Imagine a tax payable by Myer, David Jones and JB Hi Fi that doesn’t apply to Harvey Norman. What about charging a tax to Footlocker but not Athlete’s Foot? Most extraordinary of all, what about charging this tax to grocery businesses like Harris Farm on the wages of hundreds of staff who unpack and sell fresh produce grown by Australian farmers but don’t charge that same tax to a Ferrari dealership with a handful of staff selling expensive imported sports cars. Surely Australia doesn’t do that. We’re not that stupid are we?
The not-so-level playing field
Actually, we are that stupid – it’s called payroll tax and it’s charged based on the total wages, above a threshold, of a company. In NSW, the rate is 5.45% of a business’s NSW wages above $750,000. Employers like the Ferrari dealer, with few staff, don’t pay and others providing many jobs, like the grocery shops, do. The grouping provisions of Australia’s payroll tax allow franchised businesses like Harvey Norman and Athlete’s Foot (and many others) to avoid the tax even though via their franchise agreement they are heavily ‘controlled’ by a single entity. In considering whether multiple employers are centrally controlled, the grouping provisions consider only ownership, instead of a wider sense of what entity is actually in control and how. Gerry Harvey has been pushing for a level GST playing field on overseas purchases but he won’t want a similar level playing field on payroll tax.
You can own Australia’s largest and most valuable hotel and not pay any payroll tax on the small staff needed to manage the investment. But the hotel management company who leases the building and runs the hotel has to pay payroll tax on the hundreds of jobs needed to serve the food, clean the rooms, and make the beds. Why do we make it cheaper to be a billionaire owner of a hotel but dearer for the hotel management company to provide these low skill, entry level jobs?
Thousands of entry level jobs were lost some years ago when Starbucks closed 100 of their 120 stores in Australia. No doubt it was partly because they were paying millions in payroll tax but their four-fold bigger direct competitor, Gloria Jeans, with 400 franchised stores, paid no payroll tax on store wages. Payroll tax costs jobs, many jobs.
Why favour capital over labour?
Australia is having a tax debate and supposedly, ‘everything is on the table’. If we are going to reform our tax system, let’s start with this distortionary tax that favours capital intensive business whilst penalising labour intensive business. It favours franchising by distorting competition between similar businesses based on their ownership structure. Providing lots of jobs should be celebrated and encouraged, not taxed and discouraged. Payroll tax should be completely abolished and the revenue replaced in another form that encourages employment and does not distort competition.
Eliminating payroll tax removes seven State taxes with the resultant massive removal of compliance and surveillance issues. Entire departments can be eliminated in every state giving significant savings and removal of duplication. If we are not going to eliminate payroll tax at least change it substantially so that it is not linked to the size of payroll. Link it to turnover, add it to GST, add it to company tax, do anything but don’t penalise job creation and don’t allow it to distort competition.
Peter Pitt is a Director at a leading national retailer. These opinions are his personal views and not necessarily those of his company.