What Australian employers need to know about their payroll tax obligations

Australia’s employer obligations and industrial relations environment is one of the most challenging in the world. In our second Working in Australia – Payroll Compliance webinar, our experts discussed the compliance obligations organisations need to consider, including:

  • Remuneration compliance and obligations
  • Super compliance
  • Employment tax
  • Share schemes.

With employers currently facing several important compliance challenges as well as increased scrutiny from revenue authorities, it’s never been more important for Australian businesses to ensure their payroll compliance is right.

Pay Compliance - Awards and Enterprise Agreements

A clear focus on pay compliance is critical to help ensure that employees are paid at or above the minimum levels required. Impacting legal instruments range from employment contracts, the National Employment Standards under the Fair Work Act 2009, together with Modern Industry Awards and Enterprise Bargaining Agreements.

An organisation’s compliance with pay and payroll obligations has garnered increased attention in recent times for reasons including increased media focus on ‘wage theft’ and high-profile examples of underpayments, more considered compliance attention from the Fair Work Ombudsman as well as from unions, and employee’s improved understanding of their entitlements as a result.

Awards and EBA’s are often difficult to interpret and challenging to apply correctly. Be it dealing with core employee entitlements, setting the correct base pay rates and appropriate allowances, or understanding when and how penalty and overtime rates should be applied.

Common pitfalls that we see businesses encounter include:

  • Incorrect classification of employees, or misunderstanding on which Awards should apply to which employees
  • Poor rostering, record keeping and data management practices
  • Incorrect understanding and application of which penalty rates are relevant and when
  • Disregarding or mis-applying mandatory allowances.

In addition to compliance being a clear statutory obligation, there are other good reasons for organisations to focus on correct and compliant pay, including:

  • Maintaining current employees' satisfaction
  • Employee satisfaction and a compelling employee value proposition, for both current and potential future employees
  • Market reputation and customer perception
  • Potential significant effort and cost involved with fixing mistakes – including possible back-payments, interest, penalties, legal and accounting costs, lost opportunity cost, etc.

To gain a better understanding of whether you and your business are compliant, consider the following questions:

  • How well do you know your Industry Award(s)?
  • When was the last time you conducted a review?
  • How effectively do you record employee time and attendance information and convert it to pay?
  • Are you required to review and test your annualised salary employees?
  • How much overtime are you paying and when do overtime payments kick in?
  • Do you have processes in place to maintain compliance, and are these documented and regularly updated?
  • Who in your business is looking after pay compliance and do they have the support from the broader business?

Superannuation and other Employment Taxes

While it is encouraging to see employers proactively review their pay compliance obligations, if this results in back payments to employees, this remediation can lead to superannuation and other employment tax obligations. Employers should ensure these additional obligations (including but not limited to payroll tax and WorkCover) are considered, with the appropriate steps taken to ensure compliance across the broader employment tax landscape.

More generally from a superannuation perspective, employers should ensure they are budgeting for increases in the Superannuation Guarantee (SG) rate if they remunerate their employees on a base plus super basis, as there will be an additional cost to the employer each time there’s an increase in the SG rate.

The SG rate was 9% for many years and has gradually increased over time since its initial uplift to 9.25% from 1 July 2013, prompted by Treasury’s focus on ensuring sufficient retirement income for Australians. The most recent increase took effect on 1 July 2022, with the SG rate currently 10.5%. A further 0.5% increase will apply each year until the rate reaches 12% as of 1 July 2025.

Consistent with previous SG increases that have occurred, we are seeing many employers choosing to provide an uplift to employees’ total remuneration by the amount of the SG increase. This is particularly important given the impact on employees who are instead remunerated on a total employment cost basis, where the increases to the SG rate will lead to increased superannuation entitlement, but with a corresponding reduction to the employee’s take-home pay (all things being equal). Therefore, by providing an uplift to an employees’ total remuneration package, this will ensure the employee doesn't feel worse off - especially given today's inflationary environment.

These additional costs should be considered and budgeted for moving forward.

Annual Leave Loading

Annual leave loading is a contentious issue that has attracted a lot of attention and scrutiny from the Australian Taxation Office (ATO) in relation to the superannuation treatment. Unless annual leave loading is demonstrably referable to an employee’s notional loss of opportunity to work overtime, then superannuation obligations are expected to arise.

Given the introduction of Single Touch Payroll Phase 2 from 1 January 2022, employers are now required to report annual leave loading (amongst other things), hence there is more transparency and potentially greater scrutiny to be placed on an employer's superannuation compliance.

If you pay annual leave loading, care should be taken to ensure the appropriate SG treatment is applied to these payments.

Employee Share Scheme Reporting Obligations

Equity awards remain a highly effective remuneration tool for both early stage and well-established companies. Shares, options and performance rights, allow employers to align employee reward with shareholder returns, and drive behaviours which are beneficial for the entire company.

When properly structured, equity awards can provide tax effective returns to employees which further enhances their remuneration value.

Being a remuneration item, employers should not be surprised to hear that equity awards should be reported to the Australian Taxation Office so that the correct taxes can be paid by the employee. However, what might be surprising is that different reporting requirements apply to different types of equity awards. Given employer reporting will impact upon employee taxation, it is critical that employers get the equity reporting right.

The key questions that need to be asked by an employer who is providing equity to their employees are:

  • Is it reportable?
  • When is it reportable?
  • What is reportable?
  • What happens if it’s not done correctly and amendments are required?

Employee Share Scheme (‘ESS’) reporting is required for shares, stapled securities, stock options and performance rights.

ESS reporting can be required at the time of grant for equity awards which satisfy conditions for tax exemption, either the $1,000 exemption or the start-up concession. Reporting at grant is also required for shares without a real risk of forfeiture, and options without a real risk of forfeiture and without a disposal restriction. Where shares have real risk of forfeiture and options have real risk of forfeiture and/or disposal restrictions, reporting is typically deferred until a later time when those risks/restrictions cease to apply. However, reporting may instead be the time of disposal if this happens within 30 days of those restrictions ceasing to apply.

Typically, employers must report the market value of the equity awards at the relevant time, less any amount paid by the employee to acquire their equity awards. There are specific tax rules which set out how market value should be calculated for ESS reporting. The employer is required to report to both the employee and the ATO, and include other details such as the number of awards and type of scheme.

Due to the complexity of reporting equity awards, it is not uncommon that amendments to prior period ESS reporting is required. This could arise in cases of errors or because of previously reported equity awards having subsequently been forfeited. Once a trigger for amended reporting occurs, employers have 30 days to amend their ESS reporting, and this should be communicated to both the employee and the ATO.

How BDO can help in this area

Our Employment and Expatriation team has extensive experience in payroll compliance, the design and taxation of employee remuneration, incentive arrangements and employee share schemes.

Contact your local BDO adviser today to find out how we can help you manage the challenges of employment tax compliance.

Register now for the remaining sessions in our ‘Working in Australia’ webinar series, featuring expert panellists discussing the challenges and opportunities for companies to navigate when it comes to mobility, risk, and compliance.