TIME TO BACK BUSINESS: WA GOVERNMENT S PRESCRIPTION FOR INDUSTRY-LED SKILLS DEVELOPMENT FALLS SHORT
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1 TIME TO BACK BUSINESS: WA GOVERNMENT S PRESCRIPTION FOR INDUSTRY-LED SKILLS DEVELOPMENT FALLS SHORT EXECUTIVE SUMMARY In November 2017, the WA State Government announced its plans to significantly change the conditions of the Payroll Tax Exemption for many WA businesses that are committed to building the State s skills base through apprenticeships and traineeships. In particular, the State Government identified that the Payroll Tax Exemption for traineeships for all existing workers would be removed retrospectively to December It also identified it would remove the exemption for new trainees on a total salary package of over $100,000. The State Government has proposed the implementation of a Grants Scheme to replace the exemption in its entirety by July 2019, however no detail has yet been provided on the operation of this scheme. This paper identifies that the removal of the exemption and the revised policy for industry-led skills development, as currently outlined by the State Government, fails to meet industry needs across a range of key criteria. This criticism relates to the following key points: The proposed Grants Scheme is a less effective policy instrument than the current market-based payroll tax exemption as it involves the State Government providing a picking winners subsidy, rather than allowing industry to identify skills requirements related to specific workplace needs; Criticisms of the operation of the current scheme overlook the fact that appropriate amendments were made to the administration of training contract approvals in 2015 to address its inappropriate use; Defining existing employees as those who have worked for more than three months doesn t allow employers to assess new employees on probation prior to committing to a traineeship; The decision to remove the exemption for existing employees on traineeships illustrates a lack of appreciation of the value of upskilling and the future skills requirements in WA workplaces and will contribute to a further decline in training in the State; The proposal to enact this policy retrospectively to December 2017 represents a break of faith with the business community, given that the vast majority of businesses take major decisions as part of a financial year cycle, and fails to provide transition arrangements to the execution of the new Grants Scheme in 2019; Application of the $100,000 cap fails to recognise the needs of businesses in high wage cost areas of the State, particular those operating in rural and regional areas; 1
2 Grants schemes are typically inefficient policy instruments that involve additional administrative overhead for the State Government at a time when spending is already unsustainable; The Government has, to date, failed to provide any clear guidance on the proposed Grants Scheme in terms of total value and its priorities, thereby leaving industry in a policy vacuum, unable to clarify the potential benefits beyond general commentary on the inherent flaws of subsidy programs; and The lack of information on the proposed Grants Scheme, coupled with other changes to the WA s Skilled Migration policy, infers that there is a lack of appreciation as to the depth of the skills crisis in WA the State has experienced some of the sharpest drops in apprenticeship and traineeship enrolments across the country. It is critical that these concerns are addressed if the WA economy is to successfully transition to an era of higher economic growth, supporting existing industries to return to growth and providing the foundation for new, globally competitive, industries to emerge. Furthermore, the need to respond is urgent. Even with a modest return to growth, WA businesses are reporting difficulties in filling skilled positions. RECOMMENDATIONS The reality is that there is very little to encourage support of the State Government s policy as it currently stands. To this end we urge a fundamental review of the decision. It fails to reflect the needs of WA industry in creating workplaces that respond to our State s future needs. That said, at a minimum we recommend the following: 2 The State Government should reverse its decision to remove the Payroll Tax Exemption for traineeships. Any mechanism to increase the uptake of traineeships and apprenticeships should be informed by the views of industry and pay special attention to incentives that are tailored to the needs of business. If the Payroll Tax Exemption is removed for existing workers, at the very least these changes should not apply to small business employees or employees in regional or remote areas. The definition of an existing employee should be reviewed as the three-month time period is often insufficient to determine whether it is suitable for an employee to undertake a traineeship. If the State Government insists on pursuing this policy in its current form, consideration must be given to revising the proposed $100,000 salary cap by undertaking extensive consultation with industry to determine a more appropriate threshold that takes into account specific factors such as industry sector and location of employment.
