If you’re reading this, it probably means that you, or somebody close to you, is…
Are you paying payroll tax when you don’t need to?
Congratulations. If you’re reading this your business has hit – or will be close to hitting – the payroll tax threshold.
Now, I know you’re not going to be over the moon about leaking even more tax out of your small business, but if you are paying $650,000 in wages (Victorian rates effective 1 July 2018 – the 1 Jul 2017 limit was $625,000) then you have successfully grown your small business to a substantial size.
If you’re new to payroll tax the State Revenue Office website is (perhaps surprisingly) very helpful. Click here for the link.
Beware contractors
Before I let you in on some strategies to minimise payroll tax I want to warn you about a strategy that doesn’t work.
One common way employers will try to reduce their costs of employment is by using contractors in place of employees. However, this strategy often fails. I won’t go into details here but the laws about super, workcover and payroll tax can all deem a contractor to be a “worker” or “employee”.
How to avoid payroll tax in Victoria
My number one tip to limit payroll tax is to structure the payment of the owners’ share of profit as a dividend, not as wages.
Let me explain.
Your company’s money is not exactly your money. If you take money from the company this needs to happen in one of three ways:
- Wages/director’s fees
- Dividends
- Loan (which the ATO requires to be paid back at a mandated interest rate)
Only the first of these options would count towards the payroll tax threshold.
Let me give you a case study to flesh this out. Widget Makers Pty Ltd had the following wages for the 2017 financial year:
Directors wages: $320,000
Other staff: $394,000
Total: $714,000
The two directors received wages of $160,000. The real value of their roles in the company was $110,000 each. The remaining $50,000 was their share of the profit paid as a wage.
Payroll tax:
Total wages: $714,000
Less tax free threshold: $625,000 (2016-17)
Taxable wages: $ 89,000
Payroll tax rate 4.85% : $4,316.50
Let’s say the company paid the $50,000 as a dividend instead:
Total wages: $614,000
Payroll tax: $0 (under the threshold)
Note: there is a much bigger saving to you as the company director but that’s another story (see link)).
Salary packaging a car to reduce payroll tax
Generally, salary packaging fringe benefits or super contributions doesn’t help with payroll tax. The definition of wages in the Payroll Tax Act (Vic) 2007 includes super contributions and fringe benefits.
However, any fringe benefit that has special treatment in the federal fringe benefits tax (FBT) act reduces a company’s fringe benefits and therefore its payroll tax liability.
If an employee salary packages a car they can make an “employee contribution” to offset the FBT. To cut a long story short, an employee packaging a car worth $35,000 would take $5,500 out of your taxable wages and save 4.85% x $5,500 = $266.75 in the payroll tax.
Not a fortune, but worth offering. Your employee (or perhaps you as the director) can save thousands using either a novated lease or associate lease so it’s a win-win.
Help with payroll issues
You know that payroll can be a headache – award rates, super, workcover, payroll tax: there are so many ways to get it wrong.
We are here to help – anything from FBT returns and end of year checks on payment summaries right up to taking over your company’s whole payroll function or even acting as your internal accountant.
The right knowledge can keep your company safe from accidentally breaching the law as well as saving you and your company thousands in overpaid tax.
If you would like to discuss how we can assist you please give us a call.
Disclaimer: This article uses a hypothetical example that may not apply to your situation. It is not intended to be personal tax advice and should not be treated that way. If you need advice on your own situation please get in touch and we can discuss being appointed as your accountant and tax adviser.