Payroll in Australia: A Guide for Employers

Australia's payroll system combines progressive income taxation, mandatory retirement savings, and real-time government reporting. Understanding the fundamentals helps ensure compliance and efficient workforce management.

Intermezzo’s global payroll platform simplifies compliance across multiple countries, including Australia. We automate income tax withholding, superannuation contributions, modern award calculations, and government reporting—ensuring accuracy and compliance without the administrative burden.

Key Terminology and Payroll Components

Before diving into Australian payroll, here are the essential terms and payroll components:

Single Touch Payroll (STP): Real-time digital reporting system where employers report payroll and tax withholding information to the Australian Tax Office (ATO) with each pay run, eliminating the need for annual payment summaries.

Modern Awards: Industry or occupation-specific legal documents that set minimum pay rates, penalty rates, and employment conditions. Think of them as legally binding minimum standards for different types of work.

PAYG (Pay As You Go) Withholding: The Australian system where employers deduct income tax from employee wages and remit it to the ATO. Similar to PAYE in the UK or withholding tax in the US.

Superannuation (Super): Australia's mandatory employer-funded retirement savings system. Employers contribute 12% of employee wages to a retirement fund, on top of the employee's take-home pay.

Fringe Benefits Tax (FBT): A tax employers pay on non-cash benefits provided to employees, such as company cars or gym memberships.

Single Touch Payroll (STP)

Single Touch Payroll is Australia's digital payroll reporting system - employers report payroll information to the ATO digitally with each pay run, and employees in turn can access their pay information at any time in their myGov accounts.

Employers must report on or before each payday via STP-enabled payroll software, including:

• Gross wages and PAYG withholding amounts
• Superannuation liability
• Tax File Numbers
• Employment start and end dates
• Payment types (salary, overtime, bonuses, leave)
• Reportable Fringe Benefits Amount (RFBA) if applicable

The ATO receives this data in real-time, which automatically populates employees' income statements in their myGov accounts. Employees can access their year-to-date information anytime without waiting for paper summaries. The Australian financial year runs 1 July to 30 June.

Modern Awards and Minimum Wages

Modern Awards are legally enforceable documents that establish minimum employment standards for specific industries or occupations, issued by the Fair Work Commission. They go beyond a simple minimum wage by defining penalty rates (higher pay rates for working non-standard hours), overtime calculations, allowances, and working conditions.

The National Minimum Wage is $24.95/hour ($948/week for 38 hours) from 1 July 2025. This applies to employees not covered by a modern award or enterprise agreement.

Modern awards specify industry-specific requirements including:

• Classification-based minimum wages (e.g., "Retail Level 3" or "Chef Grade 2")
• Penalty rates: Premium pay for unsociable hours (e.g., 150% on Sundays, 250% on public holidays)
• Overtime rates: Typically 150% for the first few hours, then 200%
• Allowances: Additional payments for specific circumstances (tool allowances, first aid, etc.)

For example, a retail worker under the General Retail Industry Award who works on Sunday receives 200% of their base rate, while working on Christmas Day might receive 250%.

Employers must identify which modern award applies to each employee's role. Awards don't apply if an enterprise agreement (a negotiated agreement approved by the Fair Work Commission) covers the employee, though pay must be at least as much as specified by the Award.

Income Tax and PAYG Withholding

PAYG Withholding is how Australian employers collect income tax on behalf of the government. Instead of employees paying tax annually, employers deduct it from each paycheck and forward it to the ATO.

Australian residents benefit from a tax-free threshold of $18,200 (meaning no tax on the first $18,200 earned) plus the Low Income Tax Offset (LITO) of up to $700. Tax rates are progressive: 16% on income $18,201-$45,000, 30% on $45,001-$135,000, 37% on $135,001-$190,000, and 45% above $190,000. A 2% Medicare levy applies to all taxable income for residents.

Non-residents pay higher taxes: 30% up to $135,000, then higher rates, with no tax-free threshold or Medicare levy.

Superannuation: Australia's Retirement System

Superannuation (or "super") is Australia's mandatory employer-funded retirement savings program. Unlike many countries where employees contribute to their own retirement, Australian employers must contribute on top of employee wages.

Employers contribute 12% of Ordinary Time Earnings (regular wages plus most allowances, excluding overtime) to employee-chosen superannuation funds. This contribution is paid in addition to wages, not deducted from the employee's paycheck.

For example, if an employee earns $80,000 annually, the employer contributes an additional $9,600 to the employee's super fund. The employee still receives the full $80,000 (minus income tax).

Super is currently paid quarterly but transitions to within 7 business days of each payroll from 1 July 2026 ("Payday Super" legislation). All contributions must use the SuperStream electronic standard, which ensures data and payments are transmitted correctly to super funds.

