Australia’s ad hoc payroll taxes across the country are impacting jobs, business investment and the economy, with a major new report revealing South Australia and New South Wales have the most competitive payroll rates for business.

The Business Council’s upcoming Regulation Rumble report for 2024 assesses the regulation, taxes and planning systems of each state and territory, with the first scorecard on payroll tax released today.

The report found South Australia and New South Wales have the most competitive payroll tax systems in Australia, while Victoria and the Australian Capital Territory have the worst rating. This is because both systems are taxing businesses too much, constricting jobs and economic growth (see table below).

Business Council Chief Executive Bran Black said Australia has a myriad of payroll taxes across each state and territory, which adds cost and complexity to hiring people while holding back businesses wanting to expand.

“Payroll tax is a tax on jobs and business growth, and our patchwork of different systems is a handbrake on our economy,” Mr Black said.

“There are over 30 different kinds of payroll tax conditions in Australia that businesses need to navigate, so that’s a huge headache for any business trying to grow, both big and small.”

“High payroll taxes can deter businesses from expanding and hiring more workers, which is counterproductive to governments seeking to support jobs.”

South Australia topped the payroll ranking in BCA’s upcoming regulation report as it has the lowest payroll tax rate for large employers and the joint second-highest threshold at which the tax kicks in. It also has a progressive rate and deduction system, reducing the relative burden on small but expanding businesses.

“South Australians have a competitive advantage in driving more investment and jobs to their state due to it having a more competitive payroll tax system,” Mr Black said.

“Similarly, Victoria and the ACT need to seriously review the competitiveness of their payroll tax systems, because they are holding back businesses and economic growth.”

The variation in payroll tax systems across the country makes it more complex to do business and is contributing to Australia’s lagging productivity growth.

A national business has to deal with up to eight different payroll tax regimes, with differing rates, thresholds, scaling systems, exemptions and administration processes.

“We need to strive for efficiency and make it easier to do business in Australia, and this has to include harmonising payroll tax systems,” Mr Black said.

“If a business has to comply with up to eight different payroll tax systems, it’s going to increase cost and complexity, and only further deter investment from our shores.”

The BCA believes a National Reform Fund should operate to incentivise states and territories to move on difficult but important reforms, like the synergy of payroll tax, to increase our productivity.

Commonwealth, state and territory treasurers should build on previous work to explore how payroll tax compliance could be streamlined, including through harmonisation.

The BCA recently welcomed the Treasurer’s announcement of a National Productivity Fund, which mirrors the approach recommended by the BCA, with implementation and the broadening of the operational timeframe and funding envelope for the Fund being key to its success.

Figure 1: Ranking of states in terms of most efficient payroll taxation systems