3 THE STATE GOVERNMENT S PROPOSAL On 30 November 2017, the State Government announced changes to the Payroll Tax Exemption which exists for employers who train staff through traineeships in the workplace. The Payroll Tax Assessment Act 2002 (PTA Act) provided a payroll tax exemption for the wages of all trainees and apprentices paid throughout an approved training contract, registered with the Department of Training and Workforce Development (DTWD). The Government will introduce a Bill into Parliament in 2018 to amend the PTA Act retrospectively to 1 December This amendment will restrict the exemption for traineeships to new employees only, with annual wages of $100,000 or less at the date of lodgement of the training contract. This means that no existing employees (employed for over three months) will be able to access the Payroll Tax Exemption. In so doing, it will remove the few remaining financial incentives that employers have to reskill their current workforce a decision which appears to be at odds with the push for economic diversification and enhanced training opportunities and the broadly understood requirement to reskill employees for jobs of the future. While no changes have been made to the Payroll Tax Exemption for apprenticeships as part of this immediate tranche of reform, the longer-term impact of the State Government s plans will extend to apprenticeships. That is, a Stage 2 has been proposed by the Government where the remaining Payroll Tax Exemption for apprentices will also be removed and be replaced with a Grants Scheme in July Disappointingly, no detail has been provided on the scheme and so we are left to contemplate the potential impact in something of a policy vacuum. This means employers are unable to make long-term decisions as to how they will fund future skilling requirements. IMPACT OF PAYROLL TAX EXEMPTION REMOVAL As of August 2017, existing worker trainees and apprentices accounted for 24 per cent of those undertaking training in WA. Analysis undertaken by the National Australian Apprenticeship Association (NAAA) shows that removing the Payroll Tax Exemption will reduce commencement demand by 19 per cent in the year ahead. Without efforts to assist employers with the cost, the NAAA estimate that only 15,900 apprentices and trainees will commence in the next 12 months, and by this time next year In-Training numbers could be as low as 26,600 a 36 per cent decline from 2015 levels. Without having an incentive to encourage and support employers to utilise existing worker traineeships, employers will find more cost-effective and less administratively intensive mechanisms to train staff, therefore disengaging from the national system. The unintended outcome of this ad-hoc approach will be that an increasing proportion of the workforce will not be trained to a nationally accredited standard. Furthermore, this will impact labour mobility and the capacity of the state to assess the readiness for any workforce changes as this type of training delivery is not measured and will be inconsistent across individual employers and sectors. Removing the Payroll Tax Exemption for existing worker traineeships and imposing the $100,000 salary cap will therefore make it even more challenging to keep employers engaged in, or attract employers to, the apprenticeship and traineeship system. Employers use the Payroll Tax Exemption to allow the funding of extensive training programs in their businesses to upskill and improve workforce productivity. Removing incentives for employers to upskill existing workers stagnates employees professional progression, putting further pressure on the creation of new jobs. In addition, for employers that have stable workforces with limited turnover there will be no incentive to engage in the traineeship system. 3
4 IMPACT ON REGIONAL AND REMOTE COMMUNITIES - $100K CAP The removal of the Payroll Tax Exemption will also likely have significant impacts on regional and remote businesses who already face additional barriers to training, such as limited access to training providers and distances to training institutes, adding further costs to training staff. To date, there has been limited information provided by the State Government that provides justification for the $100,000 threshold. This appears to be an arbitrary figure that has not taken into consideration the impact on regional and remote employers. Many regional and remote employers offer a range of allowances to attract and maintain workforces, including housing allowances, car allowances, regional and remote living allowances, additional superannuation benefits, and overtime. This will take many employees over the $100,000 salary cap, putting even greater barriers on employers to conduct training through the Australian Apprenticeships Programme. It is also vital that the Payroll Tax Exemption is retained for existing employees in regional and remote areas, not just new employees, to ensure they can continue to be serviced by privative training providers. It is unlikely privative training providers will service regional or remote locations for a small number of new trainees or apprenticeships due to the high costs associated. IMPACT ON SMALL BUSINESS The argument that the changes to the Payroll Tax Exemption will not impact small business is also not correct. CCI estimates that between 1,100 and 5,500 small businesses in WA (less than 20 employees) exceed the $850,000 payroll tax threshold that requires tax to be paid on their labour costs. This means that up to 7.3 per cent of all employing small businesses in WA will be negatively impacted by the proposed changes to the Payroll Tax Exemption for trainees and apprentices, creating further barriers on the small business sector to conduct nationally accredited training. IMPACT ON LICENSED/ REGULATED OCCUPATIONS Removing the Payroll Tax Exemption will also