Payroll tax changes required to help struggling hospitality businesses
Cost of living pressures, inflation, staff shortages and higher wages have conflated to make running a hospitality business a near impossible task. However, there is one more piece of the puzzle proving to be the bane of an owner’s experience: payroll tax – a levy calculated on wages paid to employees.
Simone Douglas, co-owner of The Duke of Brunswick Hotel and The Port Admiral Hotel, told CityMag that the tax is “Beyond it being the bane of my existence?”
Douglas and her partner and co-owner, Alex Fairgrieve, took over The Port Admiral Hotel 18 months ago after it went into liquidation and she explains that they “sought advice at the time to assess whether [they] were at risk of having all [their] businesses grouped together for payroll tax purposes”.
Douglas also owns the digital marketing firm AOK.
“They said that based on the different shareholdings we had, that we would be fine. But it turns out that we weren’t,” she told CityMag.
“So we probably made that decision to take on that business and risk a significant amount of capital, being first-generation family business owners.
“We wouldn’t have made that decision had we known that we were going to cop a $3000 a month payroll tax bill just for that venue.”
Simone and her partner faced a significant financial setback when all of their businesses were grouped together by tax authorities, resulting in a backdated payroll tax bill that effectively wiped out their profits for the 2022/23 fiscal year. This unexpected cost went straight to Revenue SA, leaving them with no gains despite their hard work across multiple ventures.
For Douglas, the payroll tax system presents several fundamental challenges. Unlike other taxes, payroll tax does not account for a business’s profitability in a given year; instead, it is calculated solely based on employee wages. Any business with wages above $1.5 million is subject to this tax, regardless of financial performance. In the hospitality sector, where wages have risen by nearly 25%, the threshold for payroll tax has remained unchanged since January 2019.
Simone sees this as a form of "bracket creep" benefiting the Treasury, while small, family-run businesses struggle to manage mounting costs in an environment she describes as a "cost-of-doing-business crisis" that mirrors the broader cost-of-living crisis.
To combat the impunity of the tax, Douglas and Fairgrieve have reduced their headcount from a staff of 70 to around 40 people.
“The business has to make different decisions based on whether or not you can afford to run with that extra staffing, or afford to take on that person that needs training, as opposed to someone that’s experienced,” Simone told City Mag.
“It also creates a challenge with a lack of level playing field too. So if you’ve got, you know, for argument’s sake, The Prince Albert Hotel is just down the street from us. They’re probably not paying payroll tax, which means that their baseline, they’re paying five per cent less for their labour than we are, basically.
“Which means that they can afford to have greater flexibility in their pricing models.
“So again, that small family business bracket, you know, we’re not the worst of the world, but we’re incurring those same kinds of costs, but we don’t have the bargaining power, nor do we want to then screw down our local suppliers on their raw ingredient pricing.
“Because at the end of the day, we got into business to create a great space for people to come and enjoy and the grouping rules in particular were designed to catch a big corporate – so none of our businesses in and of themselves qualify to have to pay payroll tax, all of our payrolls are well below the threshold individually.”
Simone and many business owners are pushing for an increase in the payroll tax threshold to better reflect labor cost growth, concerned that without this adjustment, more small businesses will be caught in “bracket creep.”
Hospitality, one of the hardest-hit sectors, is seeing a high number of closures due to rising operational costs and tax pressures. Simone believes the government should adopt policies to support small and medium businesses, thereby sustaining job creation rather than stifling it.
Among her suggestions are a 12-month payroll tax exemption on new hires and an “EBIT test”—paying payroll tax only if earnings before interest and tax are positive. She explains that new employees require substantial investment in training, which should be supported rather than penalised. Additionally, she advocates for payroll tax exemptions on trainees and apprentices, particularly in industries facing skill shortages, to alleviate costs for business owners who cover training expenses.
Jo Bodroghy of The Cooks Pantry, which recently closed due to rising costs, echoes these sentiments, recalling how temporary payroll tax relief during COVID made a significant impact. She suggests that similar relief could offer struggling small businesses a much-needed boost today.
The South Australian Business Chamber has also called for reforms, proposing to raise the payroll tax threshold from $1.5 million to $2.1 million and to reduce taxes for businesses in their first year.
EMBR Hospitality director Sam Worrall-Thompson shared his frustrations, noting that expanding businesses often face burdensome tax bills, making growth more challenging.
Treasurer Stephen Mullighan has confirmed that payroll tax cuts are currently “not being considered” by the South Australian government.
In his argument he claimed South Australia already has one of the more favourable payroll tax structures, with the second-highest exemption threshold at $1.5 million and one of the lowest standard tax rates, at 4.95 percent. When surcharge levies in other states are factored in, he says, South Australia’s top payroll tax rate is the lowest in the country.
Instead of tax cuts, Mullighan emphasises that the Malinauskas Labor Government is supporting the hospitality sector through other initiatives. These include a second round of the Economic Recovery Fund, which provides grants for small businesses to invest in energy-saving equipment, and a “significant investment” in high-profile events like Liv Golf and Gather Round, aimed at driving demand in hospitality.
Additionally, Mullighan highlights a $14 million Business Events Fund, which supports the state’s competitive bids to host international business events, with an emphasis on drawing visitors during the winter season. The government’s Small Business Strategy is also backed by $6.5 million over four years, and $2.3 billion has been allocated over five years to address the state’s skills shortages.
Despite challenges from rising costs and softer demand, Mullighan notes that South Australia has seen a 2.2 percent increase in retail turnover in cafes, restaurants, and takeaways over the past year, according to ABS data, which he views as a positive indicator for the hospitality sector.
Jonathan Jackson, 4th November 2024
