Payroll tax does not have GST added to it, and GST is not part of the payroll tax rate itself. The two sit under separate laws: payroll tax is a state and territory charge on the wages you pay, while GST is a 10% federal tax on most goods and services sold in Australia.1Australian Taxation Office. How GST Works No revenue office layers 10% on top of your payroll tax assessment, and ordinary employee wages carry no GST component to begin with. GST only enters the picture when you’re working out taxable wages for contractor payments and certain fringe benefits, and in those cases the rule is to take the GST out, not put it in.
Why GST Doesn’t Attach to Payroll Tax
Under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999, something is a taxable supply only if an entity makes a supply for consideration, in the course of an enterprise, connected with Australia, and the entity is registered or required to be registered for GST.2Australian Taxation Office. ATO ID 2005/182 A state revenue office collecting payroll tax isn’t running an enterprise or supplying you anything. It’s exercising a statutory power. With no supply, there’s nothing for GST to attach to.
So when a monthly return or annual reconciliation lands, the amount owing is the tax itself. Nothing added. There’s also no input tax credit to claim, because no GST was ever charged. Most businesses code payroll tax as a straight operating expense with no GST treatment.
Employee Wages: Nothing to Strip Out
For regular employees, GST doesn’t enter the calculation at all. An employee working under an employment relationship isn’t making a taxable supply of services to you, so their wages and salary have no GST component.3Revenue NSW. GST Considerations for the Calculation of Payroll Tax Liability The gross wage you pay is the amount you report as taxable wages. If your workforce is entirely employees, the interaction between GST and payroll tax is not something you need to think about.
Contractor Payments: Take the GST Out First
Where the question gets real is contractor payments caught by the “relevant contract” provisions in state payroll tax legislation. If a contractor’s payments count as taxable wages, you calculate payroll tax on the GST-exclusive amount.4Revenue NSW. Contractors and Payroll Tax
A worked example makes the mechanics obvious. A contractor invoices $2,200 including GST. That’s $2,000 for the work and $200 of GST. You report $2,000 as taxable wages.3Revenue NSW. GST Considerations for the Calculation of Payroll Tax Liability The $200 is a federal amount the contractor remits to the ATO. Rolling it into taxable wages means paying state payroll tax on a federal tax figure.
When a contract covers both labour and materials, remove the GST first, then apply any deduction for the non-labour component. If the invoice separately identifies labour and non-labour amounts and the non-labour portion reflects reasonable market rates, you deduct that portion from the GST-exclusive figure.4Revenue NSW. Contractors and Payroll Tax Order matters: GST off the top, then labour separated from materials.
This treatment is the same across every state and territory as part of the payroll tax harmonisation arrangements in place since 2007.5Payroll Tax Australia. Resources Employment agents excluding GST from payments to on-hired workers apply the same rule.6Queensland Revenue Office. Payroll Tax Act – Harmonised: GST Considerations for the Calculation of Payroll Tax Liability
Fringe Benefits and the Gross-Up
Fringe benefits work a little differently, but the underlying principle is the same. For payroll tax, you report the grossed-up value of fringe benefits, and the Fringe Benefits Tax Assessment Act 1986 splits benefits into Type 1 (where you can claim a GST input tax credit) and Type 2 (where you can’t).
Rather than using the two separate FBT gross-up rates, payroll tax adds the Type 1 and Type 2 amounts together and multiplies by the Type 2 (lower) rate.7Queensland Revenue Office. Calculating the Grossed-Up Value of Fringe Benefits for Payroll Tax That effectively removes the GST component that would otherwise inflate the taxable figure. Same idea as contractor payments: state payroll tax applies to the real value of the benefit, not to embedded federal tax.
Records You Need to Support GST Exclusions
If you’re stripping GST out of contractor payments, you need the paperwork to prove it. That means valid tax invoices showing the contractor’s ABN, the total price, and the GST as a separate amount. Without a clear GST breakdown, revenue offices will generally treat the whole invoice as taxable wages.
The ATO requires records to be kept for at least five years from when the record was prepared or the transaction completed, whichever is later.8Australian Taxation Office. Overview of Record-Keeping Rules for Business State revenue offices can reassess payroll tax for five years from the original assessment.9Government of Western Australia. Commissioner’s Practice TAA 16 – Certain Assessment and Reassessment Time Limits Contractor invoices held for anything less than that window put your GST exclusions at risk if a reassessment comes through.