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Government reforms to remove payroll tax for small businesses in South Australia back in 2019 have backfired and instead restricted growth, according to the e61 Institute.
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SME growth in SA stunted by government: e61 Institute
08 August 2024
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The former South Australian government’s 2019 reform to remove payroll tax for small businesses has resulted in perverse consequences, based on research by the e61 Institute.
Research by the institute demonstrated the reform has prevented firms from growing and forced them to reduce jobs and wages.
The South Australian government increased the tax-free threshold from $600,000 to $1.5 million with the marginal tax rate “increasing steeply” beyond that to provide payroll tax relief to small businesses.
E61 Institute research economist Rachel Lee said this change to the tax-free threshold did not make the impact originally intended.
“South Australia’s decision to cut payroll taxes for small businesses appears to have created a barrier to firm growth,” Lee said.
The tax-free increase resulted in companies “bunching” below the $1.5 million threshold.
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According to the e61 Institute, the number of companies with payrolls between $1.35 million and $1.5 million increased by 21 per cent after the change.
However, the number of firms with payrolls between $1.5 million and $1.65 million decreased by 18 per cent.
Thirty-four per cent of firms that bunched below the threshold had cut their wage bills while 31 per cent stopped growing.
The other 34.5 per cent of firms had not been growing before the change.
Lee said firms would have experienced growth if the policy was not enforced.
“Many of the firms that bunched just below the tax-free threshold were growing firms that likely would have crossed the threshold if not for the policy change.”
“These small, growing firms are the ones that do the most to drive aggregate job creation and innovation in the economy.”
It was also found the businesses that slashed their wage bills decreased their payrolls by $5.9 million overall, which equated to roughly $52,000 per firm.
The e61 Institute said this significantly outweighed the increase of $3.5 million, or $2,500 per firm, in smaller businesses’ payrolls that paid less tax as a result of the reform.
This equalled a net wage reduction of $2.4 million.
Though the South Australian government increased the tax-free threshold for small businesses, the payroll tax rate for larger businesses remained unchanged at 4.95 per cent for businesses with payrolls above $1.7 million.
“Our findings highlight that firms do respond to changes in payroll tax rates and that in some cases, providing protections to small businesses can be costly to firms growth,” Lee said.
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