What’s emerging? Victorian payroll tax compliance focus on wage underpayments

29 February 2024

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Recently, the Victorian State Revenue Office (VSRO) released an update, through their subscriptions channel, outlining an increased focus on payroll tax compliance with respect to underpayment of employee wages. Specifically, the update urged employers that identify wage underpayments to voluntarily disclose the amounts for payroll tax purposes on a timely basis.

While Victoria has taken the lead in publicly committing to a review program for wage underpayments, it is likely that other State Revenue Offices (SROs) will follow suit in due course, perhaps even leveraging the template of data-led analysis being undertaken by the Australian Taxation Office (ATO).

In situations of wage underpayments, an employer’s paramount concern is often the disclosure of the underpayments to the Fair Work Ombudsman (FWO) (where relevant) and remediation to employees. However, the VSRO initiative encourages employers to also ensure payroll tax compliance, to mitigate the impact of potential interest and penalties.

However, the application of payroll tax to wage underpayments is not clear and, in our experience, has been the subject of inconsistency between the jurisdictions. Such inconsistency has been observed particularly when considering whether the liability arises in the period the wages were underpaid - as compared to the period in which the underpayment is remediated - and how a conclusion of the former (which requires historic amendments) interplays with the standard 5-year reassessment period.

In detail

When does a payroll tax liability arise for wage underpayments?

Whilst Victoria has announced a compliance focus on wage underpayments, New South Wales (NSW) has previously provided guidance on the application of payroll tax in this context.

Commissioner's practice note: CPN 021 Employer Superannuation Contributions - Payroll Tax Act 2007 including Division 3 of Part 3 (CPN 021) predominantly focuses on the application of payroll tax to superannuation remediation amounts, however the guidance includes commentary on the taxing point for wage underpayments.

Specifically, the guidance provides that “underpaid wages are taxable in the financial year in which the wages should have been paid” - i.e. the taxing point is not the financial year of remediation, but rather in the year when the underpayment entitlement arose. This necessitates a voluntary disclosure to reassess historical periods, with the ancillary overlay of penalties and interest (as well as the administrative burden of calculating historical amendments).

Broadly, the technical background of the NSW guidance is that, under payroll tax legislation, payroll tax is due based on when wages are “paid or payable”; further, the Nexus Provisions include an outline that “(i)f wages are paid in a different month from ... payable ... whether the wages are taxable in (NSW) is to be determined by reference to the earlier of the relevant months”.

In this regard, while the above legislative provisions are harmonised across each of the Australian jurisdictions, other SROs, in our experience, have not consistently adopted this treatment. That is, in some instances the regulator has accepted including remediation payments in the year the remedy occurs (i.e. when paid).

In the absence of guidance by other SROs, this has created uncertainty for employers undergoing wage remediation programs. The VSRO compliance focus, and recommendation of voluntary disclosure, suggests historical amendments are required (i.e. in alignment with the NSW position); however, this is not explicitly stated within any Victorian publicised guidance.

Reassessment period for wage underpayments

Where wage underpayments are remediated, should payroll tax require historical reassessments, another point of conjecture arises in relation to the scope of liability.

For example, the NSW Taxation Administration Act provides that the Commissioner can only make a reassessment of a tax liability beyond 5 years under particular conditions, including if, at the time of the initial assessment, all the facts and circumstances affecting the tax liability were not “fully and truly disclosed” to the Commissioner.

Noting that wage remediations are often undertaken for 6 years (or more), no guidance has been provided by the SROs as to whether, in their view, a wage underpayment prevented wages being “fully and truly disclosed”, such that payroll tax should be reassessed beyond 5 years.

In 2021, the NSW parliament released the Tax Administration Amendment (Combating Wage Theft) Bill 2021 (the Bill) which would, if passed, provide for the NSW Commissioner to reassess payroll tax liabilities more than 5 years after an initial assessment, in certain circumstances of underpayment of wages. These circumstances included:

Where an investigation relating to the taxpayer by the Fair Work Ombudsman has been finalised and had found underpayment of wages, and
As a result of that underpayment, the employer’s liability to pay payroll tax was not assessed (or assessed at a lower amount than would otherwise have been assessed).

The Bill lapsed as a result of the prorogation of the NSW Parliament, however, one may infer that the necessity to introduce such a legislative amendment in the first place indicated that the ability to reassess, beyond 5 years, was not considered to contemporarily exist.

Key Takeaways

With the VSRO publicly outlining a payroll tax compliance focus for wage underpayments and urging employers to voluntarily disclose (suggestive of a historical reassessment approach akin to NSW), national employers must carefully navigate the ensuing impact for other jurisdictions.

Given the ongoing conjecture, and absence of harmonised guidance, where an employer is of the view that payroll tax arises at the time of wage underpayment remedy, we would recommend engaging with the relevant SROs to seek endorsement of this approach, or at a minimum, seeking advice on this issue.

Similarly, if seeking to voluntarily disclosure for historical payroll tax reassessments, it is paramount that employers engage with the respective SROs in relation to the 5-year reassessment period.

With remediation of wage underpayments increasingly prevalent, and employers uncovering inadvertent or system-driven errors arising from industrial complexity, it is paramount that employers consider not just the wage remediation, but also the resultant on-flow to other obligations such as payroll tax.

Finally, given the technical postulation in relation to the taxing point of wage remediations, and the overlay of the reassessment period, we urge the SROs to clarify a harmonised approach to these issues. With the myriad of considerations employers have to face into for wage remediations, it would be desirable for necessary clarity to be available to taxpayers to mitigate non-compliance risk.

If you have any further questions please reach out to one of our PwC Employment Taxes specialists.