The Bermuda Government stands to reap millions by tightening payroll tax on notional salaries in owner-managed businesses.

Branded an “often-abused part of the payroll-tax system” by David Burt in his Budget speech, notional salaries were estimated to yield $10 million of tax revenues for the coming fiscal year.

As a form of income from employment that is not categorised as salary, the Premier and Minister of Finance said “notionals” were applied to “deemed employees” receiving an income “partly or wholly through sharing the profits of the business instead of only through salaried remuneration”.

As an example, Mr Burt told Parliament that “partners in local law and accounting firms may declare a notional salary of $200,000, while they may actually earn $1 million from their business”.

Such a partner would be taxed on the $200,000, but not their remaining earnings, he said.

Notionals came under fire in the pre-Budget report, which signalled that such arrangements for “professions deemed particularly at risk of under-declaration” were being examined by the Office of the Tax Commissioner.

The report vowed that the OTC would enforce notionals “more robustly”, with added resources to “cut back on abuse and ensure that all pay their fair share”.

The Payroll Tax Act 1995 is to be amended, requiring deemed employees to declare all income received on a cash basis, Mr Burt said.

Overall, the yield from payroll tax is estimated at $454 million in 2018-19, or nearly 42 per cent of total government revenues.

The suggested professional services tax was axed after industry consultation.

With the PST standing to increase the cost of business, and tax reforms in the United States singled out as “the most pressing threat that we face at this time”, the Government has opted to avoid imposing an extra cost on local businesses.

Calling payroll tax “the enemy of job creation”, Mr Burt said the second phase of the payroll-tax increase put forward by the former government would not be implemented.

Accordingly, all employer rates will remain unchanged — a step that would be “favourably received by many”, according to John Wight, president of the Chamber of Commerce.

Tax relief was promised for lower-income workers struggling to make ends meet, with a break for those earning less than $96,000 a year.

Other tax initiatives included absolving employers who gave jobs to disabled persons from their portion of payroll tax, and a year’s tax exemption for new entrepreneurs meeting Bermuda Economic Development Corporation standards.

The bipartisan Tax Reform Commission, unveiled earlier in the week, is to consult with retailers for potential tax adjustments to their sector.

Although taxes on commercial rents were also dropped from the Budget, a temporary increase on rates for commercial properties was projected to add $15 million to the public purse.

Telecommunications taxes have also been approved, with hikes to mobile phones fees and the government authorisation fee.

Fees for most services provided to residents and businesses will be increased by 5 per cent — a biennial increase projected to bring in an extra $5 to $6 million, Mr Burt said.