Avoiding Payroll Pitfalls: Tips and Tricks from Payroll Software Experts

Avoiding Payroll Pitfalls: Tips and Tricks from Payroll Software Experts (Australian Edition)

Payroll in Australia can be a complex beast. With specific regulations, award rates, superannuation requirements, and ATO compliance, it’s no wonder many businesses find themselves navigating a minefield of potential pitfalls. But fear not! We’ve gathered some top tips and tricks from payroll software experts to help Australian businesses streamline their processes and avoid costly mistakes.

The Landscape: Why Australian Payroll is Unique

Australia’s payroll system has some key characteristics that set it apart:

Awards and Agreements: Many employees are covered by modern awards or enterprise agreements, dictating minimum pay rates, penalty rates, allowances, and leave entitlements.
Superannuation Guarantee: Employers must pay a percentage of an employee’s ordinary time earnings into a superannuation fund.
Single Touch Payroll (STP): Real-time reporting of payroll information to the ATO.
PAYG Withholding: Employers are responsible for withholding tax from employee wages.
Long Service Leave: State-based legislation governing entitlements for long-serving employees.

Understanding these foundational elements is the first step to avoiding common errors.

Top Tips and Tricks from the Experts

1. Embrace Technology: Invest in Robust Payroll Software

This might seem obvious, but it’s the most crucial piece of advice. Generic accounting software might handle basic payroll, but dedicated payroll software designed for the Australian market is a game-changer.

Automation: Automates calculations for PAYG, super, leave accruals, and award rates.
Compliance: Stays up-to-date with legislative changes (e.g., super rate increases, award updates).
STP Reporting: Seamlessly integrates with the ATO for real-time reporting.
Data Accuracy: Minimises manual entry errors.

Expert Insight: "Trying to manage complex Australian payroll with spreadsheets is like trying to build a house with a screwdriver. You need the right tools for the job."

2. Master Award Interpretation (Or Get Help Doing So)

Award interpretation is arguably one of the biggest challenges for Australian businesses. Incorrectly applying award rates, penalty rates, or allowances can lead to underpayments, back-pay claims, and significant penalties.

Know Your Award: Understand which award(s) apply to your employees. Fair Work Ombudsman provides a helpful ‘Find My Award’ tool.
Stay Updated: Awards change. Minimum wage increases, new allowances, or updated clauses can come into effect. Payroll software often includes award updates, but it’s good practice to cross-reference with Fair Work resources.
Seek Expert Advice: If you’re unsure, consult with an HR or payroll specialist, or utilise the advisory services often provided by your payroll software vendor.

Expert Insight: "Don’t guess with awards. An honest mistake can still cost you dearly. Precision here is paramount."

3. Reconcile Regularly

Regular reconciliation isn’t just for your bank accounts; it’s vital for payroll too.

Bank vs. Payroll Software: Ensure the total wages paid out from your bank account matches the figures processed by your payroll software.
Superannuation: Cross-check that the superannuation contributions calculated by your software align with what’s actually paid to the super funds.
PAYG Withholding: Verify that the total PAYG withheld from employees matches the amounts remitted to the ATO.
Before Year-End: A thorough reconciliation before the end of the financial year can catch errors that might otherwise complicate STP finalisation.

Expert Insight: "Think of reconciliation as a health check for your payroll. Catching discrepancies early prevents them from becoming critical issues later."

4. Keep Immaculate Records

The ATO and Fair Work Ombudsman can request payroll records for up to seven years. Disorganised or incomplete records are a common cause of compliance issues.

Employee Details: Ensure all employee information (TFNs, bank details, super fund details, address, date of birth) is accurate and up-to-date.
Timesheets & Leave Requests: Digital records are best, integrated directly into your payroll system if possible.
Payment Summaries/Income Statements: Store these securely.
Correspondence: Keep records of any payroll-related correspondence with employees or regulatory bodies.
Cloud Storage: Utilise secure cloud-based storage for easy access and backup.

Expert Insight: "When an auditor comes knocking, your records are your first line of defence. Good record-keeping isn’t just about compliance; it’s about peace of mind."

That’s a great request! The world of Australian payroll compliance is vast, so there are always more layers to uncover.

Building on the foundation of regular checks, award mastery, and record-keeping, here are several advanced tips and tricks focusing on complex areas like employee classification, allowances, and long service leave.

5. Perfect Employee Classification (Employee vs. Contractor)

Incorrectly classifying a worker as an Independent Contractor when they should be an Employee is a major source of financial risk (underpayment claims, superannuation guarantee charge, and tax penalties).

