The Australian State Revenue Authorities have increased their focus on the payment of payroll taxes in relation to Employee Share Schemes (ESS) offered by employers. This increased scrutiny is likely due to a rise in data matching between the Australian Taxation Office and the State Revenue Authorities, which allows State Revenue Authorities to much more easily identify amounts in an employer’s ESS annual report that have not been reported for payroll tax purposes.
Accordingly, it is important for you to review your payroll tax affairs to ensure that equity awards that have been provided to your employees under your ESS have been reported to the State Revenue Authorities, and that any payroll tax payable on these amounts has been paid at the appropriate time.
Background: What is payroll tax?
State-based payroll tax is payable by an employer on “taxable wages” paid in the particular state. “Taxable wages” specifically include amounts in relation to shares or options (defined to include rights to acquire shares such as restricted stock units, stock settled stock appreciation rights, etc.) provided to employees under an ESS. In our experience, this has been the most common mistake – many employers don’t realise that the equity awards provided to their employees under an ESS can be treated as “taxable wages.”
Payroll tax is levied on the employer and is a separate tax to the Federal taxes payable by the employees on their equity award income.
Broadly, payroll tax is payable on the market value of an employee share or right, less any amount paid by the employee, either at the time of grant or at vesting (in the case of an option, this is generally defined as happening upon exercise).
Employers usually lodge and pay their payroll tax on a monthly basis, but the State Revenue Authorities accept that equity awards can be included in taxable wages on an annual basis in the Annual Reconciliation statement.
Next steps: What should I be doing?
Employers should review their payroll tax affairs, both in the current year and in past years, to ensure that the correct amount of taxable wages has been reported, and the correct amount of payroll tax has been paid in relation to equity awards.
If you become aware of any historic Annual Reconciliation statements that may need revision, or have been contacted by the State Revenue Authorities, please let us know if we can be of assistance. A voluntary disclosure should be made as soon as possible – and in particular, prior to a State Revenue Authority commencing an investigation – to minimise the risk of any interest and penalty taxes payable.