Victorian government’s payroll tax hit a bitter pill for growing businesses

For several years now, state governments across the country have been both gradually reducing the rate of payroll tax levied on businesses, and lifting the thresholds at which payroll tax kicks in. 

In yesterday’s Victorian budget, this practice continued, with the government announcing the state’s payroll-free threshold will lift to $700,000 and the rate of payroll tax cut to 1.2% for regional businesses. 

Governments have seemingly started to accept that payroll tax is a disincentive for hiring. It is seen, quite rightly, as a tax on jobs. This is because the tax is, by its very nature, regressive: the more employees your business has and the bigger your payroll gets, the more tax you pay. 

That’s why it came as a big surprise yesterday when Victorian Treasurer Tim Pallas announced the introduction of a new payroll tax levy to help pay for a new $3.8 billion overhaul of the state’s mental health services across the state. 

The levy will take the form of a payroll tax surcharge, of 0.5%, to apply for businesses that have payrolls of more than $10 million, from January next year. An extra 0.5% will be charged for much larger businesses with payrolls above $100 million. 

The government’s action on mental health is based on 65 recommendations made by the royal commission into Victoria’s mental health system, and there is no doubt urgent action is needed. Poor mental health comes at an enormous cost to individuals, businesses and the broader economy, and Victoria’s prolonged lockdowns in 2020 undoubtedly exacerbated mental health concerns for many. 

The fact that Victoria needs to urgently increase funding for mental health services is not up for debate. But choosing to add an extra payroll tax surcharge on large and medium sized businesses will be a bitter pill to swallow for employers. 

Pallas said on Thursday the new levy will affect the state’s largest businesses and those that “continued to profit through the pandemic — pocketing taxpayer subsidies along the way”, in an apparent reference to the federal government’s JobKeeper wage subsidies. 

While the threshold of $10 million does mean most small businesses won’t be affected, that’s not necessarily true for the state’s medium-sized businesses, many of which are still recovering from Victoria’s tough lockdowns of 2020, especially in areas like hospitality and tourism. 

Not to mention many of the fast-growing technology businesses, which the Victorian government has spent considerable effort luring to the state. As Catapult Sports chair Adir Shiffman writes in SmartCompany today, it won’t come as a surprise if growing businesses now look to establish themselves in other states.

Throughout 2020, the Victorian government offered businesses payroll tax refunds, cash support payments and even now, continues to offer wage subsidies for those that take on new hires. 

Each of these measures, and others included in yesterday’s budget, will be welcomed by the Victorian business community. The government’s counterintuitive move to impose a payroll tax levy will not.