Payroll in Australia - Taxation Structure, Payroll Components

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Payroll in Australia - Taxation Structure, Payroll Components

The Australian economy is not just about mineral or metal mining, or agriculture and cattle rearing. It is much more diverse than it was a couple of decades ago. Today, Australia is one of the largest economies in the APAC region and the world in general, with a GDP of over 1.6 trillion AUD. The country has witnessed a steadfast annual growth rate of around 3.3% since the early 1990s. Other than mining and manufacturing industries, Australia’s service sectors including telecommunications, tourism, finance, and logistics, among others contribute significantly to the economy.

Laying the foundation

A company wishing to employ people in Australia is required to have a legal presence in the country. There are currently several (tax) remitting and withholding requirements for companies looking to establish themselves in Australia. This entails registering with the Australian Taxation Office (ATO), and depending on the salary levels as well as the location, an entity will be required to register with one or more tax offices. The majority of the form filling and registration process for a new company in Australia can be done via ATO and State Revenue Office registrations facility available online. As a company that reimburses employees/contractors, you are required to withhold tax and send it to the ATO at regular intervals which is known as Pay As You Go (PAYG) withholding.

Income tax in Australia

 Australian Securities and Investment Commission (AISC) is the regulatory body in Australia which takes care of the formation and administration of companies. Companies who plan to establish in Australia have to obtain an Australian Business Number (ABN) as well as a Tax File Number (TFN) from the ATO to be able to operate and onboard employees. In Australia, the standard taxation year runs from July 1 to June 30. All tax rates are prescribed by the ATO and PAYG withholding is done as per these prescribed rates. However, withholding rates may vary basis the factors like an employee’s citizenship, age, Medicare levy exemption, etc.  Further, employees can claim rebates while withholding is done by employers.  One of the most common rebates that employee’s claim is on their Study and training support loans (STSL) debts with the ATO. On claiming these rebates, they can save on taxes in every pay period.

If a business happens to be a substantially large taxpayer, then it is required by law to pay its taxes within 7 to 8 days (depending on payroll processing day) of withholding from its employees. The employer must report any withheld amounts in the PAYG tax withheld section of their business activity statement (BAS), and pay all withheld amounts to ATO. The due date to lodge and pay your monthly BAS is the twenty-first day of the following month. In the case of an FTL (failure to lodge) of the PAYG tax on time, a penalty notice is automatically issued to the company in question. The FTL penalty depends on the size of the organization. Generally, one penalty unit of AUD 210 is applied for small entities; penalty unit is multiplied by two for medium-sized enterprises and a whopping multiplier of five penalty units is applied for large entities. A compound interest charge is applicable to all the tax penalties imposed based on interest.

Social Security in Australia

Employers are required to pay minimum super guarantee at the rate of 9.5% of employees’ ordinary time earnings (OTE) to the authorities concerned on the twenty-eighth day of the month following the end of the quarter. It is important to note that super guarantee charges are imposed on the employer for any shortfall in super guarantee contributions.

Employees in Australia also have the right to choose to make a salary sacrifice so that it can be funneled into their pension funds. Also, such salary sacrifice qualifies for employers’ obligation of minimum super. In employees’ hands, the deduction is available for super contributions so it is quite a tax-efficient means of saving. But the amount that can be paid as super for less tax is subject to a contribution limit.

Effective July 1, 2017, the maximum amount of concessional contributions that can be claimed during a financial year is AUD 25,000 annually, irrespective of age. An employee whose total contribution within a single year exceeds the contribution limit may be subject to some additional taxation on the exceeding of the contribution limit.

Australian payroll components

Australia’s taxation structure is characterized by constant regulatory changes. Among the most important and unique regulatory considerations are -

  • Employee Stock Ownership Plans: Australian employers who offer their employees access to Employee Stock Ownership Plans (also known as Employee Share Schemes) are required to comply with specific reporting requirements at the end of the tax year. ATO has issued guidelines for employers to inform them of the taxable value of their Employee Share Schemes (ESS) by submitting all annual reports and statements. Lodgments for ESS annual report are only accepted electronically from the tax year 2015-16 onwards. Reports are due by 14 August each year. Employers are also required to ensure that their employees understand their tax obligations as part of the ESS reporting process.
  • Labor Legislation: It is mandatory for all Australian employers to have appropriate workplace accident insurance in place so that they can provide suitable financial coverage in the event of an accident or injury occurring at their place of work. This obligation extends to all states and territories that a business operates for which they recruit employees.
  • Leave Laws: Full-time and part-time workers receive four weeks of paid vacation every year, in addition to 10 days of paid sick leave. New parents in Australia are eligible to receive up to 18 weeks of paid leave (at the minimum wage) from the Australian government. Parents can also take 12 months of unpaid leave and even ask their employers for 12 months more. The employer needs to withhold tax from payments of unused annual leave on termination of employment. An employee also gets long service leave after working for a specified period with the same employer. Most employees’ entitlement to long service leave is based on long service leave laws in each state or territory. The employer needs to withhold tax while paying for unused annual leave balance, long service leave pay at the termination of an employee.
  • Single Touch Payroll: In a bid to simplify corporate reporting requirements, the Australian Government recently brought into legislation the Single Touch Payroll (STP) system. STP is essentially a mechanism of relaying essential wage information to the Australian Tax Office. The mechanism itself is implemented via payroll software, which means companies operating in Australia are required to ensure that their solutions are compliant with relevant regulations. The information you need to send to the ATO includes your employees' salaries and wages, allowances, deductions (for example, workplace giving) and other payments, PAYG withholding and superannuation. This is mandatory for all employers from the financial year 2019-20.

Seeking payroll solutions

Australia has one of the most diverse populations in the world and this wonderfully reflects in the workspaces of the country. Australia was ranked 18th in the World Bank's Ease of Doing Business Survey for the year 2019 and it was ranked 7th by the World Bank in terms of the Ease of Starting a New Business. All this points to the fact Australia is vested in developing new ventures in their nation. That also means many businesses and many compliance-related work.

With this in mind, every Australian employer should consider a payroll solution that takes into account the corresponding compliance standards. Ramco's Global Payroll solutions help in managing payroll compliance matters including record keeping/time collection, leave payouts, calculation of super guarantee contributions, tax withholding, garnishee order processing and pay event reporting & year-end reporting through STP. Ramco’s multi-country payroll platform is all-encompassing, it facilitates the seamless management of tasks such as payslip distribution, banking file lodgments, general ledger interface and a lot more.