Payroll Legislation and Policies

Before delving into payroll specifics, let us look at the current legislation impacting payroll in Australia.

Legislation regarding payroll accounting includes compliance with the:

• Tax Practitioners Board (TPB)
• Australian Tax Office (ATO)
• Fair Work Commission and Ombudsman
• Safe Work Australia

Other laws relating to payroll are:

• The Corporations Law
• The Privacy Act
• Superannuation Guarantee Act
• Australian Bureau of Statistics Act
• Payroll tax
• Medicare Levy
• Higher Education Loan Program (HELP) Higher Education Support Act 2003
• Fringe Benefits Tax Assessment Act 
• Fringe Benefits Tax Act 
• National Employment Standards

Legislative obligations impacting payroll in Australia

This is an excellent reference from PWC.com. Download the PDF and save it for review when you need it.

Codes of practice

When starting or running a business, you must identify which codes of practice are relevant to your business.

Codes of practice are referenced in Acts and Regulations.

They may include:

• general statements of principle and practical advice for how a business or industry should operate
• detailed business practices where businesses must comply with specific standards.

You must comply with all instructions in a code of practice. The business has an obligation to provide training to ensure all staff are aware of and know how to comply with relevant codes. Ideally, codes of practice should be covered as part of a staff induction program.

This page, Administrative and support services industry, on the business.gov.au website, has information on specific industry codes of practice relevant to payroll operations.  

The ATO is the principal revenue collection agency of the Australian Government. The principal legislation governing income tax in Australia is the:

• Income Tax Assessment Act 1936 (Cth) (“ITAA36”)
• Income Tax Assessment Act 1997 (Cth) (“ITAA97”)
• Fringe Benefits Tax Assessment Act 1986. 

The ITAA97 has replaced some, but not all, the provisions of the ITAA36, some of which are still in force. The general rules dealing with tax liability are contained in ITAA97. The ATO administers the income tax system.²¹

Some Key Requirements of Taxation Law

Pay as you go (PAYG) withholding

Employers need to withhold PAYG withholding amounts from payments made to their employees and other workers, such as contractors, anyone they have a voluntary agreement with, or businesses that do not quote their Australian business number (ABN). The ATO provides a range of tax tables to assist businesses to work out how much tax to withhold from payments made to employees.

• It is a requirement to register for PAYG withholding before you are first required to make a payment that is subject to withholding.
• PAYG withholding registration should be cancelled if you are no longer employing staff.
• Before entering into an employment contract with a worker, you need to check that they have the right to work in Australia.
• PAYG withholding is different to payroll tax. Payroll tax is a state tax.
• It is important to keep accurate records.

A payment summary shows all the payments an employer made to their employees during a financial year and the amounts they have withheld from those payments. Employers must provide an employee with a payment summary regardless of whether they withheld tax. We will consider PAYG withholding in more detail later on in the module.

More information on PAYG withholding can be found on the ATO website.

Pay as you go (PAYG) instalments

PAYG instalments are different to PAYG withholding.

When a business's income reaches a certain amount, the business will be asked to pay income tax in instalments. The PAYG instalment amount is based on the business's instalment income (Gross business income less GST + Investment income less GST) and is intended to reflect the expected tax liability for the current year. By making instalments throughout the year (usually quarterly), the business will not have to pay a large tax bill when it lodges its current year's tax return. 

Once the business completes its tax return, the amounts already paid are offset against the total amount of tax due. The business will then receive either a bill for extra tax or, if they have paid too much, they will receive a refund. PAYGI is reported on the BAS or IAS, however, it does not impact payroll.

Individuals are liable to pay PAYG instalments if they report $4,000 or more ($1 or more if they are not a resident) of gross business and/or investment income in their latest tax return ¹unless one of the following applies:

• the tax payable on their latest notice of assessment is less than $1,000
• their notional tax is less than $500
• they are entitled to the senior's and pensioner's tax offset.

Fringe Benefits Tax (FBT)

A fringe benefit is a payment provided to an employee in place of receiving salaries or wages that can be used for that employee's benefit. The term benefit can include rights, privileges or services.
For example, a fringe benefit may be provided when an employer:

• allows an employee to use a work car for private purposes
• provides an employee with a cheap loan
• pays an employee's gym membership or other personal expense
• ²provides entertainment by way of free tickets to concerts or other events
• ³reimburses an expense incurred by an employee, such as school fees
• gives benefits under a salary sacrifice arrangement with an employee
• provide goods or services to an employee at a lower rate than they are generally sold to the public.²²

Employers pay fringe Benefits Tax (FBT) on certain benefits they provide to their employees, families, or associates. FBT applies even if a third party provides the benefit under an arrangement with the employer.

