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Employment Taxes

Employment taxes exist within both state and federal jurisdictions. Whilst certainty of treatment is important to taxpayers, various complex issues arise. These start at the threshold issue of classifying a relationship as being with an employee or independent contractor, and flow through to specific issues such as defining a ‘commercial car park’ for Fringe Benefits Tax purposes.

Some key employment taxes and issues are outlined on this page. 

Employee or independent contractors?

It is important to determine whether the relationship between two parties is an employment or contractor relationship. Employers must make superannuation contributions to employees, withhold under the PAYG system, and may be liable for taxes such as Fringe Benefits Tax (FBT) or payroll tax. Principals in a contract may not have the same obligations, but contractors they engage generally charge GST on services provided.

Payroll Tax

See our State Taxes guide here.

PAYG Withholding

Employers (and in some contractual relationships, principals) are generally required to withhold tax in order to ensure payees can meet their end of year tax liabilities. This is done by collecting pay as you go (PAYG) withholding amounts from payments made to employees, contractors and businesses that don’t provide an ABN. The money withheld is remitted to the ATO on the workers behalf.

Why is withholding required?

The purpose for PAYG withholding is to avoid workers having to pay a large lump sum when the ATO confirms the amount of tax payable for the income year. This is because the money has already been deducted from the worker’s pay and sent to the ATO throughout the year. The administrative costs associated with collecting taxes is reduced through the PAYG withholding system. 

If a business violates PAYG requirements, the company and its directors may face a penalty up to the amount which should have been withheld or paid - more information on penalties is provided here.

Who needs to withhold?

The distinction between whether a worker is an employee or contractor will often determine whether there is a requirement to withhold:

  • employees – employers are required to withhold
  • contractors – contractors are responsible to make their own payments to the ATO.

The ATO has a decision tool to help employers determine whether a worker is an employee or independent contractor for tax purposes. The tool can be accessed here.

Tax refunds and Tax bills

The amount of money withheld under PAYG will often differ on the amount actually owed. If the ATO withholds too much money under the PAYG system, they will provide the worker with a tax refund. Alternatively, if they do not withhold enough money, the taxpayer will be required to pay an additional tax bill.

PAYG withholding may also account for other debts such as:

  • HELP;
  • Trade Support Loan; or
  • Financial Supplement Debt.

Do I need to register?

You are obliged to register for PAYG withholding if you:

  • have employees;
  • pay your directors;
  • have contractors and voluntarily agree to withhold PAYG payments from them; or
  • make payments to businesses that do not have an ABN.

You do not need to pay PAYG withholding for employees under the age of 18 if you pay them less than:

  • $350/week;
  • $700/fortnight; or
  • $1,517 per month.

You must be registered for PAYG before you deduct amounts from a worker’s payment.

Fringe Benefits Tax

A fringe benefit is a benefit an employee receives from their employer, in addition to wage or salary or in return for foregoing some salary under a salary sacrifice arrangement. The benefit can be provided to an employee or their associates (generally the employee’s spouse and/or children). The tax also extends to benefits provided to prospective and former employees in connection with their employment.

Some common types of fringe benefits include:

  • a company car made available to an employee for private use
  • reimbursement of employee for expenses they incur or payment to third party for expenses incurred by employee
  • providing an employee with the right to use accommodation and that accommodation is the usual place of residence of the employee
  • providing an employee with a living away from home allowance
  • providing an employee with car parking at or near their place of employment.


Why offer employees fringe benefits?

Fringe benefits can help employers attract, retain and motivate employees. Provision of ‘perks’ assists employers in obtaining an edge in competitive job markets. Often fringe benefits are offered through salary sacrifice as part of a packaging arrangement. This might push an employee into a lower tax bracket.

Who is liable to pay the Fringe Benefit Tax?

Employers (including state and federal government departments) are liable to pay Fringe Benefit Tax (FBT) on the fringe benefits they provide. Employers can often claim deductions for the cost of providing fringe benefits and the amount of FBT paid.

Employers who are exempt from FBT

  • international organisations who are exempted from income tax and other taxes
  • foreign governments
  • religious institutions where benefits are provided to the religious practitioner’s spouse or child of the religious practitioner and the benefit is not provided in respect of the duties of the religious practitioner other than:
    • any pastoral duties
    • any other duties or activities that are directly related to the practice, study, teaching or prorogation for religious beliefs.
  • public benevolent institutions
  • public and non-profit hospitals
  • employers of certain live-in residential care workers.

