In Western Australia, payroll tax remains one of the most significant state taxes facing thriving family-owned businesses. Once your payroll creeps above $1 million — not uncommon in a family business — every additional dollar in salary attracts up to 5.5 cents in tax.
But what if there was a way to legally remove family member remuneration from your payroll tax base, without reducing their after-tax income or their engagement in the business?
There is. And it’s a well-established tax planning strategy involving trust distributions and franked dividends, rather than salaries.
Used correctly, it can save tens of thousands of dollars per year in state tax — but it also raises complexities around superannuation, personal lending, internal fairness, and exit planning. In this article, we unpack the mechanics, risks and benefits using a fictional civil engineering business in Balcatta to demonstrate how the strategy works in practice.
📘 What is payroll tax in West Australia?
Payroll tax in WA is governed by the Pay-roll Tax Assessment Act 2002 (WA). Employers become liable once their Australian taxable wages exceed $1 million annually. The top marginal payroll tax rate in WA is 5.5%, applying to businesses with total payrolls above $7.5 million.
While family-owned businesses often focus on income tax, it’s state payroll tax that can quietly erode profitability. A business that grows from $950,000 to $1.2 million in payroll doesn’t just increase costs by $250,000 — it triggers a whole new tax obligation.
💳 What Counts as Taxable Wages in WA?
When considering how payroll tax is calculated in WA, you first need to define what is a taxable wage. The WA payroll tax regime defines “wages” very broadly. Under section 10 of the Pay-roll Tax Assessment Act 2002 (WA), taxable wages include:
- Salaries and wages
- Employer superannuation contributions (including SG)
- Allowances (e.g., travel, car)
- Bonuses and commissions
- Fringe benefits (as per the Fringe Benefits Tax Assessment Act 1986 (Cth))
- Termination payments (including unused leave)
Excluded from taxable wages:
- Trust distributions from discretionary trusts
- Dividends, including franked dividends, paid to shareholders
- Reimbursements of actual business expenses
- Workers’ compensation payments under WA legislation
- Paid parental leave
These exclusions create a legitimate opportunity: where a family business is owned through a discretionary trust or private company, it may be possible to shift family remuneration away from salaries and into forms of income that are not subject to payroll tax.
📄 Contractor Payments and Payroll Tax
A common misconception is that independent contractors fall outside the payroll tax net. However, the contractor provisions under Part 3, Division 7 of the WA Act allow RevenueWA to deem payments to contractors as taxable wages where:
- The contractor performs work under a contract;
- The work is mainly labour (as opposed to materials);
- And the contractor works under the business’s direction or within its usual operations.
Even where a contractor uses an ABN or is incorporated, they can be caught if the arrangement is effectively employment in substance. Exceptions apply, such as where:
- The contractor provides services to the general public;
- The services are of a specialised nature;
- Or the contractor provides their own tools, bears commercial risk, and is free from control.
Contractor reviews should form part of any family business’s annual payroll tax compliance.
🏗 Fictional Case Study: Balcatta CivilCo Pty Ltd
Let’s explore a fictional civil engineering business: Balcatta CivilCo Pty Ltd, a family-run firm employing 40 staff. The company has an annual payroll of $5 million, which includes salaries of $150,000 each (including super) for three family members: a director, a project manager, and an accounts manager.
The combined salaries of these three families total $450,000.
At WA’s top payroll tax rate of 5.5%, the business pays $24,750 in payroll tax attributable solely to these family members.
By ceasing salaries and instead remunerating family members through distributions from the Balcatta Family Trust (which owns the company), the business can lawfully exclude these amounts from its payroll tax base — generating an annual state tax saving of nearly $25,000.
It is increasingly common for a family business to operate through a series of trusts and companies. And in that case, payroll tax grouping can apply to that business. However this payroll tax strategy can also work with a family business that has payroll tax grouping.
🔖 Trust Distributions, Dividends and Federal Tax Compliance
Shifting from salary to distribution is not just a state tax issue — it must be structured with federal tax law in mind.
Division 7A – ITAA 1936
Division 7A prevents private companies from making tax-free payments or loans to shareholders or their associates. If:
- A company pays a dividend to a discretionary trust, and
- That trust loans funds interest-free to a family member,
Then unless it is a documented Division 7A loan or repaid, the ATO may treat the amount as a deemed unfranked dividend under sections 109D and 109T. Sometimes, a family business can fix old mistakes with private company loans and avoid the deemed unfranked dividend.
Trust Streaming (Subdivision 115-C of ITAA 1997)
When distributing income from franked dividends or capital gains, the trustee must:
- Identify the income components;
- Stream them with precise trustee resolutions;
- Allocate franking credits appropriately.
Poor documentation can result in misallocated income or denied franking benefits.
If a family member receives franked dividends and then makes concessional superannuation contributions on those dividends, they can enjoy a refund of the franking credits paid by the employer company because of the special way that franking credits work.
🌐 Broader Implications of Removing Family from Payroll
1. 🏛️ Superannuation
Without wages, family members are no longer entitled to employer super contributions. Families must arrange personal deductible contributions or risk long-term super shortfalls.
The temptation, at times, is for a business owner to skip on super contributions. And while this is a personal decision, superannuation can be a great benefit to a family member over time.
2. 🏠 Lending and Credit
Banks love payslips. Family members relying on distributions may face obstacles securing personal loans or mortgages, especially where income fluctuates.
3. ⚖️ Equality Among Children
Salaries provide equality. Discretionary distributions require transparency and careful planning to avoid perceptions of unfairness. Sometimes, family members can get confused as to the difference between a reward for effort and a distribution of trust income.
4. 📈 Business Sale and Normalisation
A future buyer will expect to see normalised EBITDA. If salaries are replaced with trust distributions, adjustments must be made to reflect fair remuneration costs — complicating sale negotiations.
5. 📜 Divorce and Relationship Breakdown
When a marriage breaks down, the lack of formal wages and employer entitlements can complicate property settlements. Discretionary distributions may vary from year to year, making it harder to quantify ongoing income. Additionally, one party may allege income suppression or discretionary manipulation. Careful documentation and historic distribution records become critical in such cases.
6. 📅 Leave Entitlements
By removing family members from payroll, they are no longer entitled to accrue annual leave, sick leave or long service leave under the Fair Work framework. This may appear minor until a family member exits the business and seeks compensation for perceived lost entitlements. It also removes the ability to formally record or track time off, which may be relevant for external governance or succession planning.
📈 Quantifying the Saving
| Metric | Amount |
| Family salaries (3 x $150k) | $450,000 |
| WA payroll tax rate | 5.5% |
| Annual payroll tax saving | $24,750 |
Over five years, that’s $123,750 in state taxes avoided, not including compound earnings from reinvested cash.
✅ When This Strategy Works
This structure is most effective where:
- The business is already operated through a trust or company-trust group;
- Family members are actively involved;
- There’s clear succession planning and remuneration policy;
- And the business is not preparing for immediate sale.
Caution is needed where:
- Superannuation and lending needs are critical;
- There’s no existing trust structure; or
- Internal family equity is hard to manage.
📢 Time to Talk
If you’re running a WA-based family business with payroll exceeding $1 million and family members on salary, it may be time to reassess your structure.
At Westcourt Family Business Accountants, we help private business families design and implement proven tax strategies that save money and preserve relationships.
Let’s design a remuneration plan that works for your business and your family.
