Payroll compliance is one of the highest-risk areas in Australian business finance. The ATO's data matching capabilities have expanded substantially with STP Phase 2, the Fair Work Ombudsman runs active investigation campaigns across most industry sectors, and employees are more aware of their entitlements than at any point in recent history. An annual internal payroll compliance audit — run by the bookkeeper, reviewed with the client — is not overkill. It's risk management. Here are the 12 areas that should be on every checklist.
1. STP Reconciliation
Single Touch Payroll Phase 2 requires employers to report disaggregated payroll data — regular salary, bonuses, allowances, reportable fringe benefits, and so on — to the ATO with every pay run. By year-end, the cumulative figures reported through STP should reconcile to:
- Total gross wages in the profit and loss statement
- Total PAYG withholding in the profit and loss
- Total super contributions reported
Run this reconciliation before finalising STP at year-end. Discrepancies arise when pay runs are processed outside the payroll system, when journal entries adjust payroll accounts without corresponding STP reporting, or when corrections aren't lodged correctly. Unexplained variances attract ATO attention.
2. Super Guarantee Accuracy
Superannuation guarantee (SG) for the 2025–26 year is 11.5%, rising to 12% from 1 July 2025. Check three things: the rate is correct (a surprising number of payroll systems still carry old rates if not updated), the base is correct (SG applies to ordinary time earnings, not all payments — overtime is generally excluded, but many allowances are included), and payments have been made on time.
SG must be received by the fund by the 28th of the month following each quarter. A payment that leaves the bank account on 28 April but takes three days to clear is late — and a late payment triggers the Super Guarantee Charge, which is not deductible and includes interest and administrative penalties. Check bank remittance records against fund acknowledgements, not just the payment date.
3. PAYG Withholding Accuracy
Cross-check the PAYG withholding amounts remitted to the ATO against the withholding reported in STP and the payroll records. The ATO's activity statement data is compared to STP data in near real-time, and discrepancies trigger automated review requests.
Also verify that withholding rates are correctly calculated for each employee. Employees who have not submitted a Tax File Number declaration are subject to withholding at the top marginal rate (47%). Employees who have claimed the tax-free threshold at another employer should not also be claiming it in this payroll system — this is a common source of year-end surprises when individual tax returns are lodged.
4. Leave Accruals: Balances and Rates
Annual leave accrues at a minimum of 4 weeks per year for full-time employees (pro-rated for part-time). Personal/carer's leave accrues at 10 days per year. Long service leave entitlements vary by state. Check that the payroll system is accruing leave at the correct rate, that accrual balances are reconciled to the balance sheet liability at year-end, and that accruals are calculated on the employee's current pay rate (not the rate when leave was earned — a common error in manual systems).
Leave loading, where applicable under an award or enterprise agreement, must also be accrued and tracked. Annual leave loading of 17.5% applies under many awards and must be paid when annual leave is taken.
5. Award and Enterprise Agreement Compliance
The Fair Work Ombudsman's Compliance and Enforcement Policy makes clear that underpayment of award wages is a priority enforcement area. An annual award compliance check should verify: that the minimum rates in use are the current award rates (updated each July 1 following the Annual Wage Review), that penalty rates are correctly applied for each shift type, that all applicable allowances are being paid, and that casual loadings are correctly calculated (minimum 25% loading on the base rate in most awards).
For clients with enterprise agreements, check the agreement's expiry date. Agreements that have passed their nominal expiry continue to apply but may be challenged — a sign that a renegotiation discussion with the client is warranted.
6. Termination Payments
Termination payments are one of the most error-prone areas in payroll. The correct calculation depends on the reason for termination (resignation, redundancy, genuine redundancy, or dismissal), the employee's length of service, their classification under the relevant award, and whether they are above or below the preservation age for ETP purposes.
Check each termination processed during the year against the relevant checklist: unused annual leave paid out, unused long service leave (by state rules), any genuine redundancy payment up to the tax-free limit, and the correct PAYG withholding applied to each component (leave is withhold differently from salary; ETPs have a separate withholding rate).
7. Fringe Benefits Tax (FBT) Reporting
If any employees receive non-cash benefits — a company car, car parking, entertainment, gym memberships, low-interest loans, or expense reimbursements that don't meet the otherwise deductible rule — FBT may apply. The FBT year runs from 1 April to 31 March, and returns are due by 21 May (or later if lodged through a registered agent).
Check whether reportable fringe benefits amounts have been correctly included in STP reporting for affected employees. Reportable FBT amounts do not affect the employee's income tax but do affect income tests for Medicare Levy Surcharge, private health insurance rebate, and certain government benefits. Getting them wrong creates downstream problems for employees.
8. Salary Sacrifice Arrangements
Salary sacrifice arrangements — most commonly for superannuation, but also for vehicles and other benefits — must be correctly documented and processed. Key checks: the arrangement was agreed in writing before the work was performed (not retrospectively), the correct pre-tax deduction is applied in each pay run, and the benefit provided is correctly classified for FBT and STP purposes.
Super salary sacrifice is reported in STP Phase 2 as a separate income type. The sacrificed amount reduces the employee's taxable income but does not reduce the SG base (since July 2023, salary sacrifice cannot be used to reduce an employer's SG obligation).
9. Contractor vs Employee Misclassification
Review all contractor arrangements active during the year. For each contractor, ask: is this individual performing work that is principally personal labour? Are they working exclusively or predominantly for this business? Are they subject to direction and control? A yes answer to these questions suggests the arrangement should be examined against the employee/contractor distinction.
The High Court's decisions in CFMEU v Personnel Contracting and ZG Operations v Jamsek (2022) shifted the analysis toward the terms of the contract rather than the practical reality of the relationship — but the ATO's guidance on super guarantee and the Fair Work Act's definition of employment remain relevant for their respective obligations. Where there's doubt, document the analysis.
10. Payroll Tax Obligations by State
Payroll tax is a state and territory tax levied on wages above a threshold. Each state has its own rate (ranging from 4.75% to 6.85%) and threshold (from approximately $700,000 to $2 million in annual wages). Grouping provisions mean that related businesses' wages are aggregated for threshold purposes.
Check whether any client has crossed or is approaching the payroll tax threshold in their state. A business that grew rapidly during the year may have inadvertently triggered a payroll tax liability and registration obligation mid-year. Late registration incurs penalties — catching it during an annual audit is considerably better than the state revenue office catching it first.
11. Director Fee Payments
Directors of companies who receive fees (as distinct from salary or dividends) must have PAYG withheld and super paid on those fees, provided the fees are for personal services and the director is not receiving them through a separate company. Directors who receive "unpaid present entitlements" from a trust rather than fees have different obligations. Verify that director payments are correctly classified and that withholding and super have been applied.
12. Record-Keeping Completeness
The Fair Work Act requires that employee records be kept for seven years. Check that all payroll records — employment contracts, Tax File Number declarations, leave requests and approvals, termination paperwork, and superannuation fund details — are retained and organised. The ATO requires payroll records to be accessible on request; the Fair Work Ombudsman can require production of records during an investigation.
A complete payroll compliance audit covering these 12 areas takes a few hours for a well-run payroll and a day or more for a messy one. Either way, it's worth doing annually — before EOFY lodgements are finalised, not after.