13/12/2025 • 16 min read
Payroll Tax Simplification for SMEs (2025)
Payroll Tax Simplification for SMEs (2025)
Payroll tax simplification could materially ease the compliance burden on Australian SMEs by reducing inconsistent state-by-state rules, narrowing ambiguity around “taxable wages” (particularly contractor and grouped-entity provisions), and improving harmonised registration, reporting and payment processes—changes which would lower adviser time, reduce audit disputes, and improve cashflow predictability. In practice, simplification proposals target the biggest friction points: contractor “deemed wages”, grouping and nexus rules, and fragmented administration across States and Territories.
What is payroll tax in Australia, and why is it so complex for SMEs?
Payroll tax is a state and territory tax imposed on “taxable wages” paid by employers once wages exceed a jurisdiction’s threshold, with rules and rates set separately by each jurisdiction. Complexity arises because SMEs increasingly operate across borders, use contractors and labour-hire, and operate through multiple entities—each of which can trigger payroll tax under different definitions and tests.
- Different thresholds, rates, and lodgment/payment frequencies across jurisdictions
- “Nexus” rules determining which state can tax wages when employees work across borders
- Contractor “deemed wage” provisions (often the largest audit adjustment area)
- Grouping rules that aggregate wages across related entities and can remove threshold benefits
- Documentation and evidence requirements that differ across revenue authorities
It should be noted that payroll tax is not administered by the ATO; it is administered by state and territory revenue offices. However, payroll tax compliance is heavily dependent on ATO-governed payroll and tax concepts (PAYG withholding, superannuation guarantee, record-keeping), and SMEs often assume incorrectly that ATO payroll reporting resolves payroll tax automatically.
Which simplification changes are being proposed or commonly recommended in Australia?
The most credible “simplification” proposals discussed in Australia (including recurring themes raised by professional bodies, state reviews, and intergovernmental reform discussions) generally fall into administrative harmonisation and substantive rule harmonisation. While no single nationally binding payroll tax code exists as of December 2025, the direction of reform discussion is consistent: reduce divergence and reduce interpretative disputes.
Common proposed simplification measures include:
- Harmonised definitions and tests (substantive simplification)
- Harmonised nexus and cross-border wage allocation
- Simplified contractor provisions (the highest-friction area)
- Administrative simplification (systems/process)
How would payroll tax simplification reduce compliance costs for SMEs in real terms?
Payroll tax simplification reduces SME compliance costs by lowering rework, reducing classification disputes, and shrinking the time spent reconciling payroll and contractor payments against varying legal tests.
- Time spent mapping payroll codes to payroll tax categories across different jurisdictions
- Adviser time spent interpreting contractor arrangements against inconsistent “relevant contract” tests
- Audit defence costs (document collation, interviews, legal analysis, objections)
- Cashflow shocks from retrospective assessments and penalty/interest exposure
- Current state: staff work across NSW and VIC, plus regular subcontractors paid via AP; annual reconciliation requires manual location allocation, contractor testing, and grouping review.
- Simplified state (if reforms proceed): one consistent wage allocation method, clearer contractor safe-harbours, and consistent grouping tests would reduce repeated re-analysis each year and reduce “grey area” adjustments during audits.
Why are contractor payments and “deemed wages” central to simplification?
Contractor provisions are central because they are both high-value and high-ambiguity, particularly for SMEs using subcontractors, labour-hire, owner-drivers, IT contractors, allied health contractors, and building industry trades.
In many payroll tax audits, the dispute is not whether the payment occurred—it is whether it is taxable as wages under state “relevant contract” or similar rules, and whether an exemption applies.
- Clearer, consistent exemptions for genuine independent contractors
- Reduced reliance on highly technical fact tests that vary in practice by jurisdiction
- Better alignment between payroll tax “contractor” concepts and business contracting realities
Important distinction for SMEs: a contractor can be correctly treated as a contractor for PAYG withholding and superannuation purposes, yet still be captured for payroll tax under state contractor provisions. This mismatch is a major source of inadvertent non-compliance.
How do grouping rules create unexpected payroll tax liabilities for SMEs?
- Threshold loss (the group may be treated as one employer)
- Higher effective tax payable
- Disputes about control, common ownership, or operational integration
- A service entity employing staff and charging related trading entities
- Family groups operating multiple businesses across entities
- Medical, dental, allied health, and professional firms with mixed entity structures
- Franchise-like structures with shared management functions
- Consistent grouping tests across jurisdictions
- Clearer exclusion/de-grouping criteria, with predictable evidence requirements
- Better guidance aligned to typical SME structures (rather than large-corporate assumptions)
How could harmonised administration improve reporting and cashflow certainty?
Harmonised administration improves SME outcomes because uncertainty is often administrative, not just legal.