⁴FBT is separate from income tax and is calculated on the taxable value of the fringe benefit. Employers must self-assess their FBT liability for the FBT year (1 April to 31 March) and lodge an FBT return. If the value of fringe benefits exceeds $2000 in an FBT year, it becomes reportable, and the grossed-up taxable value of the benefits must be recorded on the employee's payment summary or income statement in Single Touch Payroll (STP). The tax payable is the fringe benefits taxable amount multiplied by the FBT rate.

A business registered for GST can claim a GST credit for acquisitions made to provide fringe benefits. However, there are some exceptions to this rule, for example, when the purchase relates to a GST-free or input-taxed supply.

More information on fringe benefits tax can be found on the ATO website.

• Fringe benefits tax  Australian Taxation Office
• The entire act: Fringe Benefits Tax Assessment Act 1986 - PDF
• Fringe benefits tax - a guide for employers

Fair Work Act 2009 (Cth) (“Fair Work Act”)

From 1 July 2009, most Australian workplaces are governed by a new system created by the Fair Work Act. ⁵The Fair Work Act is the main legislation set by the Australian Government under which the Fair Work Commission operates. The Fair Work Regulations 2009 (Cth) support the Fair Work Act. The Fair Work Australian Rules 2010 outline practices and procedures to be followed in the Fair Work Commission. They are issued by the authority of the President of the Fair Work Commission.

⁶On 31 December 2009 Queensland legislation referred state industrial relations powers for the private sector to the Commonwealth. This referral complemented the Commonwealth legislation for a national industrial relations system which commenced on 1 January 2010. The Queensland Parliament passed the Fair Work (Commonwealth Powers) and Other Provisions Act 2009 on 11 November 2009. The new national industrial relations system applies to all Queensland private sector employees.

Public sector and local government workers in Queensland remain under the state industrial relations system. Compliance services encompassing the enforcement of awards and agreements for the private sector and audit campaigns are now the responsibility of the Fair Work Ombudsman. Employees who feel they are disadvantaged with respect to payment of wages and employment conditions may lodge claims with the Ombudsman’s office.²⁰

Payroll officers need to understand the Fair Work Act 2009 and the National Employment Standards to ensure that employees receive their correct entitlements, are provided with access to flexible working arrangements and fairness at work and are not discriminated against in the workplace.

Fair Work Commission and Ombudsman 

The Fair Work Ombudsman and the Fair Work are independent and separate government organisations. They both regulate Australia’s workplace relations system but have different roles.

The Fair Work Commission⁷:

• Sets the safety net of minimum employment wages & conditions within Australia (National Employment Standards)
• Determines changes to pay & conditions in industrial awards & registered agreements
• Hears unfair dismissal claims
• Deals with harassment & bullying claims
• Makes decisions about industrial action
• Resolves collective & individual workplace disputes through conciliation, mediation & public hearings.

Business owners and payroll staff rearly deal directly with the Fair Work Commission unless they are involved in a case.

The role of the Fair Work Ombudsman is to promote harmonious, productive, cooperative and compliant workplace relations in Australia. 

The Fair Work Ombudsman⁸:

• Ensures compliance with the Fair Work Act, related legislation, Awards and Registered Agreements
• Educates individuals and companies on pay rates and workplace conditions
• Appoints Fair Work Inspectors
• Provides advice and investigates problems with pay, conditions, entitlements, discrimination, performance management, policies & procedures and workplace culture.

The Fair Work Ombudsman's website has various tools, resources and factsheets to assist businesses and payroll officers manage staff and payroll.

You can register on the Fair Work Ombudsman website to keep up to date with all the awards for your business and be notified of any changes to pay rates or conditions.
The site also has a convenient pay calculator so you can double-check rates and calculations, particularly regarding termination payments.

Access the Fair Work Ombudsman website and answer the following questions.

Industrial Instruments

An industrial instrument is a legally enforceable document relating to minimum entitlements for employees covered within its scope. This usually refers to a modern award, enterprise agreement, and any preserved instrument made under the previous workplace relations system.

The minimum conditions provided under these instruments apply automatically and cannot be overridden by any other arrangement between the employer and an employee. Although the Fair Work Act introduced modern awards and enterprise agreements as new industrial instruments, the Fair Work (Transitional and Consequential Amendments) Act 2009 [Cth] preserved existing industrial instruments.

The national minimum wage and the National Employment Standards (NES) make up the minimum entitlements for employees in Australia.

An award, employment contract, enterprise agreement or other industrial instruments can not provide for conditions that are less than the national minimum wage or the NES. They also can not exclude the NES.

National Employment Standards

The eleven minimum entitlements of the NES are:

Modern Awards

¹⁰Awards (modern awards) are legal documents that outline the minimum pay rates and conditions of employment.

