In recent times, discussions about implementing a payroll tax on non-government schools have gained traction as governments seek alternative revenue sources to pay off the state’s COVID-19 debt. From 1 July 2024, non-government schools with an income per student of more than $15,000 will be subject to payroll tax. A payroll tax is essentially a tax paid on salaries and wages by employers, and while it may seem like a straightforward concept, its implications can be significant, especially for the affected schools.
How income per student is calculated
Income per student is calculated using the Commonwealth Department of Education’s Financial Questionnaire (FQ). Schools provide information on fees, charges, income from excursions, other receipts from students, and fees allocated for capital purposes. The assessment considers various factors, including fee reductions and financial relief. Income from overseas students is excluded as they don’t receive funding. Income from kindergartens or daycare centres is separated and not assessed. The calculation is based on the 2021 reporting period and funded enrolments.
The following sets out the calculation:
- Sum of income recorded for each of the categories listed above for the 2021 reporting divided by funded enrolments.
- Example: Total FQ categories used for determination = $6,000,000 / 600 enrollments (based on 2021 funded enrolments) = $10,000 income per student.
Some non-government schools are exempt from this new payroll tax. A full list of non-government schools both exempt and not exempt from payroll tax can be found here.
It’s crucial to understand the potential effects of this tax on schools and devise strategies to mitigate risks. We explore how a payroll tax could impact schools’ operations and cash flow, along with suggestions on financial modelling, reforecasts, and assistance to navigate these challenges.
Implications for Schools
- Increased Financial Burden: Schools already face financial constraints, and the introduction of a payroll tax adds to their burden. These costs are non-deductible as these schools are non-profit organisations, so it’s a dollar-for-dollar increase in expenses. The tax can result in higher labour costs, reducing the school’s available funds for critical activities such as infrastructure development, educational resources, and teacher training. Other areas of concern are compliance with the debt covenants on any borrowings as well as the effect of the increased interest rates in the past year.
- Cashflow Challenges: Payroll taxes are calculated as a percentage of wages and salaries, creating a regular expense for schools. This can strain their cash flow as they need to allocate funds specifically for tax payments, potentially affecting their ability to manage other day-to-day operational expenses.
- Staff Recruitment and Retention Concerns: Schools often compete for skilled educators, and the added payroll tax may limit their ability to attract and retain top talent. The increased labour costs could lead to a smaller budget for employee compensation, hindering the school’s ability to provide competitive salaries and benefits and potentially impacting the quality of education provided.
Strategies for Mitigating Risks
- Financial Modelling and Reforecasts: The school can start developing robust financial models that consider the potential impact of the payroll tax. By incorporating this tax into their forecasting, schools can gain a clearer understanding of its effects on their financial health and make informed decisions accordingly.
- Cost Reduction Strategies: Schools need to identify areas for cost reduction without compromising the quality of education. This may involve analysing expenses, renegotiating contracts, exploring energy-saving initiatives, or implementing technology solutions to streamline operations and improve efficiency.
- Funding Opportunities: The school can explore alternative funding sources such as grants, sponsorships, or partnerships with local businesses or community organisations. These additional revenue streams can help offset the financial strain caused by the payroll tax. The school could potentially pass on these as tuition fee increases.
- Compliance and Reporting: We can assist schools in ensuring compliance with the payroll tax regulations and help them navigate the complexities of reporting and filing requirements. Our expertise in tax matters can provide valuable guidance to mitigate potential risks associated with non-compliance.
The implementation of a payroll tax can have far-reaching implications for schools, affecting their operations, cash flows, and ability to attract and retain talented educators. It’s somewhat disappointing that these additional taxes are not intended to enhance the quality of education but rather pay off the state’s COVID-19 debt.
We understand the challenges schools may face and are committed to providing assistance through financial modelling, cost reduction strategies, exploring funding opportunities, and ensuring compliance. By working together, we can support schools in maintaining their educational excellence while adapting to the changing financial landscape.
If you would like our support in navigating these new changes, contact us to discuss how we can assist.