‘There will be job losses’: State’s richest private schools cop $420m payroll tax bill

Private schools in Victoria will be stripped of their long-held exemption to payroll tax next year, netting the state more than $420 million in revenue over three years.

The change means that many private schools will, for the first time, pay two other levies on top of their new payroll tax obligation: the mental health levy that was introduced last year and a new temporary increase to payroll tax that was announced in Tuesday’s budget.

About 110 of the state’s highest-fee schools will lose their payroll tax exemption from July 2024.Credit: Vince Caligiuri

The schools will have to pay 4.86 per cent payroll tax and the additional two levies, which will each add between 0.5 per cent and 1 per cent to the tax bill of affected schools, depending on their size.

About 110 of the state’s highest-fee non-government schools will lose their payroll tax exemption from July 2024. The budget papers say the change will affect roughly the 15 per cent of schools that have the most expensive fees, though many mid-fee schools could also pay more.

The principal of one large, high-fee school estimated that the change would cost the school somewhere between $5 million and $7 million a year and said the new tax bill would force the school to choose between raising fees significantly or cutting back on staff and programs for students.

“There will be job losses,” the principal said. “If that 4.85 per cent [payroll tax] was passed on to families you’d be looking at fee increases of around 8 per cent to cover off on that.”

The head of Victoria’s Catholic school sector also attacked the new tax, saying it had been announced without consultation, and would hit more than 25 Catholic schools, potentially costing them more than $1 million each.

“Our families already contribute significantly to the cost of their children’s education, and unlike government schools, this payroll tax is real money, which will have to be found somewhere,” Catholic Education Commission Victoria executive director Jim Miles said.

The education minister and the treasurer will have the discretion to exempt schools from the change, which is forecast to increase revenue by $134.8 million in 2024-25, rising to $140.3 million in 2025-26 and $147.1 million in 2026-27.

The change will bring affected non-government schools into line with the government school sector, which is not payroll tax-exempt.

Lobby group Independent Schools Victoria said the news had come as a shock.

“It is likely to have a damaging impact on the operations of many independent schools, with the potential to disrupt the education of their students,” Independent Schools Victoria chief executive Michelle Green said.

The budget decision could affect up to half of the state’s 230 independent schools, Green said.

The state government some years ago adopted the arbitrary definition of a high-fee school as one charging annual fees of more than $7500, she said.

“It assumes that all schools that charge more than $7500 have the financial resources to weather this shock without cutting services or, alternatively, raising fees,” she said.

“Either course of action will be a major cause of concern for the growing number of parents who make significant financial sacrifices to send their children to an independent school.”

Non-government schools increased their fees this year by between 4 and 10 per cent – the biggest rise in five years – following years of COVID-related fee freezes. Twenty-three schools charge more than $35,000 a year at senior year levels.

The new tax hit also follows recent changes to the funding formula for non-government schools, which is now based on students’ parental income instead of the socioeconomic profile of a school’s postcode. Under those changes, heavily lobbied for by the Catholic sector, many independent schools lost government funding, particularly in regional and outer suburban areas.

Payroll tax is one of the state’s three largest revenue sources. It will be increased for large national businesses with payrolls above $10 million for the next 10 years from July 1, to help pay down the state’s COVID-19 debt.

Revenue from the temporary levy on large business payroll is expected to be $836 million in 2023-24, and the revenue is expected to grow by an average of 8.6 per cent a year over the forward estimates, the budget papers state.

Treasurer Tim Pallas said big businesses had enjoyed profit spikes during the pandemic while government had directed tens of billions of dollars in support their way. But he said the budget would also invest in small business.

The budget will also raise the payroll tax-free threshold from $700,000 to $900,000 for small businesses. This will result in 4200 businesses becoming payroll tax-exempt from July 1, 2024, the budget papers state. The threshold will increase to $1 million the following year.

“More than 26,000 businesses, or around 60 per cent of payroll tax-paying businesses will benefit from these arrangements,” Pallas said.

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