What’s Emerging: New Payroll Tax annual return requirements in NSW

The landscape of payroll tax compliance in New South Wales (NSW) is set to undergo a transformation with the introduction of more details and validations required as part of the new annual return process for the upcoming payroll tax return for the 2024 financial year, which is due 28 July 2024. 

Specifically, Revenue NSW will now require additional details from employers (such as details on an employer’s workforce mix, including in respect of payments to contractors) and comparative confirmations where there are “significant” differences between disclosures for particular components from the prior year (e.g. “salary and wages”, “interstate wages”, etc.). These details will provide increased visibility to help Revenue NSW to better understand compliance across the taxpayer base, but also provide businesses with prompts to more stringently assess their own governance and controls.

Understanding the changes

The new details and validations will require employers to answer a series of additional questions that delve into various aspects of payroll tax components, with a particular focus on what is not included in the payroll tax return or where there are material movements year on year. These questions will cover:

• Contractor engagement and exclusions: Businesses will need to disclose their use of contractors and the particular exclusions that have been applied in relation to payments made. Specifically, employers who rely on the exemption for services provided to the public generally’ will need to declare that such services are approved by the Commissioner as exempt.
• Employment agency provisions: The new return process will include questions regarding employment agency arrangements, which will allow Revenue NSW to ascertain compliance by those taxpayers who are regarded as an “employment agent” (and noting the continuously expanded interpretation of that definition by the courts). Additionally, for an “employment agent”, if there are non-taxable payments, employers must confirm the reasoning for the same (e.g. due to the position of the agent in a chain of on-hire arrangement). 
• Analysis of year-to-year variations: The system will prompt businesses to explain significant differences in payroll components such as salaries and wages, fringe benefits, contractor payments, apprentice/trainee wages, and interstate wages. Additionally, alerts will be triggered for discrepancies in superannuation contributions relative to salaries and wages (presumably based on a comparative using the prevailing superannuation guarantee rate).

Implications for compliance and governance

The insights gleaned from the new return process will undoubtedly shape Revenue NSW's compliance activities in future, potentially leading to more targeted investigation programs. For example, some of the key insights that will be gained from the new return process include:

1. Risk profiling: The new return process will enable Revenue NSW to identify businesses that:
   1. Engage contractors and the types of exemptions claimed.
   2. Claim contractors exemptions as ‘services provided to the public generally' without formal Commissioner approval.
   3. Do not identify employment agency arrangements yet operate in high-risk industries (e.g. cleaning).
   4. Acknowledge employment agency involvement but claim unexpected exemptions.
   5. Operate in employment agency industries that may not have been previously scrutinized, presenting new areas/industries to potentially investigate.
   6. Exhibit inconsistencies in their reporting from year to year.
2. Confirmation requirements: While the confirmation process is high-level and does not require employers to provide granular explanations relevant to each response (for example, the specific exemption required for each contractor), it does require businesses to affirm their tax positions, which is a notable shift from previous practices.
3. Governance and reasonableness checks: The new system mandates that businesses confirm significant differences resulting from reasonableness checks across each component. This therefore requires that businesses are conducting akin comparatives and validations as part of their internal compliance process, prior to return preparation and lodgment.
4. Record-keeping and penalties: Providing such information may be reviewed in the context of whether disclosures in the annual return constitute “full and true” disclosure under the Taxation Administration Act 1996 (NSW), which may also mean that penalties for “false or misleading” statements could be enlivened (e.g. if the question regarding whether payments are made to contractors who provide services in NSW is answered in the negative, however, in a subsequent audit, it is discovered that payments are made and were incorrectly excluded).
5. Potential expansion to other jurisdictions: While this change is currently specific to NSW, it is prudent for businesses to stay vigilant for similar reforms that may be adopted in other jurisdictions.

Key takeaways

In our view, this change marks a significant shift in the way businesses will report and confirm their payroll tax obligations in NSW, as employers are now prompted to disclose information on what is not included in their self-assessment of taxable wages and, otherwise, validate deviations year upon year across the various components of the return.

Although it operates with a different scope and granularity, this marks an initiative by the Revenue NSW to implement a system that can enable data-led compliance, akin to the utility of Single Touch Payroll (STP) for superannuation compliance in a Federal context, which has been successful in allowing the Australian Taxation Office to perform more targeted reviews. It can be assumed that the additional payroll tax information will be used to determine a risk profile of the employer, which may allow Revenue NSW to perform their own targeted investigations or inquiries.

Employers should review their current payroll tax practices, ensure accurate record-keeping, and integrate the new requirements into their internal tax governance processes. As this development may signal a broader trend, businesses should also monitor for updates in other jurisdictions to remain compliant with an evolving payroll tax landscape across Australia.