eliminate any support available to many businesses that employ regulated/ licensed occupations that require traineeship pathways for certification i.e. telecommunications, childcare, civil construction industries, and will provide added compulsory costs for project proponents to meet the 11.5 per cent Government Building Policy training benchmark for government projects. This would appear to be at odds with the Government s current policy platform that seeks to make training a priority in everything we do 1. This paradox is further compounded with the Government s Plan for Jobs, acknowledging that it has a role to play in building community sustainability and economic diversity, including supporting local business, developing skills and creating jobs. 2 The proposed removal of Payroll Tax Exemption for existing workers is clearly at odds with this view. BENEFITS OF THE PAYROLL TAX EXEMPTION The significant benefit of the Payroll Tax Exemption is its simplicity. That is, it is a market-based mechanism that efficiently responds to the needs of industry without onerous administrative costs and without placing the State Government in a position of picking winners that is, identifying current and future skills priorities of the business community based on incomplete insights and information as to how the market is operating. In this way, the significant changes proposed to the Payroll Tax Exemption have the potential to put a handbrake on WA s jobs of the future. Workers will either not be trained, or if they are, it will less likely be to the specific needs of WA workplaces and to a nationally accredited standard because the cost is too high. 1 WA Labor Plan for Jobs (2017)pp 17 2 Ibid pp114 4
5 The scheme as it is currently structured also responds to a range of concerns held by WA businesses. These include: The payroll tax liability is higher in WA than other states; The floor price for the delivery of training is higher in WA than other states; and There is an interim loss of productivity in the workplace while workers are training (which the Payroll Tax Exemption helped to offset). To highlight how these levers impact employer usage of particular qualifications, an example of one of the qualifications that can be used by a broad cross-section of industries and workforces has been mapped over time. The Diploma of Leadership and Management qualification was added to the approved traineeship list in resulting in a large take up from employers. After the initial burst of activity, numbers stabilised, however, when the Federal Government stopped providing incentives for Diplomas, commencement numbers dropped in , lifting once more when added to the Existing Worker Funded List in [Figure 1] Essentially, the biggest stimulator of existing worker commencements is when a broad qualification is placed on the approved apprenticeship and traineeship list and supported by funding or incentives. RETROSPECTIVE APPLICATION IS A PROBLEM CCI is particularly concerned that the State Government will be applying the Payroll Tax Exemption changes retrospectively to 1 December This will result in a significant portion of those employers currently undertaking training disengaging, as they will need to readjust budgets to cover seven months of Payroll Tax Exemption costs they may have already invested into training programs. LACK OF DETAIL ON GRANTS SCHEME The current proposal will replace a market-driven system in favour of a government-driven Grants Scheme about which no details are available. Without any details on, or industry involvement in the development of a Grants Scheme, CCI cannot confirm whether such a scheme is in the best interests of trainees and employers. We do, however, hold very real concerns with the policy construct being proposed. That is, there is broad acknowledgment that top-down driven approaches to training will not have the ability to respond to increasingly dynamic labour market requirements as industry seeks to prepare its workforce for jobs of the future. As such, CCI emphasises that a fit-for purpose and proportionate approach that is informed by industry is taken by government when seeking to develop incentives for businesses to invest in the formal training of their workforce. 5
6 WA S TRAINING ENVIRONMENT The current policy settings for the State in supporting skills development relate back to the Skilling WA policy in This policy was introduced to encourage the upskilling or retraining of existing workers, and training of new workers to ensure employers in WA had the capability to build, attract and retain a skilled workforce. It was acknowledged that a skilled local workforce is a key pillar to maximising economic growth in WA. These qualifications were also added to the Productivity Placement Program List which heavily subsidises training costs for listed qualifications. At this time, Skilling WA also encouraged industry to take a leadership role in promoting skills development and skills utilisation in the workplace, committing to develop programs to increase the take-up of skills development of existing workers in WA enterprises over the medium to long term. [Figure 2] From 2011 to 2013, the Federal Government also offered financial incentives for employers who put existing workers on traineeships for a 24-month duration or longer. These policy changes encouraged employers to put employees on existing worker traineeships, effectively allowing the implemented strategy to achieve its intended outcome to encourage utilisation of the traineeship pathway and to upskill the WA workforce. This included a focus on growing the existing worker traineeship program, as the report predicted that over half of all jobs to be created between 2010 and 2017 would be in higher skilled categories. This meant that skills attainment through higher level qualifications would be required to support the needs