Payroll governance for employers

Importance of payroll governance

Having good payroll governance helps you ensure that you meet your employer tax, reporting, and super obligations, including:

• Pay as you go (PAYG) withholding
• Single Touch Payroll (STP)
• Fringe benefits tax (FBT)
• Super guarantee (SG).

It also helps your employees receive the right information they need to lodge their income tax return.

Ensure your payroll governance measures are effective and fit for purpose. This means they are appropriate for your structure, size, complexity and industry.

To help stay on track, you should follow these steps regularly to see if anything has been missed or needs improvement.

Good payroll governance checklist

1. Clear roles and responsibilities

• Understand your obligations as an employer. See Fair Work OmbudsmanExternal Link and Obligations when people work for you.
• Document your payroll governance framework.
• Clearly define and document roles and responsibilities including who is accountable for payroll administration in your business.
• Ensure payroll and accounting staff have the right skills and knowledge.
• Maintain good record-keeping practices.
• If you use a third-party provider to submit your payroll data or pay super, you still need to ensure all reporting and payments are accurate and on time.

2. Set up correctly from the start

• Determine if each individual worker is an employee or an independent contractor.
• Use up-to-date STP-enabled payroll software – see How to report Single Touch Payroll data.
• Register for PAYG withholding and FBT.
• Collect accurate employee details including super fund choices – see Hiring a new worker.
• Ensure your payroll setup aligns with your reporting and payment obligations.

3. Document processes and procedures

• Appropriate processes and procedures are documented to ensure you:
  • use the correct Australian business number (ABN) when reporting and correct payment reference number (PRN) when paying
  • manage your cash flow so you can pay your tax and super obligations on time, as they fall due – see Cash Flow Kit
  • assess and mitigate risks such as employee fraud and cybercrime
  • make timely corrections when you find an error.

4. Review regularly

• Keep your payroll software, policies and procedures up to date to reflect any changes that impact your business.
• Check your STP pay codes setup in your STP-enabled software to make sure your workers have the right information for lodging their tax returns and when interacting with other government agencies – see News, events and resources.
• Review your records to make sure that you have reported all your PAYG withholding correctly through STP and the BAS and paid the ATO the amounts you owe.
• Keep employee details up to date such as full name, address, super fund details and tax file number (TFN). If you've used a TFN exemption code, update it with the correct TFN as soon as you have it.
• Take action to stay compliant when your circumstances change, including
  • software or employees’ Payroll ID changes
  • updates to authorised contacts and STP contact details in STP pay event reports
  • when you no longer hire workers.

Common payroll mistakes to avoid

We have observed these common mistakes which can result in payments being rejected, unexpected liabilities and costly penalties as well as extra paperwork.

Incorrect employee details

Incorrect employee full names, date of birth, TFN or super fund account information can cause payments you make to be rejected and reporting errors. See Stay up to date with changes.

Incorrect use of TFN exemption code for employee

Using a TFN exemption code incorrectly for your employee, affects their access to the information they need to lodge their tax returns or may require you to withhold more in PAYG withholding.

You should regularly review your use of TFN exemption codes. For example, when your employee turns 18 years old, you can no longer use 333333333.

See Stay up to date with changes.

Incorrect employer details

Using the wrong ABN, branch, PRN or electronic funds transfer (EFT) code to report and pay your employer obligations can lead to reporting errors, especially when:

• consolidated groups are restructured, or government entities are grouped
• an employer becomes a large withholder with a new PRN that ends in '70'.

See Document processes and procedures.

Payroll Service Providers (PSP)

If you are using a third-party provider to submit your payroll data, ensure that

• they report under your ABN and not their own
• report and pay PAYG withholding on time
• maintain clear communication and accountability.

See Clear roles and responsibilities.

Discrepancies between PAYG withholding amounts paid and reported

Where PAYG withholding amounts are unpaid:

• it can quickly become a significant debt amount owing to the ATO
• shortfall penalty may be raised
• general interest charge (GIC) may apply.

Ensure you undertake a year-end reconciliation when you do your STP finalisation declaration.