On Wednesday 23 March 2022, the Federal Treasurer, Josh Frydenberg, announced in a joint Media Release that the Federal Government will facilitate the sharing of Single Touch Payroll (STP) data with State and Territory Governments to enable pre-filling of payroll tax returns. This announcement comes as part of a package of measures included in the 2022-23 Budget to support small and medium businesses.
Background
Employers by now should be familiar with STP reporting. Since its commencement on 1 July 2018, the Federal Government has expanded on STP reporting requirements to further support the administration of the social security system and to reduce the reporting burden for employers that need to report information about their employees to multiple government agencies. As part of “STP Phase 2”, employers are required to report the separate, granular components of an employee’s earnings to the Australian Taxation Office (ATO).
Enabled by this more granular level of reporting required under STP Phase 2, the proposed sharing of this STP data with the relevant Offices of State Revenue (OSR) is intended to reduce compliance costs and save time for approximately 170,000 businesses with payroll tax reporting obligations.
The Federal Government anticipates that the Government technology required to facilitate this measure will be developed and implemented by late 2023.
Good news for employers?
Whilst we await further details, the proposed implementation of pre-filled payroll tax returns represents a positive step toward reducing the compliance burden for employers, by cutting down the time required of employers in many cases, every month.
This is because compliance with payroll tax obligations has long been administratively demanding for employers, given the lack of uniformity across States in wage definitions and lodgement requirements, and inconsistencies with how Federal tax laws treat common remuneration types.
This positive step towards streamlined compliance may be a compromise that sees State and Territory governments retain control over payroll tax revenue, quieting the growing noise around the inefficiencies this delivers compared to the alternate approach of a Federally-controlled administrative regime. Indeed, STP reporting for State and Territory payroll taxes could be practically contingent on updating the current reporting framework to allow the changes necessary to determine the State or Territory connection of wages. An optimist’s view, and the real opportunity for meaningful reform here, would be a move to complete simplification and alignment of payroll tax legislation, such that taxable wages for payroll tax purposes align to the taxation treatment of salary or wages for PAYG Withholding purposes, or at least, an alignment between the payroll tax treatment of taxable wage components (including exemptions and concessions) in all States and Territories. In saying that, no indication of payroll tax reform of this kind has been provided to date.
However, at the end of the day, pre-filled taxable wage fields or not, employers still need to be able to attest to the accuracy of the information being lodged with the State and Territory OSRs. And, if the OSRs are using STP data as the source of truth, that creates a new challenge for payroll tax compliance functions and overall governance.
What employers should expect
The use of data reported to the ATO to pre-fill payroll tax returns will be a major change, requiring employers to evaluate how their processes, procedures and broader governance should be adjusted to adapt and position their organisation for success. Existing payroll system mappings and calculation materials for payroll tax may need to be replaced with new STP-based mappings, to enable meaningful reconciliations, particularly if employers want to adjust the pre-filled data and defend adjustments made prior to lodgement of their payroll tax returns. It is yet another aspect of the STP rollout that necessitates tax functions to become more actively involved in the configuration of systems as we move to a real time reporting environment. This also heightens the value to organisations of standardising and automating processes, as demanded by the increasing pressure from regulators on overall governance.
We have seen the ATO highlight the use of STP data to provide “end-to-end” visibility when determining if an employer has not met superannuation guarantee obligations (please see our prior article on Superannuation Guarantee Charge for more information). We expect in due course that the OSRs will take a similar approach to determine whether an employer has met their payroll tax obligations, or whether lodged information warrants investigation.
Thus it is imperative that employers have confidence in the integrity, completion and accuracy of their payroll data in preparation for the additional level of scrutiny that will come with pre-filled payroll tax returns.
More specifically, as further details are released, we encourage employers to evaluate the data expected to be pre-filled, and to then consider the framework required to ensure the various payroll tax concepts that may warrant adjustments to pre-filled data, or additions to that data, prior to the lodgement of their returns. Examples of amounts that may require supplementary effort from employers (subject to the realisation of broader reform opportunities outlined above) may include:
- Certain types of wages which would ordinarily be ‘taxable’, may in fact be exempt - at least for some period of time, by virtue of the personal circumstances of the recipient employee;
- Wages paid to certain employees may need to be reported in a different State from one month to the next (e.g, where an employee temporarily changes work locations, without a corresponding change to their reported State in the payroll system), due to the month-by-month application of the ‘nexus’ provisions;
- The meaning of ‘wages’ for payroll tax purposes encompasses payments and remuneration transacted outside the payroll system, each of which can involve substantial analysis in order to arrive at the correct payroll tax disclosure. Key examples include employee equity interests, expatriate payments, fringe benefits, off-payroll director fees and contractor payments.
Given the range of factors which may not (yet) permit a ‘complete’ payroll tax return to be pre-filled, ultimately, the success of this initiative will depend as much on the actions taken by employers to ‘ready’ themselves, as it will depend on the Government’s development and implementation of the required infrastructure.
While it is true that the details of the initiative and the requirements of employers are not known at this stage, it is nonetheless advisable that organisations avoid leaving their evaluation of the necessary changes until the new reporting initiative goes live.
The Media Release specifically refers to small and medium businesses, nonetheless it would be prudent for employers of all sizes to expect the rollout of this measure.
If you have any questions about tax governance around payroll data, please reach out to your PwC representative.