of industry. The State Government of the day committed to promoting and supporting training pathways for priority occupations by allowing a broader range of qualifications to be delivered in WA, and focused funding support toward high priority occupations. These were based on the State Priority Occupation List (SPOL), which identified 347 occupations that were deemed in high demand or industry critical in WA. Over 10 per cent of these in-demand roles were for manager level roles and 29 per cent were manager and professional roles conducting higher qualifications (Cert IV and above), such as new versions of the Cert IV Competitive Systems and Practices, Cert IV Occupational Health and Safety qualifications, and the Diploma of Management. EXCERPTS OF SKILLING WA, STRATEGIC PRIORITIES Strategic goal 4 Provide flexible, responsive and innovative education and training which enables people to develop and utilise the skills necessary for them to realise their potential and contribute to Western Australia s prosperity Funding for high priority training The Department of Training and Workforce Development will focus funding towards high priority occupations (based on the State priority occupation list) and particularly those impacted by major resource and infrastructure projects. [Lead agency: Department of Training and Workforce Development] Industry leadership in training Industry, with support of Government, will take a leadership role in promoting the value of skills development, skills utilisation in the workplace, education and training, and foster the take-up of workforce planning and development in enterprises. [Lead group/association: Employer peak groups and industry associations] Medium to long term Existing worker training The Department of Training and Workforce Development will work with industry to develop programs to increase the take-up of skills development of existing workers in Western Australian enterprises, building on the success of the existing worker traineeship program. Figure 2 [Lead agency: Department of Training and Workforce Development] 6
7 CURRENTLY, THERE ARE JUST 67 QUALIFICATIONS THAT ARE ELIGIBLE FOR EXISTING WORKER FUNDING. This saw existing worker traineeships grow substantially between 2011 and From to , the number of higher level traineeships being undertaken in the workplace increased by 45.6 per cent. By , just over 49 per cent of all traineeships were being undertaken in higher level qualifications, up from 24 per cent in [Figure 3] In specific reference to the Payroll Tax Exemption, industry was asked to play its part by actively encouraging the uptake of this incentive. As adoption of the exemption evolved, the State Government recognised that a very small proportion of employers appeared to be utilising the incentive to minimise payroll tax, rather than as a concerted effort to build their skills base. To address these concerns, in 2015 the State Government established the Apprenticeship Office to better scrutinise training contract applications. New standards and procedures were introduced, including extensive assessments of applications, on-site visits, reducing the breadth of the Existing Worker Funded List and capping the total number of existing worker traineeships that can be undertaken by an organisation to 100 per quarter. Also in 2015, the number of qualifications on the Existing Worker Funded list was substantially reduced from 133 qualifications in to 85 in Currently, there are just 67 qualifications that are eligible for existing worker funding, the lowest number of qualifications attracting subsidisation since the list s inception in May The impact of changes at a State level have also been exacerbated by the decision of the Federal Government to remove financial incentives for existing worker traineeships, which together have resulted in a significant decline in traineeship commencements [Figure 4]. The latter change ensured that large employers could not put any more than 400 workers per year through existing worker traineeships. Previously, an employer with a staff of 1,500 could put through 800 staff on traineeships at the same time. According to Office of State Revenue data, the majority of employers claiming a payroll tax offset of $20,000 or above in the financial year were receiving a payroll tax exemption on 30 per cent or less of their wage bill. Based on this data it would be inaccurate to assume that this incentive is being used inappropriately by employers. While the current State Government claims that there was widespread abuse of the Payroll Tax Exemption through employers claiming the majority of their workers wages, this is not supported by the facts. Only 15 per cent of companies paying payroll tax claimed an exemption under this policy and the vast majority of these claimed an average payroll tax offset of $20,000 in the financial year. On this basis, the State Government s depiction of systemic rorting of the scheme is simply inaccurate. The truth is that the measures put in place in 2015 have been effective in addressing any perceived misuse of traineeships by employers, while still ensuring that the upskilling and retraining of workers was at the forefront of government policy. 7