Fringe Benefits Tax (FBT)

Employers pay 47% FBT on non-cash benefits like company cars, parking, entertainment, and health insurance. The FBT year runs 1 April to 31 March, different from the financial year.

Exemptions include minor benefits under $300, work-related devices, and zero-emission electric vehicles.

Special Considerations

Australian payroll includes several special scenarios that require additional attention and specific calculations.

Study and Training Support Loans (STSL)

Employees with outstanding student loan debt must have additional amounts withheld from their pay to repay these loans. When an employee declares STSL debt on their Tax File Number Declaration, employers apply Schedule 8 withholding tables, which add an income-based repayment amount on top of regular PAYG withholding.

Seniors and Pensioners

Employees aged 67 or over at the end of the financial year (or veterans and war widows aged 60+ receiving pensions) receive preferential tax treatment through different withholding tables and the Senior Australians and Pensioners Tax Offset (SAPTO). Many seniors also qualify for Medicare levy exemptions, further reducing their tax burden.

Paid Parental Leave (PPL)

The Australian government funds paid parental leave, but employers must deliver these payments through their regular payroll system. Services Australia sends funds to the employer along with payment instructions detailing the employee's name, payment amount, pay period, and daily rate.

From 1 July 2025, eligible parents receive $189.62 per day (based on the National Minimum Wage), for up to 24 weeks (120 days), increasing to 26 weeks from July 2026.

Termination Payments

When employment ends, certain lump sum payments receive concessional tax treatment as Employment Termination Payments (ETPs). The most common is genuine redundancy, where the employee's position no longer exists.

Genuine Redundancy Tax-Free Amounts (2025-26):

• Base amount: $13,100
• Plus $6,552 per completed year of service
• Example: An employee with 8 years service has $65,516 tax-free

Any redundancy amount exceeding the tax-free limit is taxed as an ETP with concessional rates:

• Under preservation age (currently 60): 32% within $260,000 cap, then 47%
• At or above preservation age: 17% within $260,000 cap, then 47%

Other ETPs include golden handshakes, severance payments, unused sick leave payments, and compensation for wrongful dismissal.

Salary Sacrifice to Superannuation

Employees can arrange to sacrifice pre-tax salary into their superannuation fund, receiving the concessional 15% super tax rate instead of their marginal income tax rate (up to 45%). This is particularly attractive for higher earners.

The annual concessional contributions cap is $30,000, which includes both employer superannuation guarantees and salary sacrifice amounts.

Leave Loading

Annual leave loading (typically 17.5% of base rate, though this varies by modern award) is additional payment on top of base pay when employees take annual leave. It's designed to compensate for lost opportunity to earn overtime and penalty rates while on leave.

Leave loading is:

• Included in gross wages and subject to PAYG withholding
• Not included in Ordinary Time Earnings for superannuation purposes (unless the specific award requires it)
• Calculated based on the award or employment contract terms

Compliance Deadlines

Ongoing: STP reporting each payday; super paid quarterly though this changes to within 7 business days of payday starting July 2026

Annual: STP finalisation (14 July), FBT return (25 June if lodging via a registered tax agent)

Records: Maintain all payroll documentation for 7 years

Penalties: $1,050-$5,250 per missed STP report; Superannuation Guarantee Charges with interest for unpaid super

The Bottom Line

Australian payroll is a multifaceted system that requires careful attention to progressive tax rates, mandatory retirement contributions, industry-specific wage rules, and real-time government reporting. Understanding these core elements is essential for any employer:

1. Real-time STP reporting with each payday
2. Modern award compliance for minimum wages and penalty rates
3. Income tax withholding using progressive rates (0-45%) via PAYG
4. 12% superannuation paid on top of wages to employee retirement funds
5. FBT management and reporting for non-cash benefits

Beyond these fundamentals, Australian payroll includes special considerations for students with loan debt, senior employees, parental leave, termination scenarios, and various deductions. The system continues to evolve—with Payday Super launching in July 2026 requiring super payments within 7 business days, annual tax rate adjustments, and regular modern award updates.

Why Intermezzo?

Managing Australian payroll compliance manually is time-intensive and carries significant risk. A single miscalculation in superannuation, a missed STP deadline, or incorrect modern award application can result in penalties ranging from $1,050 to $5,250 per violation, plus Superannuation Guarantee Charges with non-deductible interest.

Intermezzo addresses these challenges through comprehensive payroll automation—from accurate calculations and automated government reporting to incorporating continuous regulatory updates. Whether you're expanding into new markets or managing employees across multiple countries, Intermezzo provides the infrastructure to ensure compliance, accuracy, and operational efficiency.

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