Federal Government payroll tax takeover under consideration

The root-and-branch review of Australia taxation system is examining the possibility that the Federal Government could take payroll tax collection back from the States in return for the removal of inefficient state taxes.

According to a report in The Australia, which quotes sources close to the review of the tax system being led by Treasury secretary Ken Henry, the review team is keen to improve the way the Federal and State tax systems interact, and is considering a model whereby the Federal Government would reverse its 1971 decision to hand control of payroll tax to the States.

The Federal Government could take control of payroll tax collection and set a national payroll tax threshold.

This could result in overall payroll tax levels falling in some states, although the report suggests the Federal Government could still give the States the ability to vary the rate of the levy within an agreed rate.

The hook to get the States to give up their lucrative payroll tax systems would be a promise to gradually increase the total amount of revenue returned to State Governments thanks to the fact the overall tax system would be more efficient.

Henry is due to deliver his draft report to Treasurer Wayne Swan at the end of the year, but it remains unclear whether the payroll tax recommendation will be part of Henry’s list of suggestions, as federal-state relations over taxation issues are notoriously difficult to resolve.