The Fair Work Ombudsman has developed a Modern Awards fact sheet to assist businesses in understanding what a modern award is and who is covered under a modern award.

There are more than 122 Modern Awards in Australia¹¹, covering most industries and occupations. These awards ensure that employees experience consistently fair working conditions no matter what their job. Some examples of current modern awards include:  

• Aged Care Award 2010 
• Building and Construction General On-site Award 2020 
• Children’s Services Award 2010 
• Clerks – Private Sector Award 2020 
• Hospitality Industry (General) Award 2020 
• General Retail Industry Award 2020 
• Rail Industry Award 2020

Understanding which Awards need to be applied in a business can be difficult, particularly as this can change depending on the business's activity and employee's job role. As a payroll officer, you must understand which Award needs to be applied to each employee and carefully follow the rules within that Award.

Wage rates and obligations within awards update from time to time, particularly with each new financial year. Being aware of awards changes and updating these changes in your payroll system will ensure you are not putting the business owners at risk of underpaying employees.

Enterprise Agreement

An Enterprise Agreement is negotiated between employers, employees and bargaining representatives to establish a fair working wage and conditions of employment. Enterprise Bargaining Agreement (EBA) was an old term before the FWC amended it to Enterprise Agreement. 

An Enterprise Agreement (EA) gives employers and employees the freedom to bargain for better wages, greater flexibility and working conditions to suit their individual needs above and beyond a Modern Award or the National Employment Standards (NES).

The Fair Work Act 2009 sets out strict rules and guidelines for all parties to follow to ensure the process is fair. This includes guidelines for negotiating, mandatory terms to include, and the requirements to meet the FWC approval standards.

¹²Enterprise Agreements can benefit employers by negotiating for more flexible working conditions, provided employees are better off overall. Likewise, employees can bargain for higher wages and extra benefits the applicable Modern Award may not offer.

There are three types of employment agreements:

• Single-enterprise agreement: made between one or more single interest employers (employers with shared interest i.e in a common enterprise, joint venture or related corporations, or who are authorised to be single interest employers by the Fair Work Commision) and employees to be covered by the agreement.
• Multi-enterprise agreement: made between one or more employers who may not have a single interest and employees to be covered by the agreement.
• Greenfields agreement: made in relation to a new enterprise before any employees are hired. This agreement can be a single-enterprise or multi-enterprise agreement between employers, employee associations or other bargaining representatives (usually a union).

An Enterprise Agreement cannot offer overall lesser terms than the Modern Award or the National Employment Standards.

Workers' compensation is a compulsory form of insurance for all employers which provides protection to workers if they suffer a work-related injury or disease.

Any business that employs or hires workers on a full-time, part-time or casual basis, under an oral or written contract of service or apprenticeship, must have worker's compensation insurance that covers all workers.

If a worker suffers a workplace injury or disease, the worker's compensation scheme may provide the injured worker with: 

• one-off lump sum payments
• income replacement
• medical and rehabilitation expenses
• support for workers to return to work.

Each state government regulates the worker's compensation scheme in that state.  The various schemes are administered in different ways and insurers may have different roles within the schemes.  To learn more about worker's compensation schemes in Australia visit the website of your state or territory’s government agency that is responsible for overseeing the workers' compensation and injury management system:

• Australian Capital Territory: WorkSafe ACT 
• New South Wales: SafeWork NSW
• Northern Territory: NT WorkSafe 
• Queensland: WorkSafe Queensland 
• South Australia: ReturnToWork SA 
• Tasmania: WorkCover Tasmania 
• Victoria: WorkSafe Victoria  
• Western Australia: WorkCover WA 

Payroll is one of the largest expenses for any business. A payroll policy establishes internal checks and balances to control and protect this expense by reducing the incidence of errors and opportunities for fraud. 

Payroll procedures contained within a payroll policy create efficiencies in terms of time collection, document processing, data entry, payment and record keeping. Procedures that are clearly described, communicated, followed, and monitored set the path for a clear and well-defined approval process, and efficient payroll activities.

A payroll policy sets out a set of rules for the payroll process in reference to:

• a record and payment of salaries/wages
• processing timesheet information
• deductions, withdrawals, taxes and fees paid
• payday schedules
• methods of payment
• privacy — not disclosing any information relating to an employee to a third party without the employees permission.

As a company's payroll officer, you will likely be provided with the policies that your business uses to ensure legislative compliance. It’s good to know how to write a payroll policy so you can evaluate it and/or create one yourself.

SmallBusiness.com, has excellent information in this article, Company Payroll Policies, which provides the key Payroll areas that need direct policy. While it is U.S.-based, the concepts apply to all businesses with a payroll.

Another webpage on the same site covers the equally important establishment of payroll procedures.

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