In March 2020 we learned of Fair Work Changes to counteract employee underpayments regarding Annualised Salary issues. 

Recent independent studies have determined Australian State Revenue Offices have increased their focus on the payment of payroll taxes in relation to Employee Share Schemes (ESS) offered by employers.  

This increased scrutiny is likely due to a rise in data matching between the Australian Taxation Office and the State Revenue Authorities, which allows State Revenue Authorities to much more easily identify amounts in an employer’s ESS annual report that have not been reported for payroll tax purposes. 

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The increased focus on the payment of payroll taxes in relation to Employee Share Schemes offered by employers means it is more important than ever for organisations to ensure the appropriate payments have been made.

What payroll tax issues should be considered?

ESS may be subject to state payroll tax. However, the rules vary between states, and you will need to check with your local State Revenue Office to determine how payroll tax may apply to the ESS interests you issue. 

Workplace relations and employment law

As with any benefit provided to an employee, employers must be aware of the potential impact that ESS can have on contractual arrangements including any employee awards. Some awards, for example, do not provide for salary sacrifice arrangements. 

Accordingly, it is important that you review your payroll tax affairs to ensure equity awards that have been provided to your employees under your ESS have been reported to the State Revenue Authorities, and that any payroll tax payable on these amounts has been paid at the appropriate time. 

Payroll tax and ESS

State-based payroll tax is payable by an employer on ‘taxable wages’ paid in the particular state. ‘Taxable wages’ specifically include amounts in relation to shares or options (defined to include rights to acquire shares such as restricted stock units and stock settled stock appreciation rights among others) provided to employees under an ESS. Additionally, independent studies found this has been the most common mistake. Many employers don’t realise that the equity awards provided to their employees under an ESS can be treated as ‘taxable wages’. 

Broadly, payroll tax is payable on the market value of an employee share or right, less any amount paid by the employee, either at the time of grant or at vesting (in the case of an option, this is generally defined as happening upon exercise). 

Employers usually lodge and pay their payroll tax on a monthly basis, but the State Revenue Authorities accept that equity awards can be included in taxable wages on an annual basis in the Annual Reconciliation statement. 

Next steps: What should I be doing?

Employers should review their payroll tax affairs, both in the current year and in past years, to ensure that the correct amount of taxable wages has been reported, and the correct amount of payroll tax has been paid in relation to equity awards. 

Disclaimer: The content of this article is current as at 6 May 2020. It is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. 

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