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Businesses in the tourism and hospitality sector operate on razor-thin profit margins, are subject to seasonal variations, and require a high workforce in a fiercely competitive market. Add in wage inflation and a tax on wages paid above a $1m threshold and it's easy for a growing business to get caught out.
To explore the topic, lets start with the basics.
What is payroll tax and how is it calculated?
Payroll tax is a state-based tax assessed on the wages paid or payable by an employer to its employees. Payroll tax is payable in Western Australia when an employer’s (or group of employers) total Australian taxable wages exceed WA’s threshold amount of $1m per year.
Payroll tax is calculated by applying a 5.5% tax rate to any taxable wages above the $1m threshold amount. The threshold amount diminishes as your total wages increase and completely disappears once your taxable wages reach $7.5m . The definition of taxable wages for payroll tax purposes is very broadly defined as any payment provided to an employee in return for services provided to their employer.
The only silver lining to being taxed for employing people is that payroll tax is tax deductible for income tax purposes.
What is wage inflation and how does it affect payroll tax?
Wage inflation is the increase in the average level of wages over time. According to the Australian Bureau of Statistics Wage Price Index, wages grew by 4.1% from 2023 to 2024.
Wage inflation can be caused by various factors, such as supply and demand of labour, minimum wage changes, award rates, enterprise agreements and individual contracts. A perfect example is the 1 July 2024 increase in the compulsory Superannuation Guarantee (SG) rate from 11% to 11.5%.
What are the risks to tourism businesses?
We are noticing an increase in tourism and hospitality businesses surpassing the $1m threshold, either due to business growth or the impact of inflation. Business operators should be mindful of payroll tax and when they might surpass the threshold. Registration is necessary once your monthly taxable wages first exceed $83,333. Australia's different state and federal jurisdictions have excellent data-sharing and matching capabilities. It is much better to be proactive rather than having to deal with an audit.
What can tourism and hospitality businesses do to manage their payroll tax liability?
Tourism and hospitality businesses are among the sectors that are most affected by wage inflation, due to the high labour intensity and the competitive nature of the industry. To manage your payroll tax liability:
- Seek professional advice and review your annual wages data to see how close you are to the annual threshold amount of $1m. Review and see if there are issues in any prior financial years.
- Be aware of the grouping provisions. You may have different businesses grouped by common control/ownership or common employees. If grouping does apply you will only get one annual threshold amount for the grouped employer. You can apply for exclusions under specific circumstances.
- Be aware that payments to subcontractors could be included in the definition of taxable wages. Each individual contracting arrangement will need to be assessed on its own merits.
- Be aware of any possible exemptions such as payments to apprentices or workers compensation payments and factor them into your calculations.
- Monitor your annual taxable wages and forecast the payroll tax liability throughout the year, to avoid any surprises or penalties at the end of the financial year.
- Remember that if payroll tax applies, your gross wages cost has increased by 5.5%. This reduces your profitability and cashflow, so you need to update your budgets and business planning assumptions.
For more information
If you would like more information on how wage inflation could affect the potential payroll tax for your tourism business, please reach out to your local RSM adviser today!
