Employment taxes update

Employment taxes and superannuation have been the subject of a raft of changes over the last few weeks, on both a State and Federal level.

To ensure that your business is up to date on the latest changes, we summarise the following key topics in this edition:

  1. WA payroll tax cut – modest saving around the corner for employers
  2. Resurrection of the Superannuation Guarantee amnesty
  3. Salary sacrificed super – integrity measures passed
  4. PAYG withholding and reporting – reminder about denial of tax deductions
  5. Director penalties regime – expansion to GST
  6. Superannuation Guarantee opt out rules
  7. Redundancy and early retirement payments – concessional tax treatment extended for over 65s

1. WA payroll tax cut – modest saving around the corner for employers

In a move to stimulate the Western Australian economy and create more jobs, last week the McGowan Labor Government announced new payroll tax measures to increase the payroll tax exemption threshold over the next two years to $1 million, as follows:

It is anticipated that raising the payroll tax threshold to $1 million will result in 1,000 businesses in WA no longer being liable for payroll tax and a further 11,000 businesses (making up around 70% of businesses in WA) receiving a payroll tax cut.

The increased payroll tax threshold will provide a modest tax cut for employers each year. For example, employers with a taxable payroll of $1 million are expected to save just over $9,000 in 2021, while employers with a taxable payroll of $3 million are expected to save nearly $6,500 in payroll tax.

The rate of payroll tax remains unchanged (being a tiered rate of between 5.5% to 6.5% depending on the relevant amount of Australian taxable wages).

2. Resurrection of the Superannuation Guarantee amnesty

The Federal Government has reintroduced the Superannuation Guarantee (SG) amnesty rules into Parliament. The previous bill lapsed on 1 July 2019, following the election of the Morrison Government.

If passed, the proposed law will provide a once-off amnesty for employers to voluntarily disclose past SG non-compliance and pay employees’ full super entitlements. The amnesty period will run for six months from the date the legislation receives Royal Assent.

In summary, the SG amnesty encourages employers to correct previous non-compliance by:

  • Allowing employers to make tax deductible SG catch up payments for the period commencing on 1 July 1992 to the quarter ending 31 March 2018. The amnesty does not apply to SG shortfalls relating to the period on or after 1 April 2018.
    • Under the current law, superannuation contributions are only deductible when paid and are due 28 days after the end of the quarter. Late payments incur the SG charge and contributions offsetting the SG charge are not deductible.
  • The administration fee ($20 per employee, per quarter) is waived where employers self-correct SG shortfalls within the amnesty period.
  • Penalties and general interest charge for failing to provide a SG statement (which can be up to 200 percent of the SG charge) are waived.
    • Importantly, if an employer fails to disclose an SG shortfall to the Commissioner, he will not be able to remit penalties below 100 percent of the amount of SG charge payable, outside the amnesty period.
    • This ensures that higher penalties will be imposed for employers who do not make voluntary disclosures regarding SG non-compliance during the amnesty period.

Importantly, the employer must pay the SG shortfall to the Commissioner during the amnesty in order for the protections afforded under the amnesty to be available. The amnesty disclosure must also be a first time disclosure, i.e. the SG shortfall that has not previously been assessed or be under examination by the ATO (e.g. existing audit activity).

The takeaway: As and when the law is passed, employers must act quickly to ensure they meet the six month disclosure period in order to be covered under the amnesty.

3. Salary sacrificed super contributions – integrity measures passed

Under the current law, where an employee salary sacrifices their future salary and wages into superannuation, the salary sacrificed amounts count toward the employer’s mandated minimum SG contributions. Further, employers have the benefit of calculating their SG obligations on a lower post salary sacrifice earnings base. This can result in the employee receiving less SG contributions from their employer.

Integrity measures were recently passed on 28 October 2019 which ensure that an employee’s salary sacrificed super contributions cannot reduce an employer’s SG charge. Employers are required to make SG contributions at the current rate of 9.5% on the employee’s pre-salary sacrificed salary earnings base (up to the maximum contribution base). These measures have effect from 1 July 2020.

The takeaway: Ensure that payroll processes and employment contracts are updated to correctly reflect employers’ SG contribution requirements to avoid any future SG shortfall exposure.

4. PAYG withholding and reporting – reminder about denial of tax deductions

Although not new law – the bill was passed in November 2018 – now is a timely reminder that from 1 July 2019, employers can only claim deductions for payments made to workers (employees or contractors) where:

  • pay as you go (PAYG) withholding tax has been withheld from the payment; and
  • the amount has been reported to the ATO.

Any payments made to a worker on which tax has not been withheld or reported to the ATO are ‘non-compliant payments’ and are not tax deductible. Penalties and interest may still be imposed for failure to withhold PAYG.

