A guide to payroll deductions in Australia
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What is a payroll deduction?
Payroll deductions is money taken out of an employee’s pay. These deductions are used for purposes such as paying taxes, contributing to superannuation, and paying for benefits like health insurance. They are called deductions because they are taken out of employees' gross wages before they hit employees’ savings account.
There are a lot of different types of payroll deductions in Australia that employees pay out of their paychecks and employers can deduct some legally, such as federal income tax and superannuation for a retirement plan, while others are voluntary.
In Australia, an employer can only deduct money from an employee’s pay if:
- The employee agrees in writing and it’s principally for their benefit.
- It’s allowed by law, a court order or by the Fair Work Commission.
- It’s allowed under the employee’s Award.
- It’s allowed under the employee’s registered agreement and the employee agrees to it.
How much is deducted?
It depends on legalities and preferences, as well as the type of deduction. Payroll tax rates, thresholds and deduction entitlements vary between states and territories. The table below provides further information on 2022/2023 payroll tax rates, thresholds and maximum annual deduction entitlements. To find out more information for your state or territory, click on the link in the table below.
Payroll tax rates, thresholds and deduction entitlement in Australia
|
State/Territory |
Rate |
Monthly Threshold |
Annual Threshold |
Maximum Annual Deduction Entitlement* |
|
6.85% |
$166,666.66 |
$2,000,000 |
Same as annual threshold |
|
|
5.45% |
$92,055 (28 days in the month) $98,630 (30 days in the month) $101,918 (31 days in the month) |
$1,200,000 |
Same as annual threshold |
|
|
5.5% |
$125,000 |
$1,500,000 |
Same as annual threshold |
|
|
4.75% for employers of groups of employers who pay $6.5 million or less in Australian taxable wages 4.95% for employers of groups of employers who pay more than more than $6.5 million in Australian taxable wages Regional employers may be entitled to a 1% discount on the rate of payroll tax until 30 June 2023. From 1 January 2023, a mental health levy will apply to employers and groups of employers who pay more than $10 million in annual Australian taxable wages.
For the 2022–23 financial year, the thresholds are adjusted to accommodate the levy commencing during the financial year. |
$108,333 |
$1,300,000 |
Same as annual threshold |
|
|
0% to 4.95% Exceeds $1,500,000 but not $1,700,000 4.95% Exceeds $1,700,000 |
$125,000 |
$1,500,000 |
$600,000 |
|
|
4% $1,250,001 - $2,000,000 6.1% $2,000,001 or more |
$24,038 (per week during a month) |
$1,250,000 |
Same as annual threshold |
|
|
4.85% 1.2125% for regional employers |
$58,333 |
$700,000 |
Same as annual threshold |
|
|
5.5% |
$83,333 |
$1,104,000 |
Same as annual threshold |
*According to Payroll Tax Australia, if you employ for part of the financial year or in more than one state or territory, your deduction/threshold entitlement may be reduced. In some states and territories the deduction/threshold entitlement may reduce as wages paid increase.
An employee payroll deduction calculator might help work out how much deductions may be withheld from you.
Deductions That Aren’t Allowed
According to Fair Work, an employer can’t deduct money if:
- It benefits the employer directly or indirectly and is unreasonable in the circumstances.
- The employee is under 18 years of age and their parent or guardian hasn't agreed in writing.
Types of deductions
Payroll deductions can also be voluntary or mandated. For a better understanding of payroll deductions, keep reading, or, use the links below to jump to a specific payroll deduction section to learn more.
Types of payroll deductions
1. Mandatory payroll tax deductions
Employers are required by law to deduct these amounts and remit them to the relevant authorities.
Tax deductions
The most obvious of these types of mandatory deductions are for income tax. Workers who earn above the Australian Tax Office (ATO) set threshold will have income tax deducted. They will be taxed on the amount above the threshold; however, an employee may choose not to claim the tax-free threshold and in this instance the taxes levied will be on the entire amount. Whether or not they are claiming the tax-free threshold is determined by what they have completed on their Tax File Number (TFN) declaration.
Another mandated payroll deduction category is for the repayment of debts for the Higher Education Loan Program (HELP), VET Student Loan (VSL), Financial Supplement (FS), Student Start-up Loan (SSL) or Trade Support Loan (TSL). Thresholds apply before compulsory repayments are required. This additional deduction is usually included in the PAYG withholding amount based on information supplied in the TFN declaration.
The Medicare levy is a levy on your taxable income. This is generally included in the PAYG withholding amount deducted from employee gross wages.
Wage garnishes
Employees with a debt may have wage garnishments taken out of their wages. These types of arrangements require a court order and are withheld and remitted to the appropriate authority. Protected Earnings amounts may apply.