How is FBT calculated?

The FBT year is from 1 April to 31 March, and the ATO generally requires lodgement by 21 May.

The FBT rate for the years ending 31 March 2018 to 31 March 2022 is 47 per cent, calculated as follows:

Amount payable = taxable value of benefit x gross up factor x 47 per cent (FBT rate)

Taxable value of benefit: the rules for calculating the taxable value of a fringe benefit vary according to the type of benefit (the ATO publish a list of benefit types).

Gross up factor: there are two types of gross up factor:

The applicable gross up rate depends on whether the benefit provider is entitled to GST credits. An employer will be entitled to a GST credit if the benefit is provided in the course of the business and most benefits will be considered to be Type 1 benefits.

Example

Curb Pty Ltd employs Larry. Curb provides a car benefit to Larry with a taxable value of $10,000.

The car benefit is taxed as follows:

Taxable value

x Gross up rate

$10,000

2.0802 (because a car benefit is Type 1)

= grossed up taxable value          $20,802

x FBT Rate

FBT Payable

47 per cent

$9,776.94

Record keeping

It is very important that employers keep accurate records on the amount of fringe benefits they have provided to their employees or risk being liable to penalties. Records must be kept for at least five years.

Superannuation

Employers are required to pay a certain amount of money to their employees to help them save for their retirement. As of September 2021 the total superannuation assets in Australia is worth $3.4 trillion

How much superannuation must be paid?

Employers are required to contribute to an employee’s superannuation fund a minimum amount of money known as the superannuation guarantee.

Since 1 July 2021, the superannuation guarantee rate is 10 per cent, however this is due to increase in the coming years.

Employers are required to pay their employee’s superannuation contributions at least on a quarterly basis.

Note: Awards that an employee is covered under may set out different dates on when superannuation contributions must be paid.

Superannuation guarantee threshold

From 1 July 2022, there will no longer be a $450 minimum superannuation guarantee threshold. This means employers are required to make superannuation contributions for an employee regardless of how much money they have earned.

What are the consequences of failing to make appropriate superannuation contributions?

The ATO takes any missed or underpaid super amounts by an employer very seriously.

An employer who has failed to pay the correct amount of superannuation for its employees will be liable for the superannuation guarantee charge (SGC).

The SGC is made up of the following payments:

  • the super guarantee shortfall
  • nominal interest of 10 per cent per annum
  • $20 administration fee per employee, per quarter.

The ATO has the powers to take stronger actions against employers who repeatedly do not pay the correct amount of superannuation or make it difficult for the ATO to determine an employer’s SGC liability. Some of the penalties involved in this situation can include:

  • garnishee notice
  • fines
  • imprisonment
  • administrative penalty
  • director penalty notice
  • direction to pay SGC
  • direction to complete Superannuation Guarantee education course.

Do contractors need to be paid superannuation?

In some cases, principals will need to make superannuation contributions to independent contractors.

Examples where superannuation contributions will need to be paid for independent contractors include if:

  • they are being paid under a contract (written or oral) that is wholly or principally for their personal skills and labour
  • they are required to perform the work themselves (work cannot be delegated to someone else)
  • they are not being paid to achieve a result i.e., they are not being paid for their time.

A failure to pay superannuation contributions to an independent contractor who is entitled to it can result in the same penalties as discussed above.

The ATO has a superannuation guarantee eligibility decision tool which can be used to help determine whether certain workers are entitled to superannuation. The tool can be accessed here.

How we can assist you

How we can assist you

Our tax team can assist you in obtaining certainty by providing advice to navigate complex employment tax issues, and where relevant, assisting with engagements with state revenue authorities and the ATO.

We can assist with:

  • advice on the employee/contractor distinction under all State and Federal taxes
  • advise on potential employment related tax risks, liabilities and exposures
  • advise on ‘dispute readiness’ including review of documentation
  • rulings and other advisory products
  • voluntary disclosures
  • managing reviews and audits
  • objections
  • assistance in alternative dispute resolution
  • court proceedings
  • responding to, and taking protective action in respect of, director penalty notices and garnishee notices
  • penalty mitigation