The end of financial year (EOFY) is a time to claim all eligible tax deductions on offer. When people think of tax deductions for their businesses, they automatically think of operating and capital expenses. If you hire staff, there are tax deductions to be made on your workers’ salaries, wages, super contributions paid on time to a complying super or retirement savings accounts (RSA) for your employees and certain contractors because they are classified as a type of working expense.
Payroll is eligible for certain types of tax deductions, including:
- Staff training costs
- Payroll Tax
- Staff amenities
Types Of Deductions
Claimable tax deductions depend on your business structure.
Sole traders can’t claim any tax deductions on their salary or wage because they’re deemed to be a business owner and not an employee of themselves and as such, can’t pay a wage or salary to themselves. The income you pay yourself is considered to be a distribution of profit. Partnerships are classified in the same manner. If your business is a company or trust, you can generally claim tax deductions for salaries or wages paid to workers. Contractors who have been employed must fully comply with the Pay-As-You-Go (PAYG) withholding reporting obligations for each payment.
Tax Deductions on Super Contributions
Tax deductions can be claimed on super contributions you pay to staff. The caveat here is that payments must be made on time to be eligible. Payments made to complying retirement savings accounts (RSAs) also qualify.
The current super guarantee is 10% of your employee’s ordinary time earnings. You’ll also need to pay the super guarantee if your worker earns more than $450 a month, or if they work 30 hours or more in a week if you employ under 18s.
As of 1 July 2022, the super rate will increase to 10.5% and for workers over 18 years old, the $450 threshold will no longer exist, and the super guarantee will be payable regardless of the income earned each month.
Super must be paid at least four times per year, or with each payroll. You must pay and report directly to the Australian Taxation Office (ATO) using Single Touch Payroll (STP) with each payroll to ensure you meet SuperSteam requirements.
New rules brought in means you’ll need to pay into your employees selected fund if they give that to you, known as their ‘Stapled Fund’, or offer them your businesses choice of super fund if a request hasn’t been given.
If you don’t pay your super obligations, you’ll be charged with an excess fee that is not tax deductible.
Pro Tax Tip: Tax deductions for wages and salaries must be ordinary and necessary, reasonable in amount and paid for service provided in the current year they are received.
Payroll tax must be paid in some instances. Obligated amounts are determined on a state or territory basis. Payments are made on a monthly, quarterly or annual basis and made to respective states or territories. Check below to view the threshold and payroll tax rate for your state or territory:
Staff Training Costs
Training staff keeps your workforce skilled and up-to-date, and is well worth the investment to expand expertise and expand their knowledge. Perhaps there are certain licenses and permits needed so that your staff can do their job.
Tax deductions can be made on the full costs of providing education for your employees, such as course fees, travel costs, stationery, accommodation and meals if required. To be eligible, the course must have sufficient connection to your employee’s role and must maintain or improve specific skills for their current employment.
Pro Tax Tip: Your business might incur Fringe Benefits Tax, however the rules within FBT legislation allows for a full or partial reduction on FBT payable provided the ‘otherwise deductible’ rule is met.
Items you provide for your employees will be classified as entertainment or amenities, and are taxed differently. The difference is the way the amenity is given. If anything is given to staff with an entertainment value, the cost of the item will incur Fringe Benefits Tax. Tea, coffee and biscuits given for morning tea in a staff room isn’t liable for fringe benefits tax, unless they were given in conjunction with a party or leisure activity.
Fringe Benefits Tax (FBT)
Fringe Benefits are paid as an employer on benefits provided to employees in place of salary or wages. Benefits include use of a company car, ownership of electrical goods or certain employee benefits such as a salary package arrangement. FBT is separate from income tax and is based on the taxable value of the fringe benefit.
Cash Or Accrual
The type of accounting system you use will depend on when tax deductions can be made. Cash accounting systems means that you can claim wages and salaries in the same year its paid to your employees.
Accrual accounting systems will mean that the deduction is claimed for the year in which the obligation to pay is established and when the service is performed even if funds are paid later.
Taxation Of Termination Payments
An employment termination payment (ETP) is money paid when an employee stops working for a business. These payments are taxed differently to other payments, and include payments for:
- Rostered days off
- Unused sick leave
- Payments in lieu of notice of termination
- Severance pay
- Long service leave
- Compensation for loss of job or wrongful dismissal
- Certain payments after the permanent disability or death of an employee
Pro Tax Tip: Genuine redundancy and early retirement scheme payments are tax free to a limit and is based on your employee’s years of service. The tax-free amount is not a part of your employee’s ETP.
ITP Accounting Professional specialise in helping Australian Small Business understand and keep up to date with changes to tax law relating to employee obligations. Our business tax accountants are well versed in keep you on track and up-to-date. Phone 1800 367 487 and chat with a friendly professional about your business tax requirements today.