simplification through an extension of the 32.5% tax rate for wages between $41,000 and $200,000.
  • A 3.5% increase in minimum wage to $719.20 per week or $18.30 per hour.
  • A lower threshold of $42,000 for Higher Education Loan repayments.

An Evolving Landscape

Delivering payroll in Australia means managing the administrative challenges of a state and federal system, and keeping on top of an evolving regulatory landscape. Practically, your Australian payroll system must be nimble, adaptable to change, and staffed with employees with the skills and flexibility to deliver in that context.

activpayroll holds extensive experience in Australian payroll, and offer clients a range of payroll services - from high-level analytic tools to specialised regulatory knowledge. Our specialists work to develop bespoke payroll solutions in Australia: helping to boost clients’ compliance performance, ease their administrative burden, and take advantage of the business opportunities that await. If you’re expanding, or planning to expand in Australia, our payroll services represent not just cost-saving efficiency and regulatory know-how, but the peace of mind that your global employees will be paid accurately and on time - and continue to deliver at the level you expect. 

Begin your Australian payroll journey today: browse activpayroll’s dedicated Global Insight Guide to Australia for more essential tax and payroll information.