Payroll Tax in Australia: State-by-State Thresholds, Grouping Rules, and Contractor Inclusions

Last reviewed against current ATO guidance: 19 Sept 2026. Always confirm current thresholds, rates, and dates at ato.gov.au.

Payroll tax is one of the most frequently misunderstood taxes in Australia — largely because it is administered by eight separate state and territory revenue offices, each with its own legislation, thresholds, rates, and administrative requirements. It is not a federal tax, it does not appear on a BAS, and it is not connected to the ATO's systems. Yet for businesses with a payroll above the applicable threshold, it can represent a significant annual cost — and the consequences of non-registration and non-lodgement attract substantial penalties and interest.

For bookkeepers advising growing clients, understanding payroll tax — when it applies, how the grouping provisions work, and what counts as "wages" for payroll tax purposes — is an essential skill.

What Is Payroll Tax?

Payroll tax is a state and territory government tax levied on the wages paid or payable by an employer that exceed the applicable threshold in each jurisdiction. It is a broad-based tax on labour costs, with various exemptions, deductions, and concessions that differ between states.

The key principle: once an employer's total taxable wages (in a state) exceed the annual threshold for that state, payroll tax is levied on the excess at the applicable rate. Below-threshold employers pay nothing; above-threshold employers pay on every dollar of taxable wages above the threshold.

Payroll tax is lodged and paid monthly (or annually if the annual liability is below the state's annual lodgement threshold) via the relevant state revenue portal. It is not deductible as a GST credit and is separately managed from all other business taxes.

State-by-State Thresholds and Rates (2026)

The thresholds and rates as at the current period are:

Note: These thresholds are subject to annual indexation in some states. Always verify with the relevant state revenue office for the current financial year.

Victoria's regional employer concession is notable: employers who primarily employ in regional Victoria (outside the Melbourne metropolitan area) qualify for a reduced rate of 1.2125% — approximately one-quarter of the standard rate. This concession has significant value for employers with large regional workforces, such as agricultural businesses, regional hospitality operators, and health services.

Western Australia's threshold phase-out operates differently to other states: the threshold begins phasing out at $7.5 million total wages and is eliminated entirely for employers with wages above a higher ceiling. This means very large WA employers effectively pay payroll tax on their total wages base (no deduction for the threshold amount).

What Counts as Taxable Wages?

The definition of "wages" for payroll tax purposes is broader than the definition used for PAYG withholding. Across Australian jurisdictions (following the Interstate Payroll Tax Harmonisation Scheme), wages generally include:

• Salary and wages (including allowances)
• Annual leave, sick leave, long service leave, and public holiday pay
• Bonuses, commissions, and incentive payments
• Director fees
• Fringe benefits (at the grossed-up taxable value used for FBT purposes — meaning payroll tax applies on the FBT taxable value, not the underlying cost)
• Superannuation contributions (compulsory SG contributions are not taxable wages in most states — but employer super above the SG, salary-sacrificed super, or contributions to defined benefit funds may be included, depending on the jurisdiction)
• Termination payments — certain components

Exempt wages vary by state but typically include:

• Wages paid to apprentices and trainees (state-specific exemptions and concessions apply)
• Wages of employees on parental leave in some jurisdictions
• Wages paid by certain charities and non-profit organisations (with conditions)
• Wages paid by public benevolent institutions (PBIs) in some states

Contractor Wages Inclusions: The Most Dangerous Trap

The contractor inclusion rules are where payroll tax most often catches businesses off guard. Under the harmonised payroll tax legislation across jurisdictions, certain payments to contractors may be deemed wages and included in the payroll tax base — even though the contractor is not an employee.

The contractor provisions are based on the concept of "relevant contracts." A relevant contract is one where:

• A person (the contractor) supplies services to a business (the employer/principal)
• The services are ordinarily performed in the principal's industry
• The contractor ordinarily provides these services and those of a similar nature to others, or
• The services are provided exclusively or predominantly to one principal

Critically, if a payment is made to a contractor under a relevant contract, it may be included as taxable wages unless one of the contractor exemptions applies. The key exemptions (which vary slightly by state) include:

1. The results test: The contractor is engaged to produce a specific result, brings their own tools, and is responsible for the risk of their work — they are genuinely working for a business outcome, not supplying labour.
2. The 90-day rule: The contractor does not provide services to the principal for more than 90 days in a financial year (days of actual service, not days of contractual engagement).
3. Services supplied to the public: The contractor genuinely provides services of the same kind to the public generally — not just occasionally to another client, but as part of a genuine business operation offering services broadly.
4. Employment of two or more employees: The contractor employs two or more people (other than themselves) at all times in connection with the contract.

The practical implication for bookkeeping clients: if a business regularly engages the same individual contractor for extended periods, in the same industry the business operates in, and that contractor does not clearly meet one of the exemptions, those payments should be included in the payroll tax wages base. Failure to include them is underreporting — and payroll tax audits regularly uncover this issue.

Grouping Provisions: Related Businesses

The grouping provisions are the second major compliance trap. Under state payroll tax legislation, related businesses are grouped for payroll tax threshold purposes — the group is treated as a single employer, and only one threshold deduction applies to the entire group.

Businesses are grouped if:

• One controls the other (e.g., a company and its subsidiary)
• The same person or persons have a controlling interest in both (e.g., two companies owned by the same director)
• There is a common employee arrangement (employees are shared between entities, or one entity performs functions for another using shared labour)

The practical consequence: two businesses each paying $800,000 in wages, individually below the NSW threshold of $1.2 million, may be grouped if they share a common owner. As a group, their combined wages of $1.6 million exceed the threshold, and payroll tax is payable on $400,000 at 5.45% — approximately $21,800 per year, which neither business has registered for.

Grouping applies even where the businesses are in different industries, operate independently, and have separate ABNs. The common ownership or control is sufficient.

For bookkeeping clients who have multiple related entities — a common structure in small business — reviewing whether the grouping provisions apply is worth doing proactively. State revenue offices can and do conduct grouping assessments, and retrospective payroll tax liabilities (going back five to seven years depending on the jurisdiction) with interest and penalties can be substantial.

Practical Recommendations for Bookkeepers

For clients approaching the payroll tax threshold in any state where they employ:

1. Monitor the threshold continuously. Set a wages alert in the payroll system that flags when cumulative wages are approaching the threshold. Payroll tax registration obligations arise from the date the threshold is exceeded — not from the end of the year.

2. Register proactively. Late registration attracts penalties in all jurisdictions. In some states, voluntary disclosure before an audit mitigates penalties; registration before being caught is the cleanest outcome.

3. Review contractor arrangements annually. Apply the relevant contract test and the exemptions to each significant contractor relationship. Document the analysis in the working papers.

4. Assess group structures. Where a client has related entities, map the ownership and control structure and apply the grouping test for each state in which the group employs.

5. State-specific advice: Where a client employs in multiple states, payroll tax applies in each state separately. An employer paying $2 million in NSW wages and $600,000 in QLD wages pays payroll tax in NSW (on the excess above $1.2M) but not in QLD (below the $1.3M QLD threshold) — assuming no grouping.

Payroll tax is a tax that many growing businesses discover they should have been paying years earlier. Getting ahead of it — through good threshold monitoring and proactive compliance — is far less painful than managing a retrospective audit.