Running payroll in Australia

Payroll reporting in Australia has been simplified through the introduction of the Single Touch Payroll system which enables payroll data submission in real-time. However, the system only works for withheld income tax, but not for the payroll tax which is levied by the different states and territories and which must be paid and declared separately.  

When setting up payroll in Australia, employers have to register for tax purposes both with the federal and state tax authorities. The competent authorities are the Australian Tax Office (ATO) and the respective Office of State Revenue. 

The ATO is responsible for collecting income tax withheld from employee wages and salaries and employers must register as a withholding agent for the Pay As You Go (PAYG) system before they start paying employees. The PAYG registration must be completed within 7 days. Registration procedures differ depending on whether the company has/needs an Australian Business Number (ABN). 

Registration with the local Office of State Revenue is necessary for payroll tax which is levied on employers by the states and territories. Employers exceeding the payroll tax thresholds set by the respective state/ territory have 7 days to register for payroll tax. Under certain circumstances, it may be necessary to register for payroll tax in more than one state/ territory.  

It is worth noting that there is no separate registration requirement for social security purposes. The only relevant social security scheme is the Superannuation Fund, but as it is up to the employee to choose their own provider, it is also their responsibility to set up their personal retirement savings scheme. However, employers are responsible for taking out workers’ compensation insurance. 

There is no formal requirement to set up a local bank account to issue payments to employees or authorities.

The social security system in Australia comprises a mandatory retirement savings scheme and a universal healthcare system which are funded by contributions made by employee and employer. Income tax rates differ for residents and non-residents. The latter are excluded from most available tax deductions. 

Tax considerations

Tax rates in Australia are progressive and range from 19% to 45% (for residents). Income up to AUD 18,200 is tax-free - for residents only. Non-residents pay income tax from their first dollar earned. The base tax rate for non-residents is 32.5%.

An employee’s taxable income includes salaries and wages, bonuses, allowances and commissions - excluding benefits in kind. There are special rules with regard to taxes on employment income derived from overseas activities and the deduction of superannuation contributions. Australian citizens and permanent residents can benefit from certain tax rebates (e.g. Low Income Tax Offset) and family tax benefits if they meet the necessary requirements. Certain employment expenses and charitable contributions are deductible, but personal expenses are not.

Different states and territories levy a payroll tax on employers. However, rates and thresholds differ between states and can go up to 6.85%. In New South Wales, for example, employers pay a 4.85% payroll tax on the share of their annual payroll amount exceeding AUD 1,200,000. In addition, employers pay fringe benefits tax (FBT) equal to 47% of the provided benefits - deductible from corporate income tax. This means that employees are not taxed for fringe benefits provided by their employer. 

Residents are taxed on their worldwide income, while non-residents are only subject to income tax on income sourced in Australia. Individuals are considered tax residents of Australia if they:

• Ordinarily reside in Australia

• Have their permanent home in Australia

• Spend more than 183 days during any given tax year in Australia

However, a new tax residency framework is on the horizon and is expected to enter into force in the near future. There also is an additional residency status which is that of a temporary tax resident, under which an individual is exempt from paying income tax in Australia on foreign-sourced income. 

* Tax bands and rates given are currently confirmed until June 2022, but may be valid for the 2022/2023 and 2023/2024 tax years.

Tax withholding and reporting 

Income tax on employee wages and salaries is assessed, withheld and remitted under the PAYG (Pay As You Go) system. The administering authority is the Australian Taxation Office (ATO). The remittance frequency depends on the total PAYG withholding amount of the company. Withheld income tax must be remitted:

• Within 6 to 8 days after the payment was issued to the employee - for large employers, i.e. those with an annual PAYG amount of over AUD 1 million

• By the 21st of the month following the pay period (i.e. monthly) - for medium-sized employers, i.e. those with an annual PAYG amount of between AUD 25,000 and AUD 1 million

• By the 28th of the month following the end of the respective quarter (i.e. quarterly) - for small employers, i.e. those with an annual PAYG amount of less than AUD 25,000
  

Large and medium employers are required to remit withheld income tax electronically. 

Tax reporting is streamlined via the Single Touch Payroll (STP) system which simplifies payroll reporting for employers by aligning it with their internal payroll processes. The STP reporting is due on the same day as the payment is issued to the employee. At the end of each tax year, employers must make a finalization declaration for the payroll data submitted via STP. The deadline is 14 July. Employers who do not make a finalization declaration or who have issued payments not reported through the STP have to lodge an annual payment summary report by 14 August and are required to issue payment summaries to their employees. 

State payroll tax has to be paid separately. Remittance dates and frequencies are set by each state and territory individually. The administering authority is the respective Office of State Revenue. The tax year runs from 1 July to 30 June. Individuals file a tax return by 31 October of the same year - mandatory for resident taxpayers whose taxable income exceeds AUD 18,200 and for non-resident taxpayers who receive income from Australian sources. 

Social security contributions

Employers are required to contribute to a superannuation fund (or a similar retirement savings scheme) on behalf of their employees. The current contribution rate (valid March 2022) is 10%, but the rate is set to increase progressively until it will reach 12% in July 2025:

• Starting July 2022: 10.5%

• Starting July 2023: 11%

• Starting July 2024: 11.5%

• Starting July 2025: 12%

Payments must be made directly to the elected superannuation fund provider at least once every quarter. Electronic payment and data submission is mandatory. Furthermore, employers must take out workers’ compensation insurance to cover their employees - subject to state-specific regulations.

Employees can make voluntary contributions to their superannuation fund which are deductible for income tax purposes up to a certain limit. Voluntary contributions exceeding the limit are subject to a superannuation excess concessional contributions tax. 

A 2% Medicare contribution is levied on all residents - except for certain low-income earners. The amount due is withheld and remitted to the ATO together with the employee’s income tax. Higher incomes are subject to a Medicare surcharge ranging from 1% to 1.5%. Please note that this obligation only applies to residents - non-residents are exempt from paying the Medicare levy.

* Applies only to Australian citizens and residents.

Employees in Australia are entitled to various benefits. These include:

• Annual leave and public holidays: 4 weeks (5 weeks for shift workers), plus 7 national public holidays and several regional holidays

• Maternity leave/ Paternity leave/ Parental leave: up to 12 months of unpaid parental leave (extendable for another 12 months) for employees with at least 12 months of service; plus there is a Paid Parental Leave (PPL) Scheme allowing for up to 18 weeks of parental leave paid at minimum wage rates; 2 weeks of paid leave for fathers of newborn children

• Sick leave: 10 days of paid personal sick/ carer’s leave

For more information on employee benefits and other employment requirements in Australia (including severance pay and termination procedures), check out our Global Hiring Guide.

Australia’s national minimum wage is regularly updated. Currently (as of March 2022), the hourly minimum wage stands at AUD 20.33 which equals AUD 772.60 per 38-hour week. Overtime pay is subject to collective bargaining agreements or the individual employment agreement. If there is no such agreement in place, employers may request their employees to work a reasonable amount of overtime hours without having to provide additional pay. There is no legal obligation to pay employees an annual bonus either. 

Australian employment law mandates that employees must be paid at least once per month, but weekly and fortnightly pay periods are also quite common. Acceptable payment methods include cash, check, money order and bank transfer. Cash payments should be confirmed by a signed receipt. It is mandatory to provide each employee with a payslip no later than the day following the employee’s payday. Payslips can be issued either in paper form or electronically. Employers must keep payroll records for 5 or 7 years, depending on the document type.