State-based payroll taxes are a retrograde measure that act as a handbrake on growth. They are in urgent need of a rethink. You won’t find anyone with good word to say about payroll taxes, except maybe the state treasurers.
The payroll tax system is nutty. It is a tax on employing people. It acts as a monumental disincentive to bring on more staff. It also skews the employment market, giving an advantage to larger mainstream companies over small companies.
As ridiculous as payroll taxes are, they are a difficult problem to move without a much bigger overhaul of the rest of the tax system. The fiscal reality is that payroll tax makes up 20 per cent or more of state revenues. Unless we want to stop building roads and paying teachers, then these taxes will be in place until the tax system is overhauled.
Surely there is a need to rethink the way they applied. And here’s the thing. While the startup end of the innovation sector has not made a priority of payroll tax reform issues, that may be about to change now that larger numbers of companies are moving into scale-up stage.
The chief executive of fast-growing non-bank lender Beau Bertoli made a good case for reform in this AFR column. Of course, there is self-interest in this argument. But it also hard to read and not agree that a tax that kicks in when you add employees is a disincentive to grow.
In Prospa’s case, the galling part of this is that a NSW Government Job Action Plan introduced a couple of years that had offered some relief – it enabled some clawback through rebates in the first couple of years of a new employees joining the company – is now being wound back.
The new Job Action Plan rules mean that rebates will only apply to companies with less than 50 employees. Prospa, which is the fastest growing startup in Australia as measured by Deloitte’s Fast 50, grew from 35 employees to 95 in the past year.
It will add at least 50 this year, Mr Bertoli says. But it will no longer qualify for relief. Payroll tax will amount to about $300,000 annually for those additional 50 employees.
“That’s a huge amount of cash for a company that is trying to reinvest everything back into growth. It’s crazy.” Mr Bertoli said. The company has options, obviously. Developers are expensive, and it is not out of the question that eventually it would look to do some of that work offshore as a result.
He wants the NSW State Government to recognise that this is an issue, and to find a way to create an exemption that targets these high-growth, high-potential scale-ups.
Slingshot accelerator head of innovation for Scale-ups Karen Lawson says there is a case to be made for carving out exemptions for a very specific set of high-growth companies. These carve-outs are not ideal, but in the face of the more difficult political reality that ‘root and branch’ tax reform is a long way off, it is an interim solutions.
Payroll taxes are currently levied at 4.75 per cent to 6.85 per cent depending on the state, although the regime differ in terms of thresholds where payments start, and where rebates can be claimed.
Australia is an unusual market in that it has a very large proportion of companies with 50 employees or less. And this is where the wind-back of the Job Action Plan perhaps makes sense on paper. Small companies adding staff can still claim the rebate.
But for Karen Lawson, the problem remains the scale-up businesses. The Australian Innovation System Report 2015 – from the Federal Industry Department’s Office of the Chief Economist has some interesting numbers.
The report says just 3.2 per cent of startups in Australia go on to become high-growth scale-ups. This is a small number compared to startups in comparable economies. These companies contribute to employment growth at a spectacularly higher rate than other small businesses.
The opportunity, says Karen Lawson, is to focus on growing the pool of companies that reach scale-up stage.
“Even if we grew that number of scale-ups from 3.2 per cent of the pool to 5 per cent, that is an incredible opportunity,” she said.
Meanwhile, StartupAUS chief executive Alex McCauley says a call to make a special case of fast-growing companies in relation to payroll tax reform is a good idea.
“Beau [Bertoli]’s emphasis on young companies makes a lot of sense,” Mr McCauley said. “We don’t have to scrap the whole system and start again, but we should recognise that young, fast growing startups create most of the jobs in the economy.”
“They’re in a different category, and we should be everything we can to support them while they’re getting established and proving their model.”