Retrospective payroll tax bills causing ‘angst and hardship’

NSW business owner Colin Walker thought all was well with his payroll tax liabilities until he was suddenly hit with a $1.1 million retrospective tax bill from Revenue NSW.

Editor’s note: This story first appeared on HR Leader sister brand Accountants Daily.

Walker, managing director of cleaning business Mastercare, had passed a recent payroll tax audit with flying colours. In fact, the audit found that he had overpaid payroll tax liabilities by $6,000.

When Revenue NSW suddenly informed him that he owed $1.1 million in payroll tax, plus liabilities and interest, Walker said it came as quite a shock.

“We put our hand out for the refund of the $6,000, and they came back and said, here’s a bill for almost $1.1 million plus interest plus penalties. We said, how the hell can that be? You’ve just said that we’ve paid all our payroll tax,” Walker told Accounting Times.

“They said, yes, you have, but we are now interpreting the legislation differently, and you owe us $1.1 million plus interest plus penalties. Pay us in 21 days.”

Walker said that the scale and speed of Revenue NSW enforcement threatened to force viable employers out of business. He called for urgent reforms to the system and a six-month moratorium on current and pending Revenue NSW enforcement.

He also demanded the release of the interim report from a recent parliamentary inquiry into payroll tax. The March 2025 inquiry delved into the apparent inconsistent application of employment agency provisions within the Payroll Tax Act 2007.

“Just be fair dinkum about this. We’re not the enemy. There’s people who pay payroll tax, companies that’ve paid payroll tax for bloody years, and now there’s a different interpretation of the same act, and you’re coming along and giving people, in our case, a million-dollar-plus bill,” he said.

“This is creating huge angst and hardship unnecessarily. And we just want the government; this is what we hoped with the inquiry; to give a moratorium, as they gave to the doctors, and sit down and get the legislation fit for purpose for 2025 so everybody’s responsible for their own tax.”

In Walker’s case, the authorities went back almost a decade to rustle up his $1.1 million tax bill.

“[They went back] back nine years. And I’ve spoken to a lot of MPs of both sides of the house, and they all think it’s immoral that payroll tax is going back retrospectively that many years,” he said.

Grant Thornton remuneration and employment tax specialist, George Bendall, clarified that payroll tax rules themselves hadn’t changed – just the revenue office’s capability to enforce them and their interpretation of contractor arrangements. This enabled the authorities to carry out retrospective payroll tax audits.

Cases such as the recent Uber decision, which found that Uber drivers were employed by the company under ‘relevant contract’ provisions and thus liable for payroll tax, have provided further clarity that contractors would generally be captured under payroll tax legislation.

“[The Uber case] really just provides clarity that any contractor is included unless one of the exemptions applies. It makes it even more clear that most contracting situations will be caught,” Bendall said.

Furthermore, an evolution of enforcement technologies, including data matching, enabled authorities to crack down on ‘tax gaps’ in recent years.

“There’s more data available. We’re seeing data matching audits, which maybe weren’t there five years ago, through matching of other things like FBT disclosures, through ASIC, through the directors’ information,” Bendall explained.

Other factors, including state revenue pressures and an uptick in tax enforcement following the pandemic, could have driven the uptick in enforcement activity.

“It might be down to financing. A lot of the state budgets have highlighted deficits,” Bendall said.

In a submission to the NSW payroll tax inquiry, The Tax Institute said that legal developments had compounded uncertainty regarding the application of payroll taxes, posing a large compliance hurdle for businesses.

“The ever-evolving nature of the Courts’ interpretation of these provisions has posed a major challenge for businesses to remain compliant,” its submission read.

“A literal interpretation of the provisions often fails to align with the legislative intent, creating anomalies and unintended tax liabilities for genuine independent contractors.”

Given the significant uncertainties, Bendall suggested that it could be a good time for the authorities to revisit payroll tax rules and address discrepancies.

“We’re suddenly at a time where it’s very clear everything’s caught, so maybe they need to revisit core rules. But I say that with maybe wishful thinking, because no revenue office wants to give up additional funding,” he said.

“I think there will need to be some clarification on the rules and maybe an overhaul of the contractor rules to bring it more in line with the common law definition.”

Walker said that the 40-year-old payroll legislation was no longer fit for purpose and called on policymakers to update the law.

“Forty years ago, Google was hardly known. Mobile telephones were the size of a brick, and they're imposing this interpretation of 40-year-old legislation on commerce that’s happening in 2025,” Walker said.

He proposed five key reforms, including:

• A six- to 12-month moratorium on current and pending Revenue NSW enforcement.
• Clear rules ensuring every business is responsible only for its own payroll tax.
• Retention of current tax thresholds and rates, ensuring no revenue loss to government.
• Monthly reporting via Single Touch Payroll to reduce red tape and improve transparency.
• Elimination of retrospective taxation.

Walker also urged the NSW government to release the interim report for its March 2025 payroll tax inquiry. He warned that the government was under no obligation to act with any urgency without the report.

“The evidence was overwhelming,” Walker said.

“An interim report would allow Parliament to begin fixing this now – not after more businesses are hit with unexpected and unjust bills.”

As of the time of filing this story, Revenue NSW had not provided its response to a request for comment.