SA payroll tax reforms a ‘barrier’ to business growth
A new study has indicated that 2019 changes to South Australia’s payroll tax have impacted business growth, as the number of businesses just below the tax-free threshold grows.
Research from the e61 institute has found businesses have “bunched” just below the $1.5 million payroll tax-free threshold to avoid being liable for a higher marginal tax rate which arose from 2019 reforms.
The group said that payroll tax reforms in 2019 had combined to mean businesses overtaking the $1.5 million threshold would see a sharp increase in their effective marginal tax rates from zero per cent to around 27 per cent.
The 2019 reforms increased the tax-free threshold from $600,000 to $1.5 million and changed the tax rate for businesses with payrolls between that threshold and $1.7 million to a new variable rate of zero to 4.95 per cent. The maximum deduction remained unchanged at $600,000.
Research economist at e61 Rachel Lee said the policy changes appeared to have “created a barrier to firm growth”.
“Many of the firms that bunched just below the threshold were growing firms that likely would have crossed the threshold if not for the policy change,” she said.
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“Notably, firms did not bunch below the threshold before the policy change.”
The study showed there was a 21 per cent increase in the number of businesses just below the $1.5 million threshold since the changes were introduced, while the number of businesses above decreased by 18 per cent.
“Many of the bunching firms appear to have been relatively productive. This suggests that the policy change created a material barrier to firm employment growth and may have lowered aggregate productivity in South Australia,” the study said.
South Australian Business Chamber CEO Andrew Kay said the study confirmed feedback heard from businesses since the changes, having previously called for new reforms in this year’s state budget.
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The South Australian Business Chamber CEO Andrew Kay said the results confirmed what the Chamber regularly hears from businesses. Photo: suppliedKay said there had been a 19.3 per cent increase in the number of businesses paying payroll tax from the 2020-2021 financial year to the 2022-2023 financial year, with 46.4 per cent of businesses reporting having paid the tax in the latter year.
“Payroll tax is no longer just an issue for big business,” he said.
“Others are monitoring the situation to keep wages below $1.5 million, because once they are exposed to payroll tax, the cost to the business escalates quickly with every additional employee.
“In the five years since the last increase to the threshold, we have seen significant wages growth. Businesses who have not increased their workforce have been pushed over the threshold in what is a case of ‘bracket creep’ for payroll tax.”
Of the firms “bunching” below the threshold, 34.5 per cent had cut their payrolls since the changes.
A total of $5.9 million was removed from the payroll of businesses that reduced their payrolls, equating to around $52,500 per business, according to the study.
“These small, growing firms are the ones that do the most to drive aggregate job creation and innovation in the economy,” Lee said.
“Even though the payroll tax cut lowered the effective cost of labour for small firms, South Australian firms in aggregate may have decreased their use of labour because of the increased barriers to firm growth.”
Kay said the South Australian Business Chamber would “continue to push for change” in the area.
“There is a real opportunity here to unlock business growth and also set up SA as the most competitive place to do business in the country,” he said.