The takeaway: to ensure that payments to workers are deductible, it is critical that workers are correctly classified as either employees (and subject to PAYG withholding) or independent contractors. There are specific common law tests which must be applied to determine this.

Where an employer mistakes an employee for a contractor and failed to withhold or report a payment, the payment is still deductible if:

  • the employer obtained an invoice that quoted the contractor’s ABN; and
  • there were no reasonable grounds to believe that the ABN is not correct or not the contractor’s ABN.

The takeaway: employers must ensure that their reporting obligations are being met on a timely basis. This includes:

  • correct procedures are in place for identifying contractors and checking ABNs;
  • lodgement and payment of Business Activity Statements on time;
  • Single Touch Payroll reporting for each STP pay event on time; and
  • ensuring PAYG withholding amounts are withheld before payments are made to workers.

5. Director penalties regime – expansion to GST

Currently, the director penalty regime applies to PAYG withholding and superannuation guarantee charge (SGC) payment obligations. Where an employer fails to comply with their payment obligations, directors are personally liable for these liabilities.

Proposed law is before the Parliament to expand the director penalty regime to GST, Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) obligations. Under the proposed changes:

  • It is expected that from 1 January 2020, directors will have an obligation at the end of the relevant tax period to ensure that payment of their GST liability for the period is paid to the ATO by the due date (for example, 28 days after the end of the quarter for GST);
  • a director will then become liable for the assessed net amount or GST instalment on the payment due date;
  • as GST liabilities are self-assessed, the proposed rules also provide the Commissioner with an additional power to make an estimate of GST liability (including LCT and WET) where a GST return has not been lodged by the due date. The estimate amount is deemed to arise and be payable on the day the entity was required to lodge its GST return. This ensures that taxpayers cannot avoid the director penalty regime by non-lodgement of its GST obligations;
  • after the lodgement due date, the Commissioner can issue a Director Penalty Notice for the unpaid amount. The penalty will be equal to the unpaid liability;
  • the director then has 21 days from the issue of the DPN to pay the liability. A director penalty may be remitted where the outstanding liability is paid in full within 21 days of the issue of the DPN.

The takeaway: it is critical that BAS lodgements are made on time and payments made by the due date. If you are a business that is struggling to meet reporting deadlines, seek assistance from a tax adviser to liaise with the ATO to avoid imposition of director penalties.

Individuals taking on directorship roles must do their homework and understand the tax compliance history of the business, or risk personal exposure to tax and employee liabilities.

6. Superannuation guarantee opt out rules

New law has been introduced impacting eligible individuals with multiple employers.

From 1 January 2020, these individuals can apply to opt-out of receiving SG from some of their employers where they have multiple employers and will exceed the $25,000 concessional contributions cap for the financial year. This change aims to reduce the number of people inadvertently exceeding the cap. Contributions over the cap are taxed at the individual’s marginal rate, rather than the concessional 15% tax rate paid by the super fund.

In order to qualify for the opt-out rules:

  • the individual must have multiple employers;
  • the individual’s income for SG purposes is expected to exceed $263,156 per financial year (i.e. employer contributions would exceed the $25,000 annual cap);
  • the individuals must submit their application to the ATO 60 days before the start of the quarter that the exemption will apply to;
  • a new application must be made for each financial year. If approved, the individual and their exempted employers will receive a copy of the exemption certificate from the ATO;
  • individuals must still receive SG contributions from at least one employer;
  • where an individual opts out of receiving SG, there is no requirement for the employer to pay the opted-out amount as wages.

As the quarter commencing 1 January 2020 is the first quarter that these rules are taking effect, the ATO has provided an extension to lodge the opt-out form to 18 November 2019.

The takeaway: employees choosing to opt-out of SG contributions should review their current employment contracts to ensure they are not disadvantaged by not receiving the reduced SG amount as an increase in their salary and wages.

7. Redundancy and early retirement scheme payments – concessional tax treatment extended for over 65s

New law was passed on 28 October 2019 to increase the concessional tax treatment of genuine redundancy and early retirement scheme payments provided to employees over the age of 65.

Prior to the change in law, payments in relation to an employee’s redundancy or retirement were only eligible to be concessionally taxed where the employee was under 65 at the time of their dismissal or retirement. Payments made to employees over the age of 65 were treated as ordinary ETPs and were not eligible to access the tax-free component.

From 1 July 2019, employees between the age of 65 and pension age (ranging from 65 years and six months to 67 years) can now access tax concessions which treat part of the genuine redundancy or early retirement scheme payment to be tax-free.

The tax-free component of the payment depends on the number of years of service of the employee. The amount in excess of the tax-free component is separately taxed under the Employment Termination Payment (ETP) rules. Different tax rates are applied depending on the amount and type of the payment and the age of the employee.

Next steps

For those interested in discussing the above changes in more detail and as well as any potential impact on you, please contact your Cooper Partners client engagement team.