- Multiple registrations and different payroll tax return formats
- Inconsistent terminology (even when concepts are similar)
- Different treatment of corrections, annual reconciliations, and interest/penalty remissions
- Different audit timeframes and information request styles
- SMEs often under-provide for payroll tax when contractor/grouping issues are unclear
- Retrospective assessments can be large and disruptive, particularly where thresholds were assumed available
What is the ATO’s role, and which ATO sources are relevant to payroll tax simplification?
The ATO does not administer payroll tax, but ATO-regulated payroll and record-keeping systems strongly influence payroll tax compliance quality. State revenue offices frequently request source documentation that is also required under Commonwealth regimes.
- ATO guidance on record keeping, PAYG withholding and reporting obligations (e.g., employer withholding and reporting frameworks, including STP-related guidance)
- ATO guidance on worker classification and superannuation guarantee concepts (relevant because misclassification frequently co-exists with payroll tax errors)
- Taxation Administration Act 1953 (Cth): administration framework that underpins PAYG withholding system design (not payroll tax, but relevant to payroll controls)
- Superannuation Guarantee (Administration) Act 1992 (Cth): worker/employee concepts often considered alongside payroll tax risk reviews
- Fair Work Act 2009 (Cth): employment arrangements and entitlements documentation used to evidence workforce arrangements
It is established in professional practice that improving ATO-aligned payroll controls (contracts, timesheets, payroll categories, STP reporting hygiene) reduces payroll tax audit friction because the same underlying evidence is typically demanded by state auditors.
What should SMEs do now while reforms are still evolving?
SMEs should treat “simplification” as a likely medium-term policy direction, not a reason to defer compliance. The correct approach is to stabilise payroll tax governance now, so that any future simplification reduces effort rather than exposing legacy issues.
- Confirm jurisdiction exposure
- Review contractor arrangements with payroll tax in mind
- Review grouping risk annually (or upon restructure)
- Improve payroll coding and documentation
- Model cashflow exposure
What practical examples show how simplification could reduce SME burden?
- Current burden: each subcontractor invoice is tested for payroll tax “relevant contract” risk; exemption evidence is inconsistent; annual reconciliation becomes forensic.
- With simplification: clearer safe-harbours and consistent exemptions reduce re-testing and reduce audit disputes.
- Current burden: practitioners may invoice as contractors, but state payroll tax treatment can be contentious; grouping/service entity structures add complexity.
- With simplification: consistent guidance and clearer tests reduce retrospective assessments and improve certainty when onboarding new practitioners.
- Current burden: allocating wages across jurisdictions requires manual tracking; frequent employee travel creates “nexus” uncertainty.
- With simplification: one consistent allocation method and standardised evidence reduces administrative effort and improves accuracy.
How does automation reduce payroll tax compliance burden even before legal simplification?
Automation reduces burden by improving data quality, audit readiness, and consistency of treatment—particularly for contractor payments and reconciliations between payroll systems and bank statements.
- Reconcile wages, super, and contractor payments faster and with fewer errors
- Maintain consistent coding and evidence trails
- Identify anomalies (unusual contractor patterns, split payments, inconsistent GST treatment)
- Produce cleaner audit packs (payment proof, narratives, categorisations)
This is where AI accounting software Australia is increasingly relevant: it is established that better transaction classification and faster reconciliation reduces downstream tax risk across multiple regimes, including payroll tax.
Next Steps: How Fedix can help SMEs and accounting practices
Fedix helps Australian accounting practices reduce the manual workload that payroll tax complexity creates around reconciliations, contractor payment reviews, and year-end compliance preparation. Using MyLedger (Fedix’s AI-powered platform), practices can accelerate the monthly close and produce cleaner supporting workpapers that stand up better in state revenue audits.
- Automated bank reconciliation that reduces month-end processing time by approximately 90% (typically 10–15 minutes per client rather than 3–4 hours), freeing capacity to focus on payroll tax risk areas like contractor testing and grouping reviews.
- AI-powered categorisation to consistently classify wages, superannuation and contractor payments for review.
- Automated working papers to standardise documentation and improve audit readiness across engagements.
If you are reviewing payroll tax exposure or preparing for a state revenue audit, consider standardising your monthly reconciliation and workpaper workflow first—this is often the fastest controllable lever while legislative reform remains uncertain. Learn more at home.fedix.ai.
Conclusion: What SMEs should take away in 2025
Payroll tax simplification is likely to ease SME burden primarily by reducing inconsistency, uncertainty, and duplicated administration across jurisdictions—especially around contractors, grouping, and cross-border wages. Until reforms are implemented, SMEs should assume payroll tax remains an audit-active area and invest in stronger documentation, clearer classifications, and better monthly reconciliations to reduce retrospective assessment risk.
Disclaimer: This material is general information only and does not constitute tax or legal advice. Payroll tax is administered under state and territory legislation and interpretations differ by jurisdiction and fact pattern. Advice should be obtained from a qualified Australian tax professional before acting.