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Understanding payroll governance - A complete guide for Australian small businesses
When you employ staff in Australia, establishing strong payroll governance is essential for meeting your legal obligations and protecting your business. We’ve created this guide to help you understand exactly what’s required.
What is payroll governance?
When you employ staff, it’s important to have good payroll governance so that you can meet your employer tax, reporting and super obligations. Payroll governance refers to the systems, processes and controls your business implements to ensure compliance with Australian taxation and employment laws.
You should ensure your payroll governance measures are designed effectively and are fit for purpose. This means having systems and processes that are tailored to your businesses’ structure, size, complexity and industry.
Your core payroll obligations
Australian employers must meet four key obligations:
1. Pay As You Go (PAYG) Withholding
PAYG withholding requires employers to withhold tax from employee wages and remit it to the Australian Taxation Office. This includes calculating the correct withholding amounts, reporting these amounts and paying them to the ATO according to your reporting schedule.
2. Single Touch Payroll (STP)
Single Touch Payroll requires you to report your employees’ salaries, wages, PAYG withholding and superannuation information to the ATO each time you pay them. This real-time reporting system has replaced the previous annual payment summary process.
3. Fringe Benefits Tax (FBT)
If your business provides fringe benefits to employees (such as company vehicles, entertainment, or certain allowances), you may have FBT obligations that need to be managed as part of your payroll governance.
4. Superannuation Guarantee (SG)
Employers must make superannuation guarantee contributions for eligible employees. These contributions need to be calculated correctly and paid on time to avoid penalties.
Essential components of effective payroll governance
To meet your payroll obligations, you should ensure you have a formal, documented payroll framework that includes descriptions of roles and responsibilities to implement policies and procedures.
Systems and controls
Systems and controls should be in place and periodically reviewed to ensure accurate reporting. Your payroll system must be capable of:
- Calculating wages, tax withholding and superannuation accurately
- Generating compliant payslips and reports
- Submitting data through STP-enabled software
- Maintaining detailed audit trails
You must report payroll information through your STP-enabled software. This gives the ATO visibility of your payroll data. However, you must still also complete your annual reporting.
Risk management
These measures should include processes and procedures that support your business to comply with its legal obligations and help identify, assess and mitigate risks such as administrative errors, employee fraud and cybercrime.
Appropriate processes and procedures should be in place to support your obligations and identify, assess and mitigate risks such as employee fraud and cybercrime.
Staff capability
It’s also important to ensure your payroll and accounting staff have the right skills and knowledge to perform their role.
If they are in different departments, they should each be aware of the scope of their function and responsibilities.
Critical payroll governance practices
Maintain good record keeping
Tips to help you keep on top of your payroll governance include adopting good record keeping practices. Proper documentation is fundamental to demonstrating compliance and resolving any queries from the ATO or employees.
Review processes regularly
Reviewing your payroll processes regularly and keeping up to date with any payroll updates or changes that could impact your business is essential for maintaining compliance.
Routinely review your policies and procedures for any changes that impact your business. This includes understanding how changes to tax tables, superannuation rates, or reporting requirements affect your obligations.
Ensure accurate reporting
Ensure you report your PAYG withholding amounts correctly based on your business structure. This is particularly important when:
- Your business structure changes
- You transition between withholding categories
- Consolidated groups are restructured
When consolidated groups are restructured or government entities are grouped, the responsibility for payroll often passes from one related entity to another. It is important to update your payroll software with the new entity’s ABN and PRN. This ensures PAYG withholding payments are correctly applied.
Understand your withholding status
Understand PAYG withholding thresholds that may change your payer status from a small-medium withholder to a large withholder because this determines the frequency and method of reporting and paying.
When an employer’s withholding threshold requires a transition into the large withholder system, reporting and payment are done via a unique PRN. Update your payroll software with this PRN and use it every time a PAYG withholding amount is remitted. This ensures it is correctly applied and not against another tax type or account.
Common payroll governance issues
The ATO has identified several common issues with payroll governance that businesses should address:
Reconciliation gaps
You should routinely undertake a reconciliation of payroll totals to compare PAYG withholding amounts paid against reported year to date STP data and BAS W2 totals. A year-end reconciliation will verify if your PAYG withholding amounts paid during the year equal the reported STP finalisation declaration.
This is extremely important because these STP totals are prefilled into your payee’s individual income tax returns.
STP data provides the ATO with a near real-time indicator of what your PAYG withholding obligations should be. There are often significant discrepancies between lodged STP reports and PAYG withholding amounts paid.
Payment reference number issues
Continue to notify your PAYG withholding amounts using your Payment Reference Number (PRN) or Electronic Funds Transfer (EFT) code. Failing to use the correct PRN can result in payments being misallocated.
Third-party provider communication
If you use a third-party provider to submit your payroll data, regularly communicate with them to ensure all your obligations are being met. A lack of communication between employers and their payroll service providers can cause issues, including:
- Reporting and paying PAYG withholding late without letting their employer client know
- Incorrectly reporting under their own ABN and not the employer’s, which causes significant discrepancies
Registration and lodgement failures
Operating without required registrations and failing to report or lodge on time may attract ATO attention and incur interest and penalties.
Your payroll governance checklistBased on ATO guidance, ensure your payroll governance includes: Documentation:
Systems:
Processes:
Compliance:
People:
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Why payroll governance matters
Effective payroll governance protects your business by:
Reducing compliance risk: Meeting your obligations helps you avoid ATO penalties and interest charges that result from late or incorrect reporting.
Improving accuracy: Strong systems and controls minimise errors in wage calculations, tax withholding and superannuation contributions.
Building employee trust: Accurate, timely payments and correct reporting demonstrate professionalism and care for your employees’ financial wellbeing.
Supporting business growth: Well-documented processes make it easier to scale your payroll function as your business expands.
Enabling early issue detection: Regular reconciliation and reviews help identify problems before they become significant compliance issues.
How Paris Financial can help
Don’t wait for an ATO query or compliance issue to address your payroll governance. Taking proactive steps now will protect your business and give you peace of mind.
Need help with your payroll governance?
The team at Paris Financial is here to help. Whether you need a review of your current systems, assistance setting up new processes, or ongoing support to ensure compliance, we have the expertise to guide you. Connect with our team here: Contact Us.
About Paris Financial
Paris Financial provides comprehensive accounting, taxation and advisory services to small and medium businesses across Australia. Our experienced team helps businesses navigate complex compliance requirements while building systems that support sustainable growth.
FAQ: Australian payroll governance
Q: What is payroll governance?
A: Payroll governance refers to the systems, processes and controls businesses put in place to meet their employer tax, reporting and super obligations, including PAYG withholding, Single Touch Payroll, Fringe Benefits Tax and Superannuation Guarantee.
Q: What are the main payroll obligations for Australian employers?
A: Australian employers must comply with four main obligations: PAYG withholding, Single Touch Payroll (STP) reporting, Fringe Benefits Tax (if applicable) and Superannuation Guarantee contributions.
Q: Why should payroll governance be tailored to my business?
A: Payroll governance measures should be designed effectively and fit for purpose, meaning they are appropriate for your business’s structure, size, complexity and industry.
Q: How often should I reconcile my payroll?
A: You should routinely reconcile payroll totals to compare PAYG withholding amounts paid against reported year to date STP data and BAS W2 totals, with a year-end reconciliation to verify amounts match your STP finalisation declaration.
Q: Do I still need to complete annual reporting if I use Single Touch Payroll?
A: Yes. While you must report payroll information through STP-enabled software, you must still also complete your annual reporting obligations.
SOURCES
ATO:
Understanding payroll governance
Improving payroll governance