Apply the ‘Common Law Test’: This multi-factor test is used by the ATO and Fair Work. Don’t rely solely on an ABN or a contract. Factors include:

Control: Does your business control how, when, and where the work is done? (Employee)
Integration: Is the worker an integrated part of your business? Do they wear your uniform or use your email? (Employee)
Risk: Does the worker bear any financial risk for defects or mistakes? (Contractor)
Equipment: Does the worker provide their own tools and equipment? (Contractor)
Right to Delegate: Can the worker send someone else to do the job? (Contractor)

Superannuation for Contractors: Even if a worker is a contractor, you may still have to pay the Superannuation Guarantee (SG) if the contract is mainly for the labour of the individual.
Solution: Conduct a simple, regular Employee Classification Audit (especially when onboarding new roles) to ensure the setup in your payroll system aligns with the reality of the working arrangement.

6. Decipher Allowances and Ordinary Time Earnings (OTE)

Not all payments attract superannuation, and this is a frequent pitfall. The key is determining if a payment counts as Ordinary Time Earnings (OTE), which is the basis for the Super Guarantee (SG).

Payment Type	Superannuation (SG) Payable?	The Trick
Annual Leave Pay	Yes	Paid leave generally attracts super.
Sick/Personal Leave Pay	Yes	Paid leave generally attracts super.
Overtime Payments	No	Overtime is not OTE, but check the relevant Award/Agreement, as some may stipulate it is payable.
Annual Leave Loading	Yes (Mostly)	It’s only excluded if it’s explicitly referable to a lost opportunity to work overtime. If the reason is vague or just to cover "disadvantage," treat it as OTE.
Expense Reimbursements	No	If an employee pays for a work expense and you pay them back exactly, it’s not OTE.
Cents per KM Car Allowance	No	If calculated using a set rate per kilometre.
Other Fixed Allowances	Check Purpose	If an allowance is for work performed (e.g., supervising another employee), it’s generally OTE. If it’s for an expected expense (e.g., dirty work), it might not be.

Tip: Use clear, separate Wage Codes in your payroll software for every type of payment (e.g., ‘Overtime (Not OTE)’, ‘Annual Leave Loading (OTE)’) to automate the correct Superannuation calculation.

7. Demystify Long Service Leave (LSL)

LSL is governed by state and territory legislation (not the National Employment Standards), which makes it a unique challenge, especially for businesses operating across multiple states.

State-Specific Rules: LSL accrual rates and vesting periods vary significantly (e.g., after 7 years in some states, 10 years in others). You must follow the rules of the state where the employee works.
Portability Schemes: For some industries (like Building & Construction, Coal Mining, and Contract Cleaning), LSL is managed through a portable scheme. Employers in these industries must register with the relevant state fund and pay contributions to them.
Payment on Termination: Be meticulous about LSL payouts upon an employee’s resignation or termination.

The payout amount (and whether pro-rata applies) depends entirely on the specific state/territory legislation and the reason for the employee leaving.

Tip: If you operate in multiple states, use your payroll software’s features to tag each employee with their correct LSL scheme and monitor their contingent/entitlement dates carefully.

8. Implement the "Better Off Overall Test" (BOOT) for Annualised Salaries

If you pay employees an annualised salary to cover all or most entitlements (like base pay, overtime, allowances, and penalty rates), you have a specific compliance requirement: the Better Off Overall Test (BOOT).

The Rule: You must ensure the employee is paid at least as much as they would have been if they were paid under the relevant Modern Award for the same work.
The Trick: Modern Awards require employers to conduct an annual reconciliation. You need to:

Record Actual Hours: Accurately record the employee’s actual hours worked, including start/finish times, breaks, and any overtime or shift work.
Hypothetical Calculation: Calculate what the employee would have earned under the Award (including all applicable penalties and allowances).
Compare: If the Award calculation is higher than the annualised salary paid, you must pay the employee the difference.

Actionable Step: Schedule this review as a mandatory annual payroll task. Most modern payroll systems offer features to help you track the required hours and run the comparison.

The Rockfast payroll & HR software suite with integrated PayOffice self service takes away many of the payroll pains and helps you avoid these pitfalls.

Disclaimer: This information is for general guidance only. Australian payroll and employment law are highly complex and change regularly. Always consult with a qualified payroll specialist, accountant, or industrial relations advisor for specific business advice, and refer directly to the ATO and Fair Work Ombudsman websites for the latest legislative details.