8 SINCE , APPRENTICESHIP AND TRAINEESHIP NUMBERS HAVE FALLEN BY 35 PER CENT TO EMPLOYER TAKE UP OF APPRENTICES AND TRAINEES Apprenticeship and traineeship numbers in WA have been falling substantially since At its peak in , WA had 45,075 apprentices and trainees undertaking training. Five years later, the number of employees in training have fallen by 23 per cent, with only 34,609 people undertaking apprenticeships and traineeships by Both apprenticeships and traineeships have been experiencing declines in commencements. Since , apprenticeship numbers have fallen by 35 per cent to , while traineeship commencements have declined by 38 per cent. [Table 1] TABLE 1. HISTORICAL WA TRAINING COMMENCEMENTS AND IN-TRAINING NUMBERS Apprenticeship Commencements Traineeship Commencements Total Combined Commencements Apprenticeships & Traineeships In-training ,868 19,212 29,080 40, ,781 23,927 33,708 45, ,874 20,450 29,324 43, , ,221 42, ,378 20,914 29,292 42, ,236 18,046 25,282 38, ,316 14,926 21,242 34,609 We are also seeing declines in the number of employers utilising the system. The number of employers engaging in the system at its peak ( ) was in excess of 10,500. Apprenticeship Support Australia estimates that the number of businesses currently using the apprenticeship and traineeship pathway is approximately 8,400 only 10 per cent of all employing businesses in WA. More specifically, between September 2015 and September 2017, process manufacturing has seen a 56.7 per cent decline, whilst community services, health and education has seen 37 per cent decline over the same period. Building and construction has seen a 26 per cent decline while metals, manufacturing and services have experienced 17.5 per cent decline [Figure 5]. WA s working age population (15-64 years) has increased 5.7 per cent since , yet the proportion of people undertaking apprenticeship and traineeship opportunities is at its lowest level in seven years. With commencements declining substantially, the participation rate of the working aged population in apprenticeships or traineeships is now 1.97 per cent compared to 2.71 per cent in [Figure 6] 8
9 THE OVERALL COST OF PUTTING AN EMPLOYEE INTO AN APPRENTICESHIP OR TRAINEESHIP HAS INCREASED THREEFOLD OVER THE PAST FIVE YEARS. COST OF TRAINING TO EMPLOYERS This year alone, the number of existing workers in training has declined by 14.3 per cent between January and August, while new entrants in training has remained stagnant. This decline could be partly attributed to the increased fees and charges for training, making it expensive for employers to use traineeships, and the added rules and regulation surrounding training contracts that have been applied by the State Training Authority (the Apprenticeship Office). For example, additional questions highlighting occupational outcome have been added to the national contract in WA, and employers are often asked to provide extensive evidence in the form of organisational charts and job descriptions, to prove training need and intent. The cost of training in WA is significantly higher than other states [Table 2]. The overall cost of putting an employee into an apprenticeship or traineeship has increased threefold over the past five years [Table 3]. This, in part, can be attributed to the State Government reducing its level of subsidisation from approximately 92 per cent of the cost of a traineeship or apprenticeship in 2013 to 82 per cent in This results in a larger contribution required from employers to cover training costs. When combined with an uncertain economic climate, this will lead to a substantial increase in the risk borne by employers who take on trainees or apprentices, which causes a predictable decline in trainee and apprentice numbers. Overall, this has made training through the nationally accredited system more expensive for WA employers, making the Payroll Tax Exemption an important tool to encourage employers take up of traineeships and apprenticeships. TABLE 2. PRICE COMPARISON OF SUBSIDISED TRAINING PLACES FOR EMPLOYERS ACROSS AUSTRALIA WA VIC NSW QLD Cert IV Ageing Support (24 months) Subsidised rate $2, (New Worker) $4, (Existing Worker) $ (New worker) $ (Existing Worker) $1,000 (New Worker) $1,008 (New Worker) $1008 (Existing Worker) Full fee $12, $11,295 $11,080 $5,274 Conditions & Requirements Must no longer be enrolled at secondary school Must be 15 yrs & over and no longer enrolled at school Must be 15 yrs & over and no longer enrolled at school Subsidy applies to New Workers and Existing workers To attain a subsidised training place, individuals must be enrolled with an RTO on the Preferred Provider list. Must be Australian citizen or permanent resident Primary residence must be in WA (although some exceptions do apply) Can only receive subsidy for up to 2 courses including active and completed courses Must be an Australian citizen or permanent resident Must be a Permanent resident in NSW Must be an Australian citizen or permanent resident Subsidy applies to New Workers onlyexisting workers will be required to pay full fee rate Must be 15 yrs & over and no longer enrolled at school Must be a Permanent resident in QLD Must be Australian citizen or permanent resident Must not currently be enrolled in cert IV or higher TABLE 3. EXAMPLE OF HOW PRICES FOR QUALIFICATIONS HAVE INCREASED YEAR ON YEAR IN WA Cert IV Aged Care (24 months) New Worker $1, $2, $2, $2, $2, Existing Worker $1, $2, $2, $4, $4,
10 RECOMMENDATIONS The State Government should reverse its decision to remove the Payroll Tax Exemption for traineeships. Any mechanism to increase the uptake of traineeships and apprenticeships should be informed by the views of industry and pay special attention to incentives that are tailored to the needs of business. If the Payroll Tax Exemption is removed for existing workers, at the very least these changes should not apply to small business employees or employees in regional or remote areas. The definition of an existing employee should be reviewed as the three-month time period is often insufficient to determine whether it is suitable for an employee to undertake a traineeship. If the State Government insists on pursuing this policy in its current form, consideration must be given to revising the proposed $100,000 salary cap by undertaking extensive consultation with industry to determine a more appropriate threshold, that takes into account specific factors such as industry sector and location of employment. 10
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