Small business advocates are throwing their support behind scrapping payroll tax across Australia and replacing it with an increase in GST.
The renewed calls for changes come after the Victorian government announced fresh reforms to payroll tax, including a 0.5% levy for medium-sized businesses that will help pay for a new $3.8 billion overhaul of the state’s mental health services.
But small business advocates agree payroll tax is a burden on businesses which can discourage employers from hiring new staff and create compliance costs for businesses operating across multiple states.
Peter Strong, chief executive of the Council of Small Business Organisations Australia, supports replacing payroll tax with an expanded GST if it could help businesses grow.
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“Getting rid of payroll tax is logical, it’s a tax on employment,” Strong tells SmartCompany.
“There are businesses around the threshold who refuse to employ anybody else because it costs them money to grow,” he says.
As part of the state budget, Victorian Treasurer Tim Pallas announced a mental health levy of 0.5% for medium-sized businesses with an annual payroll of $10 million, and 1% for firms with payrolls above $100 million.
For all small businesses in Victoria, the payroll tax-free threshold will increase to $700,000, and regional businesses will pay a reduced rate of 1.2%.
Payroll tax is the largest state-levied tax, providing states and territories with about $25.8 billion in annual revenue.
Strong says the only way to remove payroll tax is to replace it with an increase in GST.
“It’s true that state governments need payroll tax because they can’t survive without it,” he says.
“The only way to fix it is GST, and that means we have to have a proper tax summit, because GST is a whole-community issue.”
A recent report by PwC offered two solutions to improve the system: remove thresholds and exemptions and lower the rates or replace payroll tax with an expanded GST.
The first option involves taxing all businesses, regardless of size, a single national rate of 3.64% for payroll tax.
The alternative option is to switch from payroll tax to GST by increasing the GST rate to 12.5% for all goods and services that currently fall within the tax.
Additionally, goods and services that are currently exempt, such as food, childcare, education, health, and water services would be taxed at 5%. At the national level, these changes would generate $25 billion annually.
Elinor Kasapidis, senior manager of tax policy at CPA Australia says PwC’s proposal to expand GST to reduce state taxes “has merit”.
“Payroll tax is a cost of employment and each time the government increases it, it costs more to keep people in a job,” Kasapidis tells SmartCompany.
CPA Australia supports consideration of broadening the goods and services captured by GST as well as increasing the rate.
“But for it to pay off for Australians, it needs to also result in the removal of or reduction in inefficient state-based taxes, levies, fees and charges.”