Claiming a tax deduction for workers' salaries and wages
A common question asked is “are wages tax deductible?” As a business owner you can generally claim a tax deduction for the salaries and wages you pay to employees. However, the deductions you can claim depend on the type of business you operate.
- Sole Trader: If you operate as a sole trader, you can’t pay yourself a salary or a wage because you are the business owner, not an employee. Any payment of a salary or wage to yourself is considered a distribution of profit, rather than a wage.
- Partnerships: If your business operates as a partnership, you can’t pay yourself a salary or a wage because you are a partner, not an employee. Any payment of a salary or wages to a partner is considered a distribution of profit.
- Company or Trust: If your business operates under a company or trust, it can generally claim a deduction for salaries and wages paid to you and other employees because the trust or company is a separate legal entity.
- Contractor: If you engage a contractor to complete a service for your business, you may be eligible to claim the amount you pay them as a deduction because you hired them to provide a professional service.
2. Voluntary payroll deductions
Unlike mandatory deductions, voluntary payroll deductions aren’t needed by law. With employee consent, some deductions can be taken from their pay. In order to deduct payments voluntarily, employers and employees will likely have to complete an employee payroll deduction authorisation form. You can learn more about deducting pay here.
Employee Superannuation contribution
An employee may wish to contribute to their superannuation voluntarily, which is separate from the obligatory employer superannuation contribution.
Union fees/professional association fees
Members of unions or professional associations can choose to make regular payments to the union they’re a member of and have these amounts deducted from their pay. These fees can be pre or post-tax provided they are directly related to earning employment income.
Other deductions
There are a range of other deductions that an employee may also request, such as workplace giving and salary sacrifice. It could include items such as employer-sponsored training where the employee needs to pay a share of the total cost, or it could even be as simple as the employee wanting extra finances in their health savings account, or other flexible spending accounts.
3. Pre-tax deductions and post-tax deductions
Pre-tax deductions are taken from an employee’s gross pay before any taxes are withheld. Pre-tax deductions reduce an employee’s taxable income, which is the amount of money on which their tax is calculated. Common pre-tax deductions include salary sacrifice options such as laptop computers, motor vehicles, workplace giving and superannuation.
On the other hand, post-tax deductions are taken from an employee’s net pay after all taxes have been withheld. Employees can refuse to take part in all post-tax deductions, except for wage garnishments.
Pre-tax deductions
Workplace giving deductions are those deductions where employees can regularly donate to charities or organisations. They can be either pre-tax or post-tax. If they choose to donate pre-tax, then the amount reduces the value of the gross wages on which the PAYG withholding tax is calculated. If they donate as a post-tax donation, then this will not reduce their taxable income and they may choose to claim this donation as a deduction on their personal tax return.
Salary Sacrifice Superannuation is a deduction where the employee sacrifices a set amount or percentage of their wage pre-tax to be paid into their complying superannuation fund. This amount is a Reportable Employer Super Contribution (RESC) on their annual income summary, and it does not reduce the calculation applied for the payment of superannuation by the employer.
Post-tax deductions
Union or Professional association fees are those deductions where employees contribute for their membership to a union or professional body.
Child support is a deduction taken from wages relating to child support payments paid across to Services Australia. When deducting child support there is a portion of the employee’s wages which is a Protected Earnings Amount (PEA) and is exempt from withholding.
Choosing a payroll system to help with your deductions
The list of payroll deductions mentioned here is by no means exhaustive as it just covers the most common types. Payroll deductions can be mandated, voluntary, pre-tax, or post-tax. Knowing the different types of deductions can help you understand where parts of your pay go each pay period.
Whether you’re a small business or large enterprise, increase your payroll efficiency and get peace of mind that you’re compliant, with a quality payroll system. A good payroll system can keep track of all of your data, making sure that you pay the right amount of employee pay, as well as keeping track of payroll taxes so you can avoid fines for not paying them.
QuickBooks Payroll, powered by Employment Hero, includes features such as taxable wages, post-tax and pre-tax deductions, payroll tax rates and thresholds, and even insurance contribution amounts and retirement savings for superannuation. QuickBooks Payroll allows you to:
- Process payroll
- Prepare payroll taxes
- Organise employee information
- Track company benefits
- Assign each employee's payroll to jobs
It is also Single Touch Payroll Phase 2 compliant. Check out QuickBooks Payroll.
Frequently asked questions
This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Neither Intuit Australia Pty Ltd nor any member of the Intuit Group (referred to collectively as Intuit) will have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit does not warrant that the information provided will continue to be accurate nor that it is completely free of errors when published. Readers should verify statements before relying on them.
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