Victorian budget: Small businesses get payroll tax relief, but big businesses will pay more

The Andrews Labor government says it plans to make payroll tax “fairer” for Victorian small businesses by lifting the payroll tax-free threshold in two stages over the next two years. 

Labelling the current payroll tax-free threshold of $700,000 as “too low”, the state government said it will increase the threshold to $900,000 from July 1, 2024, and again to $1 million from July 1, 2025. 

This means Victorian employers with total payrolls below these amounts will not need to pay payroll tax in Victoria. The state’s current payroll tax rate is 4.85%, except for regional employers, who pay a payroll tax rate of 1.2125%

The change will bring Victoria closer to being in line with neighbouring states, including New South Wales, which has a tax-free threshold of $1.2 million, and South Australia, which has a payroll tax-free threshold of $1.5 million. 

According to the 2023-24 Victorian budget, handed down by Treasurer Tim Pallas on Tuesday, the lifting of the payroll tax-free threshold will mean around 26,000 Victorian businesses will save up to $14,500 per year. Some 6000 of those businesses will stop paying payroll tax altogether. 

“These benefits will be phased out for larger businesses to ensure support is well-targeted,” the government said. 

The move has been welcomed by CPA Australia, although senior tax policy manager Elinor Kasapidis described it as “long overdue” in a statement provided to SmartCompany. 

Victoria’s largest employers are also facing a change to their payroll tax bill from this budget, albeit of a different nature. 

The payroll tax rate will increase by 0.5% for employers with payrolls above $10 million from July, while employers with payrolls above $100 million will face an additional 0.5% levy.

The charges, which will apply only to the Victorian share of an organisation’s national payroll, are part of the government’s plan to pay down its increasing debt, a large portion of which was accumulated during its response to the COVID-19 pandemic.

Hospitals, charities and local councils are exempt from the levies. 

The budget forecasts for the state’s net debt to hit $171.4 billion by 2026-27, up from $135.4 billion in 2023-24, with the government also choosing to lower the land tax threshold as a way to help pay down debt. 

The payroll tax levy mirrors a similar one introduced by the Andrews government in 2021 to help cover the cost of an overhaul of the state’s mental health services. 

At the time, members of the SME community supported the move to better fund mental health services, but said increasing the payroll tax bill for employers would drive companies interstate. 

Overall, CPA Australia’s Kasapidis was critical of the government “relying too heavily on increased taxes” to pay down debt and in particular, said the industry body is “appalled” to see more landlords and holiday homeowners now facing land tax bills. 

“Tax increases can negatively affect the economy at a crucial time of recovery,” she said. “A low taxing environment is important to encourage business activity.”

“Victoria is the nation’s least attractive state to run a business or buy an investment property,” she added. 

Business insurance duties dropped, regulation on the agenda

Reducing business insurance costs and streamlining business regulation are among the other business-related measures in a budget that also pledges to scrap stamp duty on commercial and industrial properties.

Victoria will abolish business insurance duties completely in what the government claims is a first for an Australian state. 

The rate of insurance duties will be reduced by one percentage point each year, over 10 years, starting from July 1, 2024. 

This will apply to insurance for fire and industrial special risks, public and product liability, professional indemnity, employer’s liability, and marine and aviation insurance. 

The government says the change could translate into cumulative savings for businesses of around $3,200 on professional indemnity insurance, and $2,400 on fire and other special risk insurance, over the coming decade.  

Meanwhile, the government has allocated $38 million in the budget for a government-wide ‘regulatory reform’ program, which it will task with identifying and driving “real reforms which maximise benefits to Victorian businesses and consumers”. 

The goal will be to make it “easier to start and run a small business in Victoria”, says the government, with potential reforms to include streamlined application and approvals processes and faster licensing